Crisis Management, Rethought

Atif Mian and Amir Sufi's House of Debt reviewed in today's New York Times appears not to have given a second thought to the concentration of the banking system that lead toward the 2008 crash.  The complete reliance on third parties with no skin in the game is the culprit and is what is required to reset. 

Three Expensive Milliseconds

This blog has been about the country's wasted brains and resources dedicated to Wall Street financial chicanery.  It appears Paul Krugman came to the same realization.

The Moral Power of Curiosity

Thank you David Brook's for your editorial. It generated a quite a lot of comment, such as from

Rachel

 NJ/NY Yesterday

"I think that the psychology of Wall Street traders follows that old dictum that it is hard to get a man to understand something when his salary depends on his not understanding it. I don't see Wall Street as a lot of evil people, but as a culture in which it is very convenient and profitable for people to gloss over the moral elements of what they are doing. Saying that they are "smarter" is an easy way to justify immoral behavior. And making bankers work 80 hours/week immerses them in the culture so much that they will lack the perspective that they might otherwise have from experiences outside their field (not to mention justifying the mythology that they "just work harder" than others.)

But seriously, Mr. Brooks: "If market-rigging is defeated, it won't be by regulators, it will be through market innovation in which a good exchange replaces bad exchanges"? Who is going to demand the market innovate? Not the people earning a lot of money and power from the current system. No, it has to be an outsider, and it has to be legislated. I might add that this is exactly the sort of task the government is supposed to do: protect the little guy (meaning the everyday investor) against the big fish who have infinitely more resources. The government is supposed to be the "resource" of the everyday citizen. That is why we have police and a justice system, remember? So rich people can't just buy the justice they want. No "market system" can replace the social compact."

Apparently she did not read the book where the SEC (Securities and Exchange Commission an institution meant to protect investors) turned out to be more than useless, actually complicit and quick to defend the front running activity with the expectation of some of the young regulators transitioning to the High Speed Trading world as highly paid consultants or lobbyist. This response is quite normal in finance where those being regulated out gun the regulators every time.

The best point of the book is that the good guys are going to come out on top because of free market forces. The activity described in Lewis's book is how professional investors were the victims of High Speed Trading Networks. Now that the dirty secret is out and well understood these very same people will vote with their feet and and take their business to banks that give them a fair deal. This expose shines a very bright light into Wall Street that is much better than a short and concise Dodd Frank Act could ever pretend to be; I was about to write ten Dodd Franks but that would make it weaker then with its current complexity making it fodder for gaming to total irrelevance.

The Gathering Storm and waiting for a Dead Canary

China's first bond default is a dead canary coming the from developing economies's mine shaft.  That may break pretty soon.  On the other hand, the strength of the Euro comes from a carry trade sweeping problematic bank to government loans under a huge rug. It's an irrationality outlasting my liquidity.

Flash Boys

MIchael Lewis’s book returns trust as a virtue with value in finance.  This from a blogger who has been ranting about Banks playing games with the public for the past five years.  The optimism comes from a leading bank; Goldman Sachs, a subject of previous evisceration, debating within its ranks their long term survival under the following conditions:  High Speed Trading networks are built to take advantage of customers.   HST is best exploited by small agile firms, not a Goldman, who have no customers but game Goldman’s customers.  Goldman brings to the table customers who are taken as lambs to the slaughter which is a long term loser proposition for the bank. Lewis’s expose puts Goldman in a better light than its competitors for at least acknowledging the problem beforehand and evidently helping to promote a trustworthy solution. The beauty of his expose is that customers being taken advantage of are professional and now understand how they have been gamed so that the market resolves the excesses without depending on a compromised and really useless SEC.

This is How a Lobbyist Operates

There is nothing positive that can be said of a financial network that front runs customer orders, but Philip Delves Broughton's editorial "Flash Boys for the People" certainly tries. Whether the small investor benefits is a laughable side issue as if High Frequency Traders ever had good intentions for them. Not mentioning trust is the fatal flaw in his argument.

A bank that throws customer orders to an exchange that pays them for the privilege of taking the order to front run, buy before the customer and sell back at a higher price is a practice long considered untrustworthy of an agent, is guilty of taking advantage of its client. It is surprising there are any customers left on a Wall Street best described as being in the middle of a giant shark frenzy where the sharks are eating themselves. There is no regulation that fixes this which is proper since regulations are fair game for the untrustworthy. The lesson here is to buy simple instruments, stocks and bonds and not complex ones such as funds and ETFS, for the long term and just stay out of the casino as much as possible.

An Obama Narrative in anticipation of Tim Geithner's Stress Test

Rahm Emanuel, Barack Obama’s Chief of Staff in the first term, famously declared that a crisis is too important to waste.  Unfortunately the newly elected president’s political philosophy is best described as Hamiltonian Federalist versus Jeffersonian Liberal, in the old sense of the term celebrating the individual and distrusting concentrated power.  It was an unfortunate bias for him to have because it left him unprepared to give the bank system the required reset of the century. Andrew Jackson’s reset by not renewing the charter of the Bank of the United States in the 19th and FDR’s with Glass Steagall in the 20th century were long lasting break ups of financial power and concentration.  The Dodd Frank Act, on the other hand, doesn’t and dams the economy to less than optimal growth.  

Fox news and right wing punditry aside, The Administration has many indices headed in the correct direction for those of us wishing for less government and more liberty.  The economy is growing with private employment up and government jobs down.  The deficit is decreasing.  We are disengaged from the war in Iraq and soon will be from Afghanistan as well. Other foreign events have been dealt with a clear head and in partnership with our allies.  Finally the legislative momentum has been brought to a crawl thereby reducing the prospect of further harm being done as the country mends itself.  His legacy will be of competent leadership.

This is from a President who entered office with a challenge for which he had neither the economic nor philosophical framework to understand, much less decide what to do at the cusp of the Great Recession.  That Tim Geithner, his Secretary of the Treasury, was a master mechanic of the broken status quo was not recognized.  Fearing a cascading effect, Treasury did not want to draw blood in Wall Street and decided to protect even the untenable banks.  Unfortunately Bank of America harbored Angelo Mozilo, the great criminal of the recession whose Countrywide Financial operation perpetrated a massive fraud on banks throughout the world.  Citigroup reached its nadir through sheer incompetence but Treasury compelled it’s resentful competitors to prop it up.  By this sweeping of financial misdeeds under the rug the newly elected President’s goodwill turned to ashes within his first thirty days in office.

It ignited Rick Santelli to famously rant on CNBC Business News television against protecting irresponsible borrowers. That the tirade began the Tea Party was really the least of Obama’s problems because Santelli shifted the blame to the borrowers rather than duplicitous lenders. On the other hand, banks that had acted correctly and prudently felt betrayed by the Administration for holding water for those who acted badly and recklessly.  By summer of 2009 the bad feeling in the banking community was so that none of the major players would attend a Wall Street presentation that the President gave. The impression that took over that first year was that Obama abandoned the little guy and let Wall Street off the hook.

Dodd Frank requires a rewrite to one simple precept, that every financial institution, be it Bank, Insurance Company or Investment Firm which reaches one percent of Gross Domestic Product in assets under their control divest into smaller completely separate entities.  The end result is an act that commands rather than micromanages.  It eliminates systematic risk.  Those institutions that game the system are bankrupted by free markets that determine the ersatz services and benefits they offer are worthless. Fewer bonuses for those duping their customers and a slow regression to the mean in the country’s income distribution. Unfortunately with the Financial Lobby’s current vise grip on Washington there is no chance for passing such a simple act until the next crisis.

Bill Clinton wished for the opportunity to have lead in a dire time and thereby put him in the pantheon of the Great Presidents.  Barack Obama’s bad luck in this regard is that he had the crisis but let it slip through his fingers by not having the trust busting instinct of a Teddy Roosevelt who made Standard Oil divest into five distinct competitors, a courageous battle that makes TR a Great President, despite the progressive baggage.  Obama, on the other hand, is the nation’s first President of African descent where he proves American Exceptionalism with his every living breath and for that will be remembered.