Tuesday, July 31, 2012

The Fed Should Stop Paying The Too-Big-To-Fail Banks Not to Lend

Commercial banks have significant excess reserves, but aren't very interested in lending those reserves.  Why should they when the Fed is paying them for those excess funds?  Why incur any risk (except when they want to stupidly act like hedge funds instead of commercial banks) when they can just make money by letting those excess deposits sit in their Fed accounts and get paid interest with taxpayer $?

This is but one more example of how the Fed is more interested in "protecting" the too-big-to-fail-banks than it is in stimulating the economy.

In the commentary reprinted below, Alan Blinder makes an interesting suggestion as to how the Fed could move the banks away from their risk-adverse position with these excess funds and move them toward stimulating the economy through commercial lending activities.

Commentary by ALAN S. BLINDER (July 22, 2012)
(Mr. Blinder, a professor of economics and public affairs at Princeton University, is a former vice chairman of the Federal Reserve.)

The U.S. economy could use another boost, and it won't come from fiscal policy. Can the Federal Reserve provide it?

Chairman Ben Bernanke keeps insisting that the central bank is not out of ammunition, and in a literal sense he is right. After all, the Fed has not yet exhausted its bag of tricks. It is still twisting the yield curve. It can purchase more assets. It can tell us that its federal funds target interest rate will remain 0-25 basis points beyond late 2014. It can even nudge the funds rate down within that range. The operational question is: How powerful are any of these weapons?

Let's start with Operation Twist, which was recently extended through the end of this year. The Fed seeks to flatten the yield curve by buying longer-term Treasurys and selling shorter-term ones. And it's probably succeeding—a bit. But Federal Reserve activity in the Treasury markets is modest compared with the vast volume of trading. Realistically, the U.S. yield curve is probably influenced far more by daily developments in Europe. In any case, the Fed will be out of short-term Treasurys to sell by December.

The logical next step would be more quantitative easing—QE3—or, as the Fed likes to call it, more large-scale asset purchases. Purchases of what? There are two main choices. One is Treasurys. But does anyone really think that lower U.S. Treasury rates are what this country needs?

Mortgage-backed securities (MBS) are a better choice, the idea being to reduce mortgage rates by shrinking the spread between MBS and Treasurys. But mortgage rates are already falling toward 3.5%. With 10-year expected inflation around 2.1%, can a 1.4% real interest rate be deterring many prospective home buyers? No, they are shut out of the market by the unavailability of credit. Posted rates are low, but try getting a mortgage. The third available weapon is what the Fed calls "forward guidance"—that is, indicating (please don't say promising!) that the 0-25 basis points funds rate will be maintained for years to come. The Fed's current guidance (please don't call it a pledge!) extends "at least through late 2014." While that's pretty far into the future, the Fed could stretch it to 2015, 2016 or 2025 for that matter.

In rational models, the yield curve should flatten a bit every time the Fed pushes that date out further. But the key words here are "rational" and "a bit." To most bond traders, two and a half years is already an eternity. Would they really respond much if 2015 replaced 2014?

This brief analysis paints a pretty grim picture: The Fed has three weak weapons, one of which will be exhausted by year's end.

Fortunately, there is more the Fed can do. I have two out-of-the-box suggestions to make, one in today's column and another in a companion piece soon.

The simpler option is one I've been urging on the Fed for more than two years: Lower the interest rate paid on excess reserves. The basic idea is simple. If the Fed reduces the reward for holding excess reserves, banks will hold less of them—which means they will have to find something else to do with the money, such as lending it out or putting it in the capital markets.

The Fed sees this as a radical change. But remember that it paid no interest on reserves before the 2008 crisis and, not surprisingly, banks held practically no excess reserves then. In early October of that year, Congress gave the Fed authority to pay interest on reserves, which it promptly started doing. When the Fed trimmed the federal funds rate to its current 0-25 basis-point range in December 2008, it also lowered the interest rate on reserves to 25 basis points, where it has been ever since.

My suggestion is to push it lower in two stages. First, test the waters by cutting the interest on excess reserves (in Fedspeak, the "IOER") to zero. Then, if nothing goes wrong, drop it to, say, minus-25 basis points—that is, charge banks a fee for holding their money at the Fed. Doing so would provide a powerful incentive for banks to disgorge some of their idle reserves. True, most of the money would probably find its way into short-term money-market instruments such as fed funds, T-bills and commercial paper. But some would probably flow into increased lending, which is just what the economy needs.

The Fed has steadfastly opposed this idea for years. Why? One objection is true but silly: Lowering the IOER might not be a very powerful instrument. No kidding. Are there a lot of powerful instruments sitting around unused?

The other objection is that making the IOER zero or negative would push other money-market rates even closer to zero than they are now, thereby hurting money-market funds and otherwise impeding the functioning of money markets. My answer two years ago was that we have more important things to worry about. My answer today is that it has mostly happened anyway: U.S. money-market rates are negligible.

It is noteworthy that the European Central Bank just jumped ahead of the Fed by cutting the rate it pays on bank deposits to zero—and European money markets did not die. Denmark's National Bank went even further, dropping its deposit rate to minus 20 basis points. Yet the Little Mermaid still sits in Copenhagen harbor.

The Fed's hostility toward lowering the interest on excess reserves is almost self-contradictory. When Mr. Bernanke lists the weapons the Fed plans to use when the time comes to tighten monetary policy, he always gives raising the IOER a prominent role. His reasoning is straightforward and sound: If the Fed makes holding reserves more attractive, banks will hold more of them. Why doesn't the same reasoning apply in the other direction?

But suppose it doesn't work. Suppose the Fed cuts the IOER from 25 basis points to minus 25 basis points, and banks don't lend one penny more. In that case, the Fed stops paying banks almost $4 billion a year in interest and, instead, starts collecting roughly equal fees from banks. That would be almost an $8 billion swing from banks to taxpayers. There are worse things.

Thursday, July 26, 2012

Job Creators, The Middle Class, Taxes, Class Warfare, Common Sense

Mitt Romney's Diplomacy 1.0

From an article in the Financial Times --

July 26, 2012 1:47 pm

Romney questions UK enthusiasm for Olympics

Mitt Romney, the presumptive Republican candidate for the US presidency, got off to a shaky start in his effort to show a statesmanlike profile when he appeared to question London’s readiness to host the Olympics and the British people’s enthusiasm for the Games.

Tuesday, July 17, 2012

Why? Why? Why?

News story #1 -

"WASHINGTON -- Senate Republicans blocked a bill Monday evening to increase transparency in campaign spending by independent groups.

In a 51-44 vote, the DISCLOSE Act failed to obtain the 60 votes needed to clear a Republican filibuster. The bill would have required disclosure of anyone who donates to independent groups that spent more than $10,000 on campaign ads -- or their functional equivalent -- and other election spending."

News story #2 - Here's the answer to the "why" related to news story #1 -

"The megadonors who bankrolled “super PACs” during the Republican presidential primary are now turning their attention to the general election, with some top donors pouring millions of dollars into Republican efforts.

Restore Our Future, the super PAC affiliated with Mitt Romney’s presidential campaign, raised more than $20 million in June, an official said on Monday, at least half from the casino billionaire Sheldon Adelson and his wife, Miriam. The couple also poured $5 million into the YG Action Fund, a super PAC started by former aides to the Republican House majority leader, Eric Cantor of Virginia, according to filings with the Federal Election Commission. The financier Bruce Kovner and his wife, Suzanne, gave $250,000 to the group.

The Congressional Leadership Fund, a group devoted to Republicans running for the House, raised $1.3 million in June, with $1 million from the Texas homebuilder Bob J. Perry, who contributed heavily to Republican super PACs during the primary.

Those totals do not include the millions of dollars being funneled into tax-exempt groups that are politically active but are not required to register with the Federal Election Commission or disclose their donors."

Sunday, July 15, 2012

We Need a President We Can Trust

Here's a problem the American electorate should have with Mitt Romney:  we don't know what he stands for.  Secrecy surrounds the policies he would promote as President, secrecy surrounds his tax returns and the compensation he may have received for his tenure at Bain Capital when he wasn't in "any management capacity" (although he signed various documents certifying that he did exercise management responsibilities when he wasn't in "any management capacity"), secrecy surrounds what's "really in [his] heart" (but he just can't or won't articulate it). Basically, the American electorate just doesn't know who Mitt Romney is or what he stands for.
So what do we think of Mitt Romney?  Will the real Mitt Romney please stand up?

"I was not responsible for what happened at Bain Capital after I left" - Mitt Romney
"I was the sole shareholder, sole Managing Director, Chief Executive O
fficer and President of Bain until I resigned retroactively [huh?] in 2001" - Mitt Romney

"The Arizona immigration policy is a good model" – Mitt Romney
"I didn't really support the Arizona immigration policy" – Mitt Romney

“The Massachusetts healthcare plan should be a model for the nation” – Mitt Romney
“Healthcare reform should be left to the states” – Mitt Romney

"Let Detroit go bankrupt" -Mitt Romney
"I'll take a lot of credit for saving the auto industry" -Mitt Romney

“I believe Roe v Wade has gone too far.” – Mitt Romney
“Roe v Wade has been the law for 20 years ... we should sustain and support it.” – Mitt Romney

“I respect and will protect a woman’s right to choose.” – Mitt Romney
“I never really called myself pro-choice.” – Mitt Romney

“It was not my desire to go off and serve in Vietnam.” – Mitt Romney
“I longed in many respects to actually be in Vietnam and represent our country there.” – Mitt Romney

“I’m not trying to return to Reagan-Bush.” – Mitt Romney
“Ronald Reagan is … my hero.” – Mitt Romney

“I think the minimum wage ought to keep pace with inflation.” – Mitt Romney
"There’s no question raising the minimum wage excessively causes a loss of jobs.” – Mitt Romney

“I saw my father march with Martin Luther King.” – Mitt Romney
“I did not see it with my own eyes.” – Mitt Romney

“I would like to have campaign spending limits.” – Mitt Romney
“The American people should be free to advocate for their candidates without burdensome limitations.” – Mitt Romney

“I supported the assault weapon ban.” – Mitt Romney
"I don’t support any gun control legislation.” – Mitt Romney

Campaign Finance Reform

So, why can't we get our elected Representatives to enact real campaign finance reform?   Maybe they really don't want our Democracy "to be of the people, by the people, and for the people" (that is, all the people).

Friday, July 13, 2012

American Democracy for Sale -- Another Thought

American Democracy for Sale -- and All Americans Lose

  • The Tea Party is always talking about "taking the country back." They're not clear about whom it should be taken back from, nor are they very clear on why it needs to be taken back.
  • But I think Robert Reich has put his finger on something in his recent article that I have reprinted below in full.
  • We do need to reestablish that our democracy is of the people, by the people and for the people --- and, unfortunate as it is that we need to do so, we need to insert "all" before "the people."
  • The Supreme Court's decision in Citizens United v. Federal Election Commission put us on the very slippery slope whereby our democracy is being sold to the highest bidder --- and without transparency, we sometimes don't even know who the highest bidder is. As a result, all Americans (even the Tea Party folk) are losers in this process.

Here's the Reich article ---

Who’s buying our democracy? Wall Street financiers, the Koch brothers, and casino magnates Sheldon Adelson and Steve Wynn.

And they’re doing much of it in secret.

It’s a perfect storm:
The greatest concentration of wealth in more than a century — courtesy “trickle-down” economics, Reagan and Bush tax cuts, and the demise of organized labor.
Combined with…
Unlimited political contributions — courtesy of Republican-appointed Justices Roberts, Scalia, Alito, Thomas, and Kennedy, in one of the dumbest decisions in Supreme Court history, “Citizens United vs. Federal Election Commission,” along with lower-court rulings that have expanded it.
Combined with…
Complete secrecy about who’s contributing how much to whom — courtesy of a loophole in the tax laws that allows so-called non-profit “social welfare” organizations to accept the unlimited contributions for hard-hitting political ads.

Put them all together and our democracy is being sold down the drain.

With a more equitable and traditional distribution of wealth, far more Americans would have a fair chance of influencing politics. As the great jurist Louis Brandeis once said, “we can have a democracy or we can have great wealth in the hands of a comparative few, but we cannot have both.”

Alternatively, inequality wouldn’t be as much of a problem if we had strict laws limiting political spending or, at the very least, disclosing who was contributing what.

But we have an almost unprecedented concentration of wealth and unlimited political spending and secrecy.

I’m not letting Democrats off the hook. Democratic candidates are still too dependent on Wall Street casino moguls and real casino magnates (Steve Wynn has been a major contributor to Harry Reid, for example). George Soros and a few others have poured big bucks into Democratic coffers. So have a handful of trade unions.

But make no mistake. Compared to what the GOP is doing this year, Democrats are conducting a high-school bake sale. The mega-selling of American democracy is a Republican invention, and Romney and the GOP are its major beneficiaries.

And the losers aren’t just Democrats. They’re the American people.

You need to make a ruckus. Don’t fall into the seductive trap of cynicism. That’s what the sellers of American democracy are counting on. If you give up on our system of government, they win everything.

This coming Monday, for example, the Senate has scheduled a cloture vote on the DISCLOSE ACT, which would at least require that outfits like the Chamber of Commerce and Karl Rove’s “Crossroads GPS” disclose who’s contributing what. Contact your senators, and have your friends and relatives in other states — especially those with Republican senators (who have been united in their opposition to disclosure) — contact theirs. If the DISCLOSE ACT is voted down, hold accountable those senators (and, when and if it gets to the House, those House members) who are selling out our democracy for the sake of their own personal ambitions.

Re-thinking Your Investment Perspective

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend and step off before it is discredited."
George Soros

Wednesday, July 11, 2012

A Message for the KC Fans Who Booed Yankee Robinson Cano

Here's a message for the classless Kansas City Royals "fans" who booed NY Yankee Robinson Cano because he didn't pick KC's Billy Butler to be on the AL Home Run Derby team ---

First, Butler didn’t deserve to be picked over Prince Fielder, Jose Batista or Mark Trumbo.

Second, Robbie showed class when interviewed after the event (maybe KC fans could learn something from Cano's classy response).

Oh yes, and third, Robbie will be going to Baseball's Hall of Fame some day and maybe, if he's lucky, Billy will be able to get into another All Star game and do better than his 0-2 showing last night.

Is the US the Greatest Country in the World Anymore?

Some who view this post will think I've gone off the "liberal/progressive" deep end and lost my patriotic bearings.  (Actually, I remain a political moderate today, although that position would have been described as "conservative" not so long ago.)  I can hear some say, "How dare he question the greatness of our Country?" --- and if our President even thought of mentioning that we, as a Country, could do better in any area than we're doing, the ultra- (and not-so-ultra-) conservative TV and radio airways would be filled with comments like "you lie" or "traitor" or "he doesn't believe in American exceptionalism."

But the truth is that I'm more and more realizing that to be unquestioning of our Country and its policies and its results is what is truly unpatriotic.  And those who would stick their heads in the sand about our lack of National exceptionalism are the most unpatriotic and do no good service for our Country.

As the fictional news anchor Will McAvoy states in this clip from HBO's The Newsroom, "The first step in solving any problem is recognizing there is one — America is not the greatest country in the world anymore."

On the other hand, America can once again be the greatest country in the world --- but we can't do it without solving our problems in a bi-partisan fashion.  Hopefully, we'll all think of that as we enter our voting booths in November and exercise our Constitutional freedom to choose our elected representatives to steer us once again toward American exceptionalism.

For those who want to reflect on what Will says in his rant, here's the transcript ---
It's not the greatest country in the world, professor, that's my answer.
[pause] You're saying—
Let's talk about—
Fine. [to the liberal panelist] Sharon, the NEA is a loser. Yeah, it accounts for a penny out of our paychecks, but he [gesturing to the conservative panelist] gets to hit you with it anytime he wants. It doesn't cost money, it costs votes. It costs airtime and column inches. You know why people don't like liberals? Because they lose. If liberals are so fuckin' smart, how come they lose so GODDAM ALWAYS!
And [to the conservative panelist] with a straight face, you're going to tell students that America's so starspangled awesome that we're the only ones in the world who have freedom? Canada has freedom, Japan has freedom, the UK, France, Italy, Germany, Spain, Australia, Belgium has freedom. Two hundred seven sovereign states in the world, like 180 of them have freedom.
And you—sorority girl—yeah—just in case you accidentally wander into a voting booth one day, there are some things you should know, and one of them is that there is absolutely no evidence to support the statement that we're the greatest country in the world. We're seventh in literacy, twenty-seventh in math, twenty-second in science, forty-ninth in life expectancy, 178th in infant mortality, third in median household income, number four in labor force, and number four in exports. We lead the world in only three categories: number of incarcerated citizens per capita, number of adults who believe angels are real, and defense spending, where we spend more than the next twenty-six countries combined, twenty-five of whom are allies. None of this is the fault of a 20-year-old college student, but you, nonetheless, are without a doubt, a member of the WORST-period-GENERATION-period-EVER-period, so when you ask what makes us the greatest country in the world, I don't know what the fuck you're talking about?! Yosemite?!!!
We sure used to be. We stood up for what was right! We fought for moral reasons, we passed and struck down laws for moral reasons. We waged wars on poverty, not poor people. We sacrificed, we cared about our neighbors, we put our money where our mouths were, and we never beat our chest. We built great big things, made ungodly technological advances, explored the universe, cured diseases, and cultivated the world's greatest artists and the world's greatest economy. We reached for the stars, and we acted like men. We aspired to intelligence; we didn't belittle it; it didn't make us feel inferior. We didn't identify ourselves by who we voted for in the last election, and we didn't scare so easy. And we were able to be all these things and do all these things because we were informed. By great men, men who were revered. The first step in solving any problem is recognizing there is one—America is not the greatest country in the world anymore.
[to moderator] Enough?

Monday, July 9, 2012

Mitt's Approach to the Deficit!

Here's Romney's approach --- go beyond the Bush tax cuts for the weathiest Americans ---

Is Mitt f***ing kidding us?  Is he interested in being President of the whole country or just interested in taking care of himself and his too-wealthy-to-care friends?

Tell Me Again --- How Are LIBOR Rates Set?

Apparently without any transparency ...

Sunday, July 8, 2012

The "Ethics" of the Too-Big-To-Fail Banks

Just when you think the too-big-to-fail banks can’t stoop any lower with their ethics, here we go again ---

The Wall Street Scandal of all Scandals by Robert Reich
Saturday, July 7, 2012

Just when you thought Wall Street couldn’t sink any lower – when its myriad abuses of public trust have already spread a miasma of cynicism over the entire economic system, giving birth to Tea Partiers and Occupiers and all manner of conspiracy theories; when its excesses have already wrought havoc with the lives of millions of Americans, causing taxpayers to shell out billions (of which only a portion has been repaid) even as its top executives are back to making more money than ever; when its vast political power (via campaign contributions) has already eviscerated much of the Dodd-Frank law that was supposed to rein it in, including the so-called “Volker” Rule that was sold as a milder version of the old Glass-Steagall Act that used to separate investment from commercial banking – yes, just when you thought the Street had hit bottom, an even deeper level of public-be-damned greed and corruption is revealed.

Sit down and hold on to your chair.

What’s the most basic service banks provide? Borrow money and lend it out. You put your savings in a bank to hold in trust, and the bank agrees to pay you interest on it. Or you borrow money from the bank and you agree to pay the bank interest.

How is this interest rate determined? We trust that the banking system is setting today’s rate based on its best guess about the future worth of the money. And we assume that guess is based, in turn, on the cumulative market predictions of countless lenders and borrowers all over the world about the future supply and demand for the dough.

But suppose our assumption is wrong. Suppose the bankers are manipulating the interest rate so they can place bets with the money you lend or repay them – bets that will pay off big for them because they have inside information on what the market is really predicting, which they’re not sharing with you.

That would be a mammoth violation of public trust. And it would amount to a rip-off of almost cosmic proportion – trillions of dollars that you and I and other average people would otherwise have received or saved on our lending and borrowing that have been going instead to the bankers. It would make the other abuses of trust we’ve witnessed look like child’s play by comparison.

Sad to say, there’s reason to believe this has been going on, or something very much like it. This is what the emerging scandal over “Libor” (short for “London interbank offered rate”) is all about.

Libor is the benchmark for trillions of dollars of loans worldwide – mortgage loans, small-business loans, personal loans. It’s compiled by averaging the rates at which the major banks say they borrow.

So far, the scandal has been limited to Barclay’s, a big London-based bank that just paid $453 million to U.S. and British bank regulators, whose top executives have been forced to resign, and whose traders’ emails give a chilling picture of how easily they got their colleagues to rig interest rates in order to make big bucks. (Robert Diamond, Jr., the former Barclay CEO who was forced to resign, said the emails made him “physically ill” – perhaps because they so patently reveal the corruption.)

But Wall Street has almost surely been involved in the same practice, including the usual suspects — JPMorgan Chase, Citigroup, and Bank of America – because every major bank participates in setting the Libor rate, and Barclay’s couldn’t have rigged it without their witting involvement.

In fact, Barclay’s defense has been that every major bank was fixing Libor in the same way, and for the same reason. And Barclays is “cooperating” (i.e., giving damning evidence about other big banks) with the Justice Department and other regulators in order to avoid steeper penalties or criminal prosecutions, so the fireworks have just begun.

There are really two different Libor scandals. One has to do with a period just before the financial crisis, around 2007, when Barclays and other banks submitted fake Libor rates lower than the banks’ actual borrowing costs in order to disguise how much trouble they were in. This was bad enough. Had the world known then, action might have been taken earlier to diminish the impact of the near financial meltdown of 2008.

But the other scandal is even worse. It involves a more general practice, starting around 2005 and continuing until – who knows? it might still be going on — to rig the Libor in whatever way necessary to assure the banks’ bets on derivatives would be profitable.

This is insider trading on a gigantic scale. It makes the bankers winners and the rest of us – whose money they’ve used for to make their bets – losers and chumps.

What to do about it, other than hope the Justice Department and other regulators impose stiff fines and even criminal penalties, and hold executives responsible?

When it comes to Wall Street and the financial sector in general, most of us suffer outrage fatigue combined with an overwhelming cynicism that nothing will ever be done to stop these abuses because the Street is too powerful. But that fatigue and cynicism are self-fulfilling; nothing will be done if we succumb to them.

The alternative is to be unflagging and unflinching in our demand that Glass-Steagall be reinstituted and the biggest banks be broken up. The question is whether the unfolding Libor scandal will provide enough ammunition and energy to finally get the job done.