Taylor's Forensic Analysis Of The Credit Crisis
In 1993 Stanford economics professor John B. Taylor developed the Taylor rule which is now the generally accepted formula on how a central banks should set interest rates. Recently he did some good forensic analysis: The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong (pdf)
Here is my short summery of his paper, pimped up with a conspiracy theory.
The problem that led to the crisis started with the deflation scare in 2002/3 when Greenspan set the interest rates far too low (1%) and for far too long (1 year). He broke the Taylor rule.
Too low interest rates led to the housing boom and a credit bubble - this in parts of the Euro area as well as in the United States. Taylor proves that there never was a "global savings glut", i.e. Greenspan's explanation of the boom is false. Mainly the low central bank rates created the bubble.
Through 2005 to 2006 the interest rate climbed back up to 5.25%. This pricked the housing bubble. New home sales declined sharply. In April 2007 mortgage lender New Century declared bankruptcy. On August 6 American Home followed.
The credit crisis started for real on August 9 2007 when suddenly the London Inter Bank Offer Rate jumped higher than other rates it normally follows and stayed elivated. LIBOR is calculated daily from reports and guestimates of rates on interbank loans by 16 major banks. Instead of the normal 0.1% difference between LIBOR and OIS the difference was suddenly at 1%. This threatened to develop into a monetary shock as $300 trillions of loans and derivatives have their interest rate bound to LIBOR.
The relevant policy actors reacted. But they misdiagnosed the underlying problem and therfore used the wrong tools. They assumed that the LIBOR spread showed that there was a liquidity crisis and that pumping money into the markets would help. The Fed opened the Term Auction Facility to give billions of additional cheap loans to the banking system. It did not help. The Bush administration sent checks to taxpayers. That money was not spend for consumption but saved. Interest rates were lowered sharply (again too low.) But all these did not influence the problem obvious in the LIBOR-OIS spread.
The crisis was a solvency and trust crisis. People knew that there were many bad assets out there but did not know who owned how many of them. Banks mistrusted their counterparts and that was the reason they demanded a higher risk premium when lending - thus the LIBOR distortion.
Meanwhile the sharp decrease of U.S. interest rates to 2% in 2008 had led to a deeper decline in the value of the dollar and a sharp rise in the price of oil. The high oil prices sent the 'real' economy into a recession.
Fourteen month into the crisis the problem visible in the LIBOR spread exploded.
Lehman Brothers failed on September 15 2008. This is now usually seen as the event that brought the system down. But Taylor shows that this view is wrong. Lehman's bankruptcy in itself did not have bad consequences. Indeed markets reacted quite calmly. But the shit really hit the fan a week later when, as Taylor assumes, policymakers screwed up.
Taylor writes:
[I]t is plausible that events around September 23 actually drove the market, including the realization by the public that the intervention plan had not been fully thought through and that conditions were much worse than many had been led to believe. At a minimum a great deal of uncertainty about what the government would do to aid financial institutions, and under what circumstances, was revealed and thereby added to business and investment decisions at that time.
So policy makers fucked up because they, instead of spreading calm and confidence, added uncertainty and thereby risk.
That is indeed a plausible explanation. But there are other plausible explanation for the much watched and remarked on spread increase.
On September 23 Paulson offered a $700 billon taxpayer gift to the big banks - the very friends he had worked with all his life. The common people and congress were very much against giving away that money. The house even voted it down. Pressure needed to be applied to congress and the public for the banks to get their hands on the money. They reported too high interbank lending rates and drove up LIBOR and thereby the much watched and reported on risk spread until on October 3 congress gave in and Paulson, on October 13, started to hand out the money in a way they liked.
The banks abused LIBOR to manipulate public opinion and congress to get the money. Call it the greed theory.
Can I prove that banks abused LIBOR to get hundreds of billions in taxpayer money?
No.
LIBOR is a rate that is calculated daily from phone-in reports and guestimates from 16 big banks. There is no way for me to verify that those big banks did not report correctly and did not collude in what they report.
To really prove manipulations one would have to shuffle through all the real interbank deal records of all major banks at that time and to find out if the interest rates they really payed each other were the same they reported for LIBOR.
In spring 2008, by using some other measures, a Wall Street Journal investigation found it likely that several banks, Citibank in the lead, reported too low rates to LIBOR to hide their credit problems.The day after the WSJ first published on the issue, LIBOR rates corrected upwards. (I wrote about possible LIBOR manipulation on October 13 2008. The very next day LIBOR started their decline. But I admit that those were likely independent events - the WSJ circulation is still a bit higher then ours.)
From the WSJ investigation we know that LIBOR can be manipulated by the banks and was manipulated in spring 2008. It is hard to prove manipulation without the actual records. The British Banker's Association is supervising the LIBOR reporting and calculation. But what interest would it have to really find problems with it?
One thing is sure. In October 2008 banks had a huge incentive to report too high rates as it furthered the pressure to hand them over hundreds of billions. Simply ask yourself: What would you do to get a 100 billion dollar gift?
Taylor may be right with his explanation. I may be right to suspect manipulation. Indeed we both could be right.
Taylor concludes:
In this paper I have provided empirical evidence that government actions and interventions caused, prolonged, and worsened the financial crisis. They caused it by deviating from historical precedents and principles for setting interest rates, which had worked well for 20 years. They prolonged it by misdiagnosing the problems in the bank credit markets and thereby responding inappropriately by focusing on liquidity rather than risk. They made it worse by providing support for certain financial institutions and their creditors but not others in an ad hoc way without a clear and understandable framework.
This is not a call for less government action and intervention. Only for the right ones.
The paper is dated November 2008. Some acting policy persons have changed since then but unfortunately not the policies with regards to the financial crisis. Policy makers still misdiagnose the problem and apply the wrong tools.
The issue is to restore trust into the banking system. The only way to do that is to take them over, clean them up and then privatize them again with a clean bill of health into a strict regulatory environment. Only when that is done can the repair of the real economy begin.
Posted by b on March 8, 2009 at 17:56 UTC | Permalink
.Only when that is done can the repair of the real economy begin.
And really given the historic, structural dimensions of this collapse, "nationalizing banks" is at best prophylactic unless it means socializing finance once and for all.
Posted by: slothrop | Mar 8 2009 18:22 utc | 2
The Iraq war was to be carried out on the cheap, it was going to be a cakewalk, it was necessary to maintain those fictions by not allowing the economy to contract. Interest rates were kept at a minimum in order to produce the necessary euphoria that would cover up the deaths and devastations. The war lasted much longer, it was much more cruel and what might have been a short lived reduction of interest rates was prolonged until the whole edifice cracked. Any one could see that the regime of gratis money could not be sustained, so some measures were taken to put the condition aright, but the damage had been done. A little contraction here or there was magnified into a general contraction. I remember Pareto's drawing comparing a system to a network where it is enough to cut a link for all the nodes to change position. The decision to inflate during the Iraq war was political and geopolitical. From a moral stand point and I am a fanatic about that, the Iraq war was and is wrong and we pay the necessary penalty, we are getting poorer.
Posted by: jlcg | Mar 8 2009 18:56 utc | 3
OT but I could not resist ;)
Culinary analysis:
Pigs and pigeons (pigeon = a dupe in French, as in Eng. clay pigeon) - are cooked together.
by Maistre Chiquart, translated by Elizabeth Cook:
quote:
May holy Mary, mother of Jusus Christ, assist the prince. (Etc. etc.)
.....Again, parma tarts: for the said parma tarts which are ordered to be made, to give you understanding, take three or four large pigs and, if the feast should be larger than I think, let one take more, and from these pigs remove the heads and the hams, and put the fat apart to be melted; and take the said pigs and cut them into fair slices or pieces and wash them very well and put them to cook in fair and clean cauldrons, and put in salt in measure. And for the said parma tarts you will need three hundred pigeons, two hundred very young chickens -- and if it happens that the feast is given at a time when there are no very young chickens, have one hundred young capons -- six hundred small birds; and these pigeons, poultry, and small birds should be plucked and cleaned properly...
from http://www.medievalcookery.com/cgi/booksearch.pl>medieval cookery
Posted by: Tangerine | Mar 8 2009 22:12 utc | 4
slothrop of course you are right.
basically capital has accumulated to a point where the few people who own it do not know how to use it anymore.
Me, I would know how to spend it.
Posted by: outsider | Mar 8 2009 22:14 utc | 5
More seriously, Jesse comments on Weissman:
http://jessescrossroadscafe.blogspot.com/2009/03/weekend-reading-how-wall-street-and.html> Jesse’s Café Américain
Sold Out: How Wall Street and Washington
Betrayed America
by Robert Weissman & James Donahue, March 09.
http://www.wallstreetwatch.org/soldoutreport.htm> Wall street Watch. link to paper, summary, etc.
Posted by: Tangerine | Mar 8 2009 22:45 utc | 6
You are correct when you state that the government was focusing on a liquidity problem instead on an insolvency problem. I am absolutely convinced that Bernanke, Paulson, et al knew absolutely that they were laying down bullshit. But what would have happened if Paulson had gone to congress and told them that our 5 largest financial institutions were kaput? Zombie banks they could live with. Wall-to-wall coverage of financial nuclear winter was out of the question.
As to whether this recession was pre-meditated and deliberate, it's something's I've been wondering about for some time.
Posted by: vachon | Mar 9 2009 2:22 utc | 8
How would one go about getting the bank records needed to verify your analysis, b? Where would the records that you're talking about to be found, and how would one go about getting them?
Posted by: china_hand2 | Mar 9 2009 3:15 utc | 9
@china_hand2
I have access to Lexus Nexus, give me some search words and I'll look into it...
America has reach the backside of the event horizon of organised, institutionalised corruption and fraud on every level. Where protection rackets, embezzlement, larceny, confiscation, entrapment, misappropriation, and rico crimes, as well as murder have become the norm; by bullies, fraudsters, pervert soul sick class elites, politicians with their sykophants, lobbys, lawyers of the Kelptomania class who run everything. A litigation nation where truth is treason, justice is a mockery, and liberty is for sale to the highest bidder, where action of the State, arising from suspicion and not from proof, has degenerated into the satisfaction of vendettas by a "coin-operated congress", a "blue-blooded-aristocratic Senate" and finally, a power hungry blood thirsty executive branch- a general system of tyranny, all in the name of "public safety" and "TRANSPARENCY"...
Posted by: Uncle $cam | Mar 9 2009 4:14 utc | 10
Is anyone else having problems with b's pdf above? I was going to download the pdf to look for citations, but no go... I can't get it to download, however, I was able to read the, 'View as HTML' here, however, there are no citations or works cited...
Posted by: Uncle $cam | Mar 9 2009 4:57 utc | 11
Here is a short but exceptionally cogent commentary by Malaysian analyst Matthias Chang on "the shadow banking system". He is actually full of praise for Obama's stated opposition to the financial lobbies and special interests:
"Outlaw the Shadow Banking System"
Posted by: Parviz | Mar 9 2009 7:01 utc | 12
Only skimmed this . . . so far. So only have TWO things to comment upon.
1) In CA, and in the Sacto region and Central Valley especially, our depression and housing boom drop began back in '04 or so. I was working in a business that did hydroseed and erosion control work, home building was a hot and heavy target for all businesses doing hydroseed and erosion control.
By late '03, early '04, it was OBVIOUS that overbuilding was taking place up and down the Central Valley (originally based on the exodus from the SF Bay Area prices where folks sold and bought cheaper with retirement savings galore or simply moved to Central Valley for lower rents AND ownership, but it climbed so fast from '01 thru '04 that even LOCAL Central Valley folks couldn't keep up their standard of living, and then, jobs began to be lost early in '04).
So, I take a wee tiny piece of exception as to WHEN the shit was hitting the fan. Sure, my exception is purely regional, to where I live . . . but man, it sure was a fuckin precursor too many missed.
2) Bush tax breaks for taxpayers? Gimme a fuckin break. $600 or $1,200 to a couple, much less a family of four or more is barely a month's or more worth of food. To a family it's two weeks of any household budget and don't even PAY the mortgage, much less any other bills. It's a fuckin pittance.
So them tax breaks were useless then, are useless now. Tax breaks? We don't need no stinking tax breaks, we need jobs that pay $30K or more with medical and healthcare bennies for a family, and we need two parents working or two adults without kids working with benefits at $30k annual each and even THAT won't buy a fuckin house in The Central Valley.
Tax breaks? Gimme a fuckin break. They were, and are, useless. I guarentee NO fuckin one SAVED that pittance, it went to food and gas to keep a couple or a family alive . . . . no one's putting that little shit of an amount into their pockets, under the mattress or in a tin can buried in the back yard.
So, that's my basic rant in opposition to two of the things posited in the post up above. And I'm pretty fucking solid on my stance with THOSE two items.
The rest I'll have ta get back atcha about . . . complicated shit.
But really, it seems easy to see from the evidence at hand that money funnels upwards, and GOP policy's enable that, and MOST elected officials from any party in the USA are lobbied and greased to enact and support legislation and laws that ENHANCE the money going upwards . . . and that don't take a fuckin genius anymore, to figure out.
So, why are we the sheeple, not demanding better?
And again, once more. Who's responsible for this shit? And for how long?
Who do we be cui buono blame goddamnit? Ya know?
Discuss . . . but leave out the obvious . . . let's cut to the chase, who do we track, hunt, trap, capture, lug back to the fire and hang?
And how do we DO it? Given we are outmanned, outlegislated, and outgunned . . . *G*
Posted by: larue | Mar 9 2009 7:12 utc | 13
http://www.nakedcapitalism.com/2008/10/are-central-banks-making-libor-worse.html
Good story at the time. Better was the LIBOR survey chart in it. No confirmation of it being real, but no reason now to doubt it. Libor survey information on the reporting banks for the period ending the 3rd quarter. The timing of the chart is suspect, and not nearly enough data for hard conclusions.
Looked around it for a while when I first saw the chart. First glance it looked to me like a poker table where everyone was trying to give away their chips. Even with hindsight it looks like a fixed game. JPM and Rabo are probably clearing the entire market. Again, no volume data.
Interesting note: 10/7 for west lb Is that lehman passing to them? They were the only Bank at that time that was explicitly backed by a Government. They got them there in a big hurry.
Press release attached. There are others around that time for LBPH Business Wire
October 7, 2008 Tuesday 3:15 PM GMT
Fitch Downgrades Lehman Brothers Financial Prods' LT IDR to 'D', Counterparty to
'B/RR1'
LENGTH: 415 words
DATELINE: CHICAGO
Lehman Brothers Financial Products, Inc. (LBFP) has filed for reorganization
under Chapter 11 October 6, 2008. This was deemed a strategic measure to protect
its assets from creditor actions related to Lehman Brothers Holdings Inc. (LBHI)
and Lehman Brothers Special Financing (LBSF). LBSF is a counterparty to LBFP,
subsidiary guaranteed by LBHI and the market risk manager that is owed monies
from LBFP. Fitch Ratings downgraded the long-term Issuer Default Ratings (IDR)
to 'D' and the counterparty rating to 'B/RR1'. The 'RR1' Recovery Rating (RR)
indicates a very low probability that any counterparties will ultimately incur a
loss. LBFP continues to have sufficient capital in highly liquid funds that is
more than sufficient to cover current payments due.
LBFP's portfolio was in the process of being transferred to its contingent
manager, West LB AG, following the declared bankruptcy of its sponsor. The
guarantor's bankruptcy constituted a 'trigger event,' requiring the installation
of its contingent manager to administer the trading book and facilitate an
orderly wind-down of the portfolio over the remaining life of its contracts. On
Sept. 17, 2008, Fitch placed LBFP's ratings on Rating Watch Negative upon the
occurrence of the trigger event.
At this time, LBFP's trading book is in a net receivable position with a pool
of highly rated counterparties. In addition, capital is maintained in money
market accounts with large, independent, reputable third-party money managers.
Capital levels remain in excess of obligations and are not dependent upon
receipt of any receivables from counterparties. Future capital levels should be
protected by the existing excess and any hedges established as the portfolio is
wound down.
The following ratings were downgraded by Fitch:
Lehman Brothers Financial Products Inc.
--Long-term IDR to 'D' from 'AAA';
--Counterparty Rating to 'B'/RR1' from 'AAA'.
Fitch's rating definitions and the terms of use of such ratings are available
on the agency's public site, www.fitchratings.com . Published ratings, criteria
and methodologies are available from this site, at all times. Fitch's code of
conduct, confidentiality, conflicts of interest, affiliate firewall, compliance
and other relevant policies and procedures are also available from the 'Code of
Conduct' section of this site
Posted by: bob | Mar 9 2009 7:13 utc | 14
Well god phreakin dang . . . UncleScam @#10:
Yes, we HAVE become the worst of the worse. And it's just like USSR at it's demise, too, ain't it. *G*
But again, how, and why? And by whom? (I'm always hinting at a banking/banker large scale conspiracy thru out history)
ALL the disparate elements you list didn't happen on their own . . . they are connected.
The BIGGEST Picture . . . there's ALWAYS someone at the top pullin strings . . . always.
*G*
Posted by: larue | Mar 9 2009 7:16 utc | 15
Slothrop @#1:
Damn, I shoulda read yer comment . . . earlier. But it rings truth.
The loss of our sweat equity value and worth, is how the masses have lost their upward mobility.
And it was TAKEN from us, and IS being taken from us . . . even now with the bailouts and the money of our futures going up the ladder without accountability and to pay off bonuses for the privileged.
Guess I'm ranting once again to and with the choir of our lives . . . .
It DOES feel good to get it out, though . . . thanks to all for indulging. ;-)
Posted by: larue | Mar 9 2009 7:22 utc | 16
My first question on that chart is about Rabo, not familiar with them. What is their reputation? They are undercutting JPM throughout the period on that chart. JPM is usually the market maker for the FED, or at least that is its reputation.
Any thoughts from anyone?
Posted by: bob | Mar 9 2009 7:26 utc | 17
Nice little nugget from Friedman:
"We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese ..."
Thomas L. Friedman: The Great Disruption
Posted by: Parviz | Mar 9 2009 9:23 utc | 18
...and fund all the wars...one must add to TLF's lines about the Chinese.
Posted by: JanSan | Mar 9 2009 11:47 utc | 19
What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it's telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall - when Mother Nature and the market both said: "No more."
What took him so long to realise this? I've known this for decades. I guess that's why I'm not a NYT/IHT columnist...
Posted by: CluelessJoe | Mar 9 2009 13:11 utc | 20
Indeed, Tangerine@4
Reminds me of,
Sing a song of sixpence,
pocket full of rye,
four and twenty blackbirds
baked in a pie.
When the pie was opened,
the birds began to sing:
isn’t that a dainty dish
to set before the King?The King is in his counting-house
counting out his money;
the Queen is in the parlor
eating bread and honey;
the Maid is in the garden
hanging up the clothes,
when down swoops a Blackbird
and snaps off her nose!“Sing a song of sixpence…” is one of the oldest nursery rhymes still popular today in “Mother Goose” collections. While its earliest printed appearance is in a 1744 song book, a reference to the poem appears in Shakespeare’s Twelfth Night (1601?), Act II, Scene III: “Come on; there is sixpence for you: let’s have a song.”
Unlike some other nursery rhymes that allegedly have a coherent political or cultural background, “Sing a Song of Sixpence…” remains mysterious. (Unless you consider Snopes’ hoax claim that the rhyme was used as a recruiting song for the pirate Blackbeard.) At best we know that old European cookbooks did have recipes for baking pies containing live birds as kind of a joke or surprise (“a diverting Hurley-Burley”) for a guest or party.
Naturally I see the political in the rhyme. The vagrant and mischievous blackbirds ruining the King’s dinner with raucous singing aptly represent a loud-mouthed fiction writer and his rude blog. That the King merely retreats to his riches and the Queen to her sweets possibly mirrors the futility of the exercise, which is alleviated – no doubt unfairly – by the rogue blackbird’s violent attack on the innocent Maid.
3 Repli
We might oughta brush up on our recipes eh? because after all this eating of crow, well, as they say, there is nutrition in eating insects, and I'd rather do that than eat the rich, as they are full of trans fats and way to sweet.
@slothrop
Damn, that makes, what, three posts this year alone, that I have agreed 100% with you.. your on a roll baby!
You should write up your own, Pseudodoxia Epidemica, I'd skim it.
Posted by: Uncle $cam | Mar 9 2009 14:10 utc | 21
[b here - 19 identical comments deleted. How did you do that Uncle?]
Posted by: Uncle $cam | Mar 9 2009 14:10 utc | 22
The good old fashion community banking that the media keeps touting was purposely designed to extract the maximum value from working families. When women entered the work force, housing prices correspondingly increased in price.
What changed to create zombie banks? Crony capitalism ripped off the Golden Goose. Paying jobs were outsourced. Banks caught Elephantitis.
The Elites are unable to devise a scheme to rid the banking system of toxic waste without screwing themselves. So the can is kicked down the road, the hoi polloi be damned.
Posted by: VietnamVet | Mar 9 2009 15:33 utc | 25
Type pad has yet AGAIN changed how we post, my browser on three different machines reload automatically when ever you type something, and now I'm getting a new interface with preview and posted comments, I've asked a few days ago, anyone else?
This is only a preview. Your comment has not yet been posted.
Posted by: Uncle $cam | Mar 9 2009 15:45 utc | 26
Your comment has been posted. Post another comment
Arrrgggghhh!
Posted by: Uncle $cam | Mar 9 2009 15:46 utc | 27
Slothrop @ # 1,2:
You can be right and Taylor can be right at the same time. Nationalizing the banks may not solve the broad crisis of capitalism but it might postpone it, or create a bridge toward a different, maybe more rational, form of state-managed capitalism (something between Japan and China).
Taylor's article is interesting because it shows the difference between smart capitalism and knee-jerk financialized capital, i.e. Wall Street and its Washington political agents.
Posted by: seneca | Mar 9 2009 15:57 utc | 28
uncle - looks like typepad implemented a yui component. i'm guessing there's a listener on the comment textbox that triggers the component once you start entering txt. it is very annoying b/c for a fraction of a second the atpcomments interface is rendered visible. w/o spending any time examining the api or implementation, maybe b has some ability to modify it if need be? the main code is here.
Posted by: b real | Mar 9 2009 16:30 utc | 29
state-managed capitalism (something between Japan and China).
I'm unconvinced these exist as policies able to create a capitalism able to withstand the usual contradictions of capitalist development.
Among the celebrated middle-way theorists who will be proved completely wrong by this crisis are Emmanuel Todd and John Gray. Day by day, the shtick that this or that new improved capitalism will emerge as an option to Anglo-American neoliberalism, seems doomed.
Perhaps the chinese communist party can expropriate wealth from its frankenstein capitalist class and reoccupy the commanding heights of the economy. I doubt it.
Posted by: slothrop | Mar 9 2009 19:14 utc | 30
@#30
Tangentially related?
China 'will not have democracy'
China will never adopt Western-style democracy with a multi-party system, its top legislator has said.Parliament chief Wu Bangguo said that China would draw on the achievements of all cultures but would not "simply copy" the West.
Communist Party leadership should be strengthened and "the correct political orientation" maintained, he said.
Mr Wu made the comments in a speech to the National People's Congress, China's annual parliament session.
China 'will not have democracy'? hehe... neither will we..
Posted by: Abe Linclon | Mar 9 2009 19:40 utc | 31
I'd like to see the Treasury Department follow in the footsteps of the Defense Department by developing a set of playing cards to help taxpayers identify the most-wanted crooks in the financial mess. And being that Alan Greenspan "Bubble Al" is the Saddam Hussein in this mess, I'd make him ace of spades with Robert Rubin, Larry Summers, and Tim Geithner -- king, queen, and jack-ass of spades, respectively.
http://en.wikipedia.org/wiki/Most-wanted_Iraqi_playing_cards
Posted by: Cynthia | Mar 9 2009 21:20 utc | 32
Blackbird
In modern English english a blackbird is a songbird similar in size to the N American robin and whose formal name is turdus merula. It is another family of birds to corvus, half the size of crows, rooks and ravens. I believe it was eaten in England and is still eaten on the mainland of Europe now. Lovely song and fun to watching bouncing around the garden with black feathers and (mainly) bright yellow beaks eating apples in fall and earthworms when it can catch them.
Posted by: jimmy | Mar 9 2009 21:56 utc | 33
Slothrop @ #20:
I didnt mean capitalism will evolve and save itself, only prolong the agony. I think this is what we have in store, in our lifetime, and our job will be more about resisting fascism than bringing in a new order.
Posted by: seneca | Mar 10 2009 0:55 utc | 34
@$cam at 11: I found the paper here: http://www.stanford.edu/~johntayl/FCPR.pdf
Posted by: PeeDee | Mar 10 2009 3:28 utc | 35
How about limiting corporate charters to 30 years, stop treating corporation like persons, have an earning cap of something that to me at least seems reasonable; $100 million, $200 million, $300 million but less than $500 million.
Companies that employ more than "X%" of the working class in a particular area would need to offer ownership potential to employees.
A massive effort would need to be mobilized to educate the public and make them wiser consumers. Rather than spend so much money regulating industry (whether finance, manufacturing or resource extraction) making consumers and citizens aware of bad corporate practices would let the consumers be the watchdogs making sure their employers, and the stores where they shopped, and the companies in their communities abided by safe and moral practices. Then have an enforcement agency with the teeth and manpower to keep all businesses equally on the straight and narrow...
For too long the average person has been suffering at the hands of the corporate assholes. When will people realize the fucks who run multinational corporations don't give a damn about them? These businesses knowingly pollute; they knowingly feed us poisons; they cheat, they steal, and then they pay our politicians to cheat and steal. Arggggh!
We'd each like to have just a few more crumbs than the next person, and so why would we expect our companies to be any different? We have all been corrupted by our individual greediness which resembles the sort of animal drive humans understand.
Love, peace and justice only exist for higher beings to enjoy; the rest of us, unable to realize such a life, wallow in mud and pretend to be clean...
Posted by: David | Mar 10 2009 4:34 utc | 36
In the New Yorker, James Surowiecki is delivering a counter-argument to Taylor's assertion that it was not Lehman that caused the credit freeze.
Taylor’s conclusion is based on one piece of evidence: a graph of the 3-Month LIBOR—the interest rate that banks charge to lend to each other—which he says shows that the real terror in the credit markets didn’t emerge until well after Lehman Brothers failed.I'm not convinced of that. I'll stay conspirish and believe the market was manipulated to get the $700 billion.
...
The problem is that the graph that Taylor relies on as his only piece of evidence (it’s on p. 16 of his paper) doesn’t demonstrate what he thinks it does. In fact, LIBOR rose sharply in the days just before Lehman failed—evidence that even the prospect of Lehman going under had people worried. It then dropped a little when AIG was rescued, but then went straight up again, so that in the seven days leading up to and just after Lehman’s failure, LIBOR nearly doubled. That’s hardly a sign of the market shrugging off the incident.More important, Taylor’s assumption in his paper is that investors would have known right away how severe the repercussions of Lehman’s bankruptcy would be. But this is simply untrue—for whatever reasons (some suggest fraud, others panic), the hole in Lehman’s balance sheet was much bigger than people initially thought it would be, which meant that the losses its lenders suffered were much bigger than anticipated. (One study suggests that the chaotic nature of Lehman’s bankruptcy alone cost creditors tens of billions of dollars.) As the magnitude of the losses became clearer, so too did banks’ risk aversion, since Lehman’s failure seemed to demonstrate starkly the risks of lending to any other big financial institution.
It seems to me that Josh Marshall is finally catching up with what people here and other sites have been saying for a long time - that the bond holders (i.e. of derivatives) should be the losers and not the taxpayers.
I've been increasingly mystified and frustrated, bordering on angry, over recent days as I realized that the assumption behind all the would-be financial sector fixes is that the bondholders -- i.e., the creditors of the big financial institutions, the folks who lent them money -- should take at most a nominal hit, even though they lent money to companies that in every real sense of the word went bankrupt. And the money to pay them off has to come from American taxpayers.I was expected to hear some basic skepticism about this assumption from the economists I spoke to. But I didn't. They agreed that the danger was just too great, notwithstanding the unfairness to the taxpayer. And most of the fear stems back to what happened to the global credit markets after the collapse of Lehman Brothers last fall.
Now, as to RB's point, I think he's got a big part of the equation right. Having the bondholders take a substantial hit seems too scary to contemplate to these folks. The amount of money you'd need to make everyone whole just looks politically unfeasible. So it's very hard to know just where to go.
What it all amounts to is that the bondholders have a gun to the head of the world economy. But it's a real gun. And it may be loaded.
Nobody seems willing to say who exactly these players are - among potential friends and foes - and what exactly they would do to taxpayers if they aren't paid off.
Posted by: Hamburger | Mar 10 2009 9:30 utc | 38
@37
one way to examine this would be to chart some other quantity that "correlates" wih the actual (not quoted) libor
Posted by: jony_b_cool | Mar 10 2009 10:34 utc | 39
Parviz, please, Thomas Friedman? You have to be joking, right? Mr. Neoliberalism himself? Any nugget from him is a piece of shit.
Posted by: Obamageddon | Mar 10 2009 15:31 utc | 40
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/#_ftn6>Steve Keen on the credit economy and implausible solutions offered by neoclassical economists.
Posted by: slothrop | Mar 10 2009 15:55 utc | 41
obamageddon, although my respect for friedman is very moderate, the passage cited by parviz is remarkably reasonable - even a blind pig finds an acorn once in a while
re taylor's analysis and responses to it - krugman's blog has a posting and comments about it
http://krugman.blogs.nytimes.com/2009/03/09/irrelevant-lehman/
krugman himself says surowiecki has a good answer, and then gives a sarcastic analogy:
you’re looking at some building, and you hear the fire alarm go off, and smoke starts trickling out the windows. Then a lot of fire trucks and firemen arrive — and only after that do flames start shooting out the top of the building.Clearly, the fire department turned a small problem into a crisis.
Posted by: mistah charley, ph.d. | Mar 10 2009 19:01 utc | 42
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This is indeed very interesting. However, why do you focus on astounding reasons for the collapse? This is an odd reflex repeated ad nauseum in the business press.
A good example of this is http://www.prudentbear.com/index.php/commentary/creditbubblebulletin?art_id=10198>Doug Noland's recent screed (scroll down). Noland emphasizes that the recession was created by Washington. This is a common narrative among the mostly academic economists (Krugman, Roubini, etc) who have been appropriated by the ostensible left as men who speak the truth, viz., that capitalism doesn't work because Washington inflated credit to give Wall Street the liquidity it needed to destroy capitalism.
The left should not be fooled by such shitty analysis.
The cause of this crisis is not political; the cause of this crisis is structural. The narrative should be honest about the origins of this collapse. To be sure, the derivatives scam was pure scam exacerbating underlying crisis. But the crisis is endemic to capital. For forty years or more, the capitalist class has been waging a war against workers to confiscate the rewards of increasing productivity and to suppress the rightfully rising expectations of workers everywhere. The assault has been a vicious attempt to reduce the costs of labor and increase profits at the expense of the working family's welfare and future opportunities.
Capital accomplished this in several ways:
Labor exploitation
The solution of capital was to maintain rates of accumulation by expanding the length of the workday and the intensity of labor. Everyone knows how this works.
Privatization of collective pensions
In order to expropriate wealth from workers, capital established private investment schemes to raid wealth stored in collective pensions. The privatization of retirement coincided with the diminution of social benefits and the expansion of wealth managed by capital.
Globalization
Capital deindustrialized northern economies creating service economies paid for by the exploitation of cheap labor in industrializing southern economies. This could only be paid for by contradictorily maintaining the purchasing power of immiserated and poorly paid service workers in the zones of northern deindustrialization. This maintenance required expansion of credit, but the costs of the credit bhubble are massive trade imbalances, instability of currencies, stagnant growth and deflation.
Permanent War
The three decade-long suppression of wages in the north suppressed consumption for the surfeit of wage goods flooding in from the south. The result of this was the monstrous accumulation of idle capital in the industrializing south needed to finance consumption of wage goods in the deindustrializing north. This solution is inadequate because growth in the production of wage goods leads to a growth in the value of labor, which reduces profits. An alternative solution is the everready outlet of investment offered by the production of armaments. Permanent war increases accumulation but only at the expense of the production of wage goods as workers are taxed to sustain the production of arms. To the extent permanent war helps to lower the costs of energy resources is arguable given the costs.
And so here we are.
The left would do well to resist belief in the view offered by the Galbraiths, Roaches, et al. that the great pyramid schemes of "innovative finance" have destroyed international capitalism. Rather, the collapse was always already an inevitable feature of the system.
Posted by: slothrop | Mar 8 2009 18:15 utc | 1