From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘Ben Bernake

Yet another comment about today’s economic news

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It’s hard NOT to be pleased at today’s economic news.  The unemployment rate is down, total employment is up (the two numbers don’t ALWAYS move in sync, due to the growth in the potential workforce), the stock market is up, the dollar is up versus the Euro, Yen, and Pound (not always a good thing), and bond yields are up (reflecting a potential demand for borrowing — a very “old school” view of stocks versus bonds).  Intriguingly, oil is up but only by $0.59 a barrel as of this writing (12:35am EST on Friday the 3rd)  — one would normally expect that great economic news would spur a run on oil.

Which may, in fact, reflect the continued anxiety in the marketplace.  Recessions rarely happen in a straight line (see my post a few weeks ago on the relationship between the yield curve and the onset of a recession — click here for a shortcut).  Real estate continues to be in disarray, and the banking sector is still in rehab, with the continued concern of a relapse if the Euro crisis doesn’t solve itself.

Ben Bernake’s testimony before the House Budget Committee this week was painful to watch  — members of Congress would prefer to listen to themselves rather than the Chair of the Fed, and it was clear that members of that august committee had only a cursory understanding of what the FED actually DOES.  Nonetheless, a piece of Bernake’s testimony had the tone of Armageddon.  He noted that we’re on our way to addressing the CURRENT problems — the huge deficit overhang, the Euro crisis, etc.  Congress still has ample work to do in those areas, but we are at least confronting the issues.  The larger problem, in his mind, is what start happening in about 10 years or so when the demographic overhang starts hitting.  The rapid shrinkage in the number of people PAYING into social security and medicare versus the number of people COLLECTING these transfer payments will be substantial, and this doesn’t even begin to address the productivity problems associated with a society in which a substantial number of people are retired and not contributing to the nation’s output.

Sigh…. at least it looks great today, right?

Written by johnkilpatrick

February 3, 2012 at 10:10 am

Niall Ferguson in Newsweek

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Absolutely riveting piece in Newsweek this week by Harvard Prof. Niall Ferguson titled “The Feds Critics are Wrong:  We Need to Avert Depression.”  He notes the significant parallels between the current financial crisis and the Great Depression.

In short — and I encourage you to read his piece and not just this synopsis — we often mistakenly think of the Great Depression as starting with the U.S. stock market crash in 1929.  Ferguson points out that there were really two depressions, the one that started in 1929 and the subsequent banking crisis that began in 1931 when European banks began to go bust.  This moved back across the pond to the U.S., and eventually led to our “bank holiday” in 1933.  This second crisis probably had longer and stronger impacts than the first, and wasn’t really ended until the arms buildup preceding WW-II.

It was this spector that Ben Bernake (who was a Depression-era scholar in academia) had in mind when he catalyzed the bank rescues in 2008, and Ferguson makes it clear that we are no where near out of the woods yet.  Ferguson encourages leaders to read Friedman and Schartz’s Monetary History of the United States, which he calls the “single most important book about American financial history ever written.  They note that the panic of 1929 turned into a depression because of avoidable errors by the FED.  Fortunately, Bernake is well aware of this history and is loathe to repeat those mistakes.  However, his views aren’t fully accepted — or politically acceptable — by our European allies, who are unfortunately in the driver’s seat right now.

Tim Geitner is in Europe this week, with an array of meetings in preparation for Thursday’s big soiree in Brussels.  (See David Jolly’s great article in this morning’s New York Times — click here for the article.)  Some good news — a German bond offering this week met with great success in the market, after problems with a similar bond offering back in November.  Markets seem to feel that European leaders (read:  Merkel and Sarkozy) understand what they need to do and are willing to impose the necessary discipline.  Nonetheless, one cannot understate the importance of Thursday’s meeting.

Written by johnkilpatrick

December 7, 2011 at 9:36 am

A Movie Review of Sorts

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I just saw HBO’s “Too Big To Fail”, staring a whole host of Hollywood “names” (James Woods, John Heard, William Hurt, Paul Giamatti, Cynthia Nixon, Topher Grace, Ed Asner etc.). Sadly, it’s a fairly boring movie, albeit about a terrifically exciting piece of near-term history. It focuses on the collapse of Lehman Brothers, mostly through the eyes of Treasury Secretary Hank Paulson (played spot-on by William Hurt). Asner does a wonderful Warren Buffett (who almost, albeit reluctantly, came to Lehman’s rescue) and Giamatti is a wonderful Ben Bernake. (As an aside — Bernake is the most dead-pan person I’ve ever met. Giamatti’s version of Bernake is even more deadpan than reality.)

The movie gets one thing right and one thing wrong. First, the wrong, and then the right.

The movie keeps referring to Lehman’s “real estate”. No one will buy Lehman if they have to buy its real estate holdings, too. Lehman’s real estate “problem” is at first estimated at $40 Billion, then $70B, then “who knows”. The truth, of course, was “who knows”. Cynthia Nixon plays Paulson’s press secretary, who serve as an amiable foil to allow Paulson and his Chief-of-Staff Jim Wilkinson (Topher Grace) to explain the nature of the crisis to her (and thus to the viewer). Unfortunately, Lehman’s “real estate” isn’t “real estate” but “real estate mortgages”. More to the point, they have “tranches” of real estate mortgage pools, and to understand what a “tranche” is would be well beyond the capacity of a two-hour movie. Tranche, by the way, comes from the French word for “slice”. Imagine we pool $100 million or so in mortgages, then split up the ownership into three equal parts — an “A” tranche which will get paid in full, including interest, before anyone else gets paid; a “B” tranche which gets paid next, and a “Z” tranche which only gets paid after everyone else gets paid.

In theory, all three tranches should be good securities, since the underlying mortgages are pretty safe bets, and in practice the “A” and “B” tranches really were pretty good. However, the “Z” tranches will bear all the default risks. Banks (both mortgage and investment) made tons of money on these things, because the default risks could be “priced” as long as market continued to rise. Various investment banks then borrowed money to buy “Z” tranches, and coupled with credit-default swaps (essentially, a mutual insurance pact among investment banks), they were able to borrow huge amounts of money with very little capital.

The Paulson/Wilkinson explanation in the movie makes it sound like the whole problem came from mortgage defaults and foreclosures. In reality, mortgage defaults DO cycle up when a recession comes along, but these are usually predictable cycles. The REAL problem came from borrowing huge amounts of money — with almost no capital — to buy “Z” tranches that didn’t reasonably price the increased in defaults. A slight up-tick in defaults sent everyone to the emergency room, and when owners couldn’t sell or re-finance, the whole market went down the tubes. THAT was the “real estate” problem which plagued Bear Sterns, Lehman Brothers, Salomon Brothers, Morgan Stanley (my old alma-mater) and all the others. Sadly, the movie perpetuates the myth that the real estate down-turn was an exogenous event, and fails to discuss the sins of the secondary mortgage market which took a simple, cyclical downturn and turned it into a long-term, world-wide crisis.

But, even with that, the movie got one thing so very right that made up for the mistakes. In one pivotal scene, Paulson and his team are presenting the TARP idea to the leaders of Congress. (Central Casting found some excellent look-alikes for Pelosi, Dodd, Shelby, Frank, and the rest.) Note that this comes very late in the movie, well after Paulson (an almost billionaire, who really didn’t sign on for this level of stress) and his team have tried ever possible solution to stem the crisis. The movie does a great job of playing Paulson up as the unsung hero who really saved the world’s economic life, by the way. Anyway, the leaders of Congress don’t “get it” until Giamatti’s Bernake gives the most important 2-minute economic lecture in history. He notes that while the Great Depression started with a stock market crash, it was the failure of the credit markets which made the depression last so long. The current crisis, if left un-solved, would spin the world into a much worse, much longer economic depression. Giamatti really nails the tone of the reality which was facing the nation’s top economic thinkers at the time.

Anyway, I don’t watch very many movies. I saw Adam Sandler and Jennifer Anniston in “Just Go With It” on an airplane last week, and thought it was a hoot. As movies come-and-go, “Too Big To Fail” doesn’t even rise to the entertainment level of “Just Go With It”, but as an educational piece, it’s a must-see, even with its critical flaws.

Written by johnkilpatrick

June 7, 2011 at 4:54 pm

Paul Krugman’s Column

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Frequently I disagree with Prof. Krugman, but I nonetheless enjoy reading what he has to say. His writing is clear and lucid, and he backs up what he has to say with facts rather than simplistic conjecture. Nobel Prize Winners tend to write like that.

Today’s column in the New York Times is no exception, and this happens to be one of those times that I agree with him. Indeed, I think he doesn’t go far enough. I’ll leave the bulk of what he’s said for you to read on your own, but basically he ties global warming (even if you disagree with the theory, you can’t argue with the empirical observations) to floods, famine, and food inflation. Many critics (the Chinese, right-wing-ers, etc.) blame Ben Bernake and QE2 for the crisis. That theory has a real cart-before-the-horse problem. As it happens, global food price inflation became a reality before QE2, not after. Some theorists would also blame China and other developing nations — as their economies grow, their people want and indeed need better calorie counts. City dwellers have less time to prepare complex meals from simple ingredients, thus adding to the food logistics chain.

Krugman draws, I think, a difficult but correct conclusion that global unrest (Egypt, Tunisia) has to be placed in the context of food prices. In developing countries, food makes up a much larger portion of consumption expenditures than it does in the U.S., Japan, or Europe.

Where Krugman stops short, unfortunately, is the more direct implications for the U.S. Authoritarian governments who draw this lesson properly will find themselves caught between a rock and a hard place. On one hand, they will want to pay workers more, either directly (through higher wages) or indirectly (through food subsidies). China, with enormous cash reserves, has the easiest time of this. Indonesia, for example, will face problems. On the other hand, rising wages means either directly raising the costs to the consumers (that’s us and our European friends) or indirectly raising it via currency manipulation (which few countries have the ability to do). Of course, consumers faced with rising prices have the option of decreasing consumption, something which is fairly easy to do when we’re talking about non-essentials. Declining consumption leads to unemployment abroad, which frightens the daylights out of authoritarian regimes.

U.S. consumers have enjoyed rapid increases in consumption with relatively flat-lined prices for the last three decades, due to the juxtaposition of relatively flat commodity prices (food, energy, raw materials), rapid increases in productivity, and global application of the law of comparative advantage. Spikes in commodity prices could change all of this, as we saw in the 1970’s, and THAT may be the most important thing to look at in the economy right now.

Written by johnkilpatrick

February 7, 2011 at 10:06 am

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