About Me

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Los Angeles, California, United States
The blog 'Breaking Bread' is for a civil general discussion, like you might have at the dinner table with guests. The posts 'Economics Without the B.S.' are intended for a general audience that wouldn't have to know the difference between a Phillips Curve, a Laffer Curve, or a Cole Hamels Curve. Vic Volpe was formally educated at Penn State and the University of Scranton, with major studies in History, Economics and Finance, and Business; and, is self-educated since by way of books and on-line university courses. His practical education came from fifty years of work experience in the blue-collar trades as well as a white-collar professional career -- a white-collar professional career in production and R&D. In his professional career and as a long-haul trucker, he has traveled throughout the lower forty-eight. From his professional career alone he has visited many manufacturing plants in the United States, Europe and China. He has lived in major metropolitan areas and very small towns in various parts of the United States. He served three years with the U.S. Army as an enlisted man, much of that time in Germany.

Wednesday, February 5, 2014

An Appraisal of the Bailout – Part II

Economics Without The B.S.**: An Appraisal of the Bailout – Part II


[**  Double entendre intended.]


An Appraisal of the Bailout – Part II

          If you want to get an idea of just how serious the Financial Crisis of 2008 was and what it cost us I know of no better source than the Federal Reserve’s Report of December 1, 2010.

News reports which summarize the Fed Report:
          If you are as old as me you can recall experts saying that the Fed is limited in actions in what it can do in the economy – mainly setting short-term interest rates by utilizing the Fed window for bank borrowing and setting bank reserve requirements (e.g., the discount rate and Fed funds rate, etc.).  Stanley Fischer, who was nominated by President Obama to be the next Vice Chair of the Federal Reserve with Janet Yellen and was one of Ben Bernanke’s instructors, has a text book on Macro-Economics which he co-authored and released a revised edition in 2007 before the outbreak of the Financial Crisis in 2008.  It is a text book that is a standard at many universities and details the role of central banking in rescuing the financial industry during times of crisis.  He and his co-authors had to release a newly revised edition just a couple of months ago as a result of his student’s extraordinary actions in 2008 and 2009.  Fischer himself ran the Central Bank of Israel recently for over ten years and previously served with the IMF and World Bank.
          So let’s take a look at what actions the Fed took.  21,000 transactions in all from December 2007 to July 2010.  $9 Trillion – that is not a typo; TRILLION with a ‘T’ – in all with not just leaving the Fed discount window wide open but a whole host of other measures never contemplated by previous chairmen.  There were days when over $1 Trillion was being loaned out, with the biggest day being December 5th, 2008 for a total of $1.2 Trillion.
          The Fed used a variety of emergency actions for the bailout.  There were over $9 Trillion in emergency short-term loans, mainly using the Fed discount window.  Goldman-Sachs and Morgan Stanley were converted to bank holding companies so they could tap the Fed discount window.  And my links show, tap it they did quite liberally.  As the Bloomberg link points out, these loans are like no interest loans to these largest of financial institutions so they earn the interest rate on the Government treasuries that are purchased with the loan – earning $13 Billion on the trillions of dollars of short-term loans.  Loans provided by the Term Auction and Primary Dealer Credit facilities alone totaled nearly $13 Trillion.
          In addition to banks getting bailed out by the Fed, were investors – Fidelity, Black Rock, Merrill Lynch, T. Rowe Price, Oppenheimer, PIMCO, and CalPERS among others.  Non-bank companies got Fed bailouts – GE, Harley-Davidson, Caterpillar, McDonald’s, Verizon, as well as pension funds and insurers.  Although it is legal for our Fed to have exchanges with foreign central banks, it is not legal for our Fed to bailout foreign companies.  But that didn’t stop our Fed.  The December 1, 2010 report shows that our Fed lent to the central banks of Britain, Japan, Sweden, South Korea, Australia, Denmark, Mexico, Norway,  Switzerland, and the European Central Bank, in some cases so the foreign central bank could make the loan available to companies within their country.
          All of these constitute the bailout by our Fed, monetary policy by the Central Bank.  None of this includes fiscal policy by our Federal Government.  Under Bush we had a $700 Billion TARP-I.  Under Obama we had TARP-II for another $700 Billion.  In addition to Fed actions, we had the FDIC guaranteeing bank debt during the take-over/restructuring of banks that failed (over 100 I believe) and the AIG bailout/rescue along with GM and Chrysler.  ProPublica has a bailout tracker at https://projects.propublica.org/bailout/list.
          And talking about fiscal policy, and remembering from a previous post on the blog that the object in a financial crisis is not to constrict economic activity but to flood the market with liquidity, many of our state and local governments were doing just the reverse and were cutting spending and payrolls and trying to keep their budgets balanced while the Federal Government deficit grew from $400+ Billion to $1.1 Trillion just under Bush before he left office in January 20th, 2009, four months after Lehman Brothers failed setting off the Financial Crisis.
          So to put some kind of perspective on the extent of the Crisis and what it took to fix it, remember right now we have some opposed to extending Unemployment Benefits to the long-term unemployed because of the costs – something just over $200 Billion since it was initiated in 2007, SNAP cuts of about $17 Billion over 10 years, food stamp cuts of $8 Billion over 10 years, and cuts to Vets of about $6 Billion over 10 years.  And I don’t even want to mention what it would take to fix Social Security or MediCare for comparison sake.
          Neither do I want to get into compensation on Wall Street or in the financial sector, the bonuses that went out in 2009, especially for the extraordinary skills displayed in “managing” a company through “The Crisis”.  I will mention that when J.P. Morgan, the person not the bank, rescued a company in the 19th Century he fired the president of the bank and replaced the Board of Directors, all without compensation (or green mail).

          So like I mentioned in a previous post, if you are a small business in Topeka, Kansas and you cannot get a loan today that you could have secured a few years ago…Tada, Tada, Tada!

Tuesday, February 4, 2014

ROOT CAUSES OF THE FINANCIAL CRISIS OF 2008

Economics Without The B.S.**: ROOT CAUSES OF THE FINANCIAL CRISIS OF 2008


[**  Double entendre intended.]

[Written in 2011]

ROOT CAUSES OF THE FINANCIAL CRISIS OF 2008
AND IT’S CONSEQUENCES


          If you are a small business in Topeka, Kansas and you cannot get a business loan today that you could have secured a few years ago…Why?  Why!  Because there was a great cash flow during the bailout of the financial industry that went from the rest of the nation to the New York City metropolitan area, where the financial industry is centered.
Recent commentary by some on the causes of the financial crisis is a mix of superfluous, disjointed peripheral issues and fails to get at the root causes and central issue concerning a well functioning democratic society dependent on a vibrant economic system.
          Some want to blame Fannie Mae and Freddie Mac; but, as the FCIC Report and Congressional testimony has indicated, they only contributed to the problem, they did not cause  the problem.  They do not originate any mortgages.  Their buying activity fueled the flames of the brew of toxic mortgages; but, they were late to the feast.  Testimony by Angelo Mozilo of Countywide, their biggest customer for selling mortgages to them, revealed that he told them they were “irrelevant” after they lost 40% of their market to Wall Street firms.
          They also blame community banks coming under the influence of the Community Reinvestment Act (CRA).  But as the FCIC Report indicates (and the FDIC) community banks contributed less toxic mortgages than other sub-prime lenders not subject to the CRA – Countrywide, Washington Mutual, and Citibank to name a few.
          Some blame too much Government regulation of the financial industry, which clearly defies the facts.  From the 1980’s and 1990’s the Glass-Steagull Act which separated commercial banking from investment banking in the 1930’s was continually weakened and ultimately got Citigroup mixed up in the toxic brew of this crisis.  In addition, the failure to let Brooksley  Born’s Commodity Futures Trading Commission regulate OTC (Over-The-Counter) derivatives meant that this market activity would remain opaque and in the dark  rather than transparent and in the open market.
          As the FCIC Report details – both the majority and the minority view – you had a toxic brew of financial products created by Wall Street firms that encouraged the lowering of underwriting standards not just for the making of mortgages but also the securitization of packaged mortgages, coupled with a failure of governance by rating agencies and an assortment of governmental regulators, resulting in a business model that could not sustain itself.  Not to mention a compensation system along the way for all participants which encouraged this societally destructive behavior.  When Lehman Brothers collapsed, following earlier bankruptcies of sub-prime lenders, the collapse of Bear Sterns, followed by the take-over of Fannie Mae and Freddie Mac, the “Crisis” began because of the liquidity squeeze from over-priced assets and over-leveraged financing resulting in a contraction to the world economy not seen since the 1930’s.  As the minority report noted, the liquidity freeze had international repercussions in Europe although they did not have the toxic mortgages and poor underwriting standards found in the U.S.; but, still got caught in the mire because of overly optimistic lending practices that led to a highly speculative market which could no longer be supported in the liquidity freeze.
          The problem, as the FCIC Report addresses, is that we have allowed these enterprises to become too big and too connected so that they represent a systemic risk if they fail.  It should not be left to governmental regulators to provide a safety guarantee from financial failure.  The moral hazard argument would suggest otherwise.  Instead of letting these business ventures fail, we (the Public) have had to transfer trillions of dollars from public resources to the financial industry in order to provide some form of stability to our way of life.  These contractions in our economy with the resultant take-over of failing firms by bailed-out healthier firms evolves into a concentration within the industry and a concentration of wealth and political influence which becomes entrenched and less subject to the transformation needed in a vibrant, democratic society.  This undermines our democratic, middle-class values.  What is regrettable is that several years later, even after Dodd-Frank, we still have the same financial system and we are back to business as usual.


P.S.  Those of us who are not professionals when studying just what is going on are left to wonder about the recent events in the world, especially in the Arab revolt of the masses, if there is not some connection between their plight – perhaps living in the margins of society – and the cash squeeze caused by the global effects of the financial crisis. 

Ben Bernanke’s Tenure at the FED

Economics Without The B.S.**: Ben Bernanke’s Tenure at the FED

[**  Double entendre intended.]


Ben Bernanke’s Tenure at the FED:
An Appraisal of the Bailout – Part I

It is difficult to say just how serious the Financial Crisis of 2008 was; but, by judging just from the Fed bailout alone that totaled into the trillions of dollars you can get a pretty good idea.  The Fed, under Ben Bernanke’s leadership went to extraordinary measures to rescue the financial sector of not just our economy but also the world economy.
Bernanke is a well-studied student of our Great Depression of the 1930s and of the 19th Century English writer Walter BagehotThe financial sector of the market is like the oil in your car’s engine – it is the lubricant that keeps transactions going in the business world.  When the financial sector freezes up (i.e., financial liquidity comes to a halt), the transactions stop flowing and the economy comes to a standstill and people suffer the consequences.  The prescription for a freeze-up in the market is to add liquidity, not just add liquidity but flood the market with liquidity, as Bagehot said in the 19th Century and as Bernanke did in the last quarter of 2008 and throughout 2009.  In the days of Central Banking, this means the Fed becomes the lender of last resort by buying assets in the financial sector (that may be undervalued as a result of the freeze-up or because they were bad investments to begin with) with Government treasuries that are more highly esteemed during times of financial stress.
Ben Bernanke studied the Great Depression of the 1930s and knew the failure of the Fed to take action at that time contributed to the hardships.  During the initial collapse of the market at the outset of the Depression combined with the initial tight monetary policies of the Fed to “cool off” the speculative fever of the 1920s resulted in a three year period where you had a deflationary spiral that almost reached 30%.  While deflationary spirals have negative consequences for everyone, it particularly hits debtors (people who borrow) the hardest because they cannot afford to make loan payments with earnings based on deflated dollars or income that has been cut by half.  Their failure to make payments of course affects creditors negatively also.  But among the debtors are your investors, the entrepreneurial class, who too often use extended credit for their investments.  When this entrepreneurial class gets hit, investment ceases, and economic growth collapses, and the economy shrinks.  During the Great Depression, the GDP shrank from around a little over $100 billion during the Roaring ‘20’s to a little over $55 billion during the depth of the Depression during the ‘30s.  This calamity is what caused the Great Depression to last so long until a recovery could be generated, mainly from the outbreak of WWII which created a demand for goods.

In 2008 our economy was around $14 trillion.  So if you are critical of the Fed actions under Ben Bernanke with the bailout of Wall Street at the expense of Main Street, think where you would be today if the economy went into a deflationary spiral and GDP shrank to $8 trillion?  And for those who would be opposed to any bailout on the grounds of moral hazard, I would ask:  If it took WWII to get us out of the Great Depression, what do you think would get us out of the Financial Crisis of 2008 if we had no bailout?