Posts filed under “Really, really bad calls”
One of the oddest things to come out of the entire credit crisis, recession and muddling recovery has been the sudden re-emergence of deficit hawks.
While a few honest deficit hawks are out there — the Peterson Institute is a good example of a group looking at long term structural issues, not immediate fiscal concerns — the vast majority of born again fiscal hawks are political hypocrites. They voted for all manner of budget busting programs — unfunded tax cuts, new entitlement programs (i.e., prescription drugs), an expensive war of choice (Iraq).
How is it that they only learned of the evils of deficits after they lose power? How very convenient.
The current group of anti-deficit spenders are pro-cyclical, rather than counter-cyclical. This means that during an expansion, they have no problem with expanding deficits, running big spending programs, giving generous tax cuts. During a recession is where they suddenly rediscover fiscal prudence.
This is ass backwards. During an economic expansion, with employment gaining and GDP growing is when you should be thinking about saving for the next rainy day. Counter-cyclical spending means that governments should watch the budget carefully during the good times, but spend spend more freely during the downturns. What we are hearing from this crowd is the exact opposite of what should be.
Many people believe the government’s early withdrawal of depression stimulus after the early 1930s is what caused another downturn circa 1938-39. But few people realize that Japan made the exact same mistakes in 1997 and 2001.
That is the lesson SocGen’s Albert Edwards points to in Richard Koo’s book about Japan’s balance sheet recession, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession:
The crux of his analysis is that governments have no option but to stimulate
aggressively all the while the private sector is de-leveraging. ANY attempt at fiscal cuts simply results in renewed recession and a further loss of confidence, thus making it even harder and more costly to sustain any subsequent recovery and hence the budget deficit ends up bigger than before (e.g. see chart below). This is exactly the outcome I expect.
Koo argues that the premature fiscal tightening by Japan 1997 and 2001 weakened the economy, reduced tax revenue and ultimately made the fiscal deficit even bigger:
Premature Fiscal Reforms in 1997 and 2001 Weakened Economy, Reduced Tax Revenue and Increased Deficit
Source: Nomura Securities
There are few things more annoying the a drinker who just discovered sobriety: Hence, those who have spent the past decade getting drunk on government spending are now suddenly proselytizing a belated sobriety. These calls are occurring exactly when government largesse would do the most good.
I can’t tell what motivates these new deficit hawks — are they merely ignorant, unaware of the historical analogs? Or are they hoping for another recession as part of a debased power grab? (I don’t know).
What I am sure of is that calling for fiscal temperance RIGHT NOW is essentially calling for another recession . . .
The Age of Balance Sheet Recessions: What Post-2008 U.S., Europe and China Can Learn from Japan 1990-2005
Richard C. Koo, Chief Economist
Nomura Research Institute
Tokyo, March 2009
KOO’s “Good News”
Welling, September 11, 2009
Richard Koo books:
The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession
Caving to Congress Creeps Into Market Views on Obama
Rich Miller and Mike Dorning
Bloomberg, Feb. 16 2010
Judging a Stimulus by the Job Data Reveals Success
NYT, February 16, 2010
I love this: The Dynamite Prize in Economics is to be awarded to the three economists who contributed most to enabling the Global Financial Collapse (GFC), or more figuratively, to the three economists who contributed most to blowing up the global economy. Here’s the short list: Fischer Black and Myron Scholes Eugene Fama Milton Friedman…Read More
The usual crowd of ne’er-do-wells are seeking to divert attention from their own roles in the crisis, and shift blame elsewhere. These people make up a big chunk of the Its All Fannie’s Fault! crew. By muddying the waters, they hope to avoid retribution for their own roles in what occurred. As the mid-term election approaches, we should expect to hear more from this crowd.
The reality of crisis causation is far more complex and nuanced. Looking at the many factors that independently contributed to the collapse, and prioritizing them by degree of causation is not easy. A sophisticated approach is required to separate the prime and secondary factors.
Rather, than just repeat my list of factors what were the causal factors, today I want to try a different approach. Let’s do a “Causation Analysis” of the biggest factors to see if we can determine not just the various elements that contributed to the credit collapse, but which factors actually caused it to occur and what merely exacerbated the collapse, making it worse.
Understand that this is a theoretical discussion based on counter-factuals — what is likely to have occurred if various elements leading up to the crisis were different. We are trying to discern the differences between primary and secondary factors, separating the causes from the exacerbators.
Whenever someone asserts as a cause an event or force relative to a particular outcome, you should always ask: “Is this a “BUT FOR cause of that outcome?” In terms of a specific result or outcome, “But for” this factor, how would the outcome have changed? Would the result have been the same or different?
My top 3 list of crisis “BUT FORs” are:
1) Ultra low rates;
2) Unregulated, non bank, subprime lenders;
3) Ratings agencies slapping AAA on junk paper.
Why are these “But Fors?” But for these things occurring, the crisis would not have happened:
-If it wasn’t for ultra low rates, the housing boom would likely have been much more modest; further, bond managers would not have been scrambling for yield, and searching for alternative products to low yielding Treasuries;
-If it wasn’t for the sub-prime lenders, the credit bubble would not have inflated; further, millions of unqualified borrowers would not have been able to purchase homes they could not afford;
-If it wasn’t for the ratings agency fraud, the enormous market for this high yielding junk paper — mislabeled as AAA — would not have existed; further, the primary purchasers were firms that were only permitted to buy investment grade bonds. No A+ or better rating, no sale.
Hence, these factors are huge causative elements — BUT FOR them, there is no boom and bust, no crisis and collapse. Bond managers could not have owned all of these securitized sub-prime mortgages; the credit default swap market would have been much smaller, perhaps 1/10 its size; Sovereign wealth funds around the world could not have purchased all this bad paper; Iceland does not collapse. That is these are the big 3 — why I label them the prime cause of the crisis.
Great piece in Friday’s Times by Floyd Norris on an earlier boom and bust in securitized mortgages: The 1920s and 30s! “Real estate securitization was one of the great innovations in finance in the last quarter-century. In an unprecedented way, it allowed vast sums of money to go into the real estate market from people…Read More
The politicalization of the WSJ has moved to a new and more risky phase. The paper is now in danger of being a money loser — not for its investors (tho that has already happened), but for those traders who read its content. It used to be that articles on the Market or specific companies…Read More
Our story so far: Back on December 9th, my young niece informed me (via Facebook) that she had discovered her name publicly posted on a DeepCapture website. That was the first discovery of the “Facebook Friends scraping” operation. My assumption was that the asshats at DeepCapture had exploited a Facebook security lapse, and grabbed all…Read More
“The debate about the CPI was really a political debate about how, and by how much, to cut real entitlements.” -Greg Mankiw, chairman of George W. Bush’s Council of Economic Advisers from 2001-2003 > I’ve been meaning to get to the absurd argument put forth last week by Michael J. Boskin in the WSJ, titled…Read More
Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve. His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock…Read More
I have to call foul on a surprisingly foolish article in today’s NYT. Less than a month into 2010, it is already a leading candidate for the dumbest article of the year. It reads like it was written by the PR firm for a group of VCs and Palo Alto law firms.
There were numerous ignorant comments in the article, but this is the one that actually made me laugh out loud:
“Newer restrictions, like those on executive compensation, have made I.P.O.’s even less attractive to some entrepreneurs, said Doug Collom, a partner at Wilson Sonsini Goodrich & Rosati, a Silicon Valley law firm. “Lawyers now have a profound significance in the boardroom,” he said.”
WTF is this idiot talking about? Last I checked, none of the Silicon Valley tech firms had received TARP money during the bailouts. The exec comp restrictions this dimwitted Wilson Sonsini lawyer mentioned came with the nearly trillion dollar taxpayer bailout/subsidy for insolvent banks and the incompetent execs who ran them into the ground — not dot com start ups.
What a tool.
I cannot figure out who is more responsible for this brain dead exercise in ignorance and spin — the writer who (re)typed it from a press release, or the editor who let this nonsense slide by.
Here’s some more stupidity:
“In the last two years, only 18 tech start-ups have gone public, compared with 143 in the two years prior. The Sarbanes-Oxley Act of 2002, which tightened corporate governance and accounting rules, has taken a lot of the blame.”
Astonishingly, the article fails to note the massive decrease in IPOs across all sectors due to the recent turmoil. Even more amazingly, the author somehow fails to deploy so much as one single word regarding the total collapse in the markets, or the simple fact that investors have seen precisely zero gains over the past 11 years.
Quite bluntly, I am embarrassed that this is what passes for Journalism today.
UPDATE: January 18, 2010 3:02pm
Here is a chart of IPOs going back about 3 decades. Note after the 1987 and 2000 and 2008 crashes, the IPO numbers plummeted. I do not know what the actual impact of Sarbanes Oxeley was on IPOs, but the data shows that after SARBOX passed, the number of new IPOs actually went up.
I am NOT suggesting there is a correlation between SARBOX and any subsequent increase in IPOs; I am merely pointing out that blatherings of those mentioned above is factually incorrect, and belied by actual data.
Have a look at these two charts, courtesy of Jim Bianco. They show the number, and the dollar amount raised in IPOs; There appears to be no correlation with SARBOX, but a huge correlation with market crashes.
IPOs by Deal Volume 1991-2010
IPOs by Dollars (billions) 1991-2010
More charts after the jump.
For Many Start-Ups, a Spot on the Nasdaq Is No Longer the Goal
CLAIRE CAIN MILLER
NYT, January 17, 2010
Excel Spreadsheet for IPOs anbd secondaries, Bianco Research
Equity IPO And Secondary
Some Factoids about the 2009 IPO Market
Jay R. Ritter, Cordell Professor of Finance
University of Florida, Jan. 14, 2010