Subprime Reasoning

Subprime Reasoning on Housing is a title that says it all for the argument David Beckworth and Ramesh Ponnuru  put forward of tight money causing the 2008 Great Recession. Its a macro view that believes a little adjusting of interest rates which were at a historical low of 2% was going to turn around "The Big Short's" well described bubble of fraud saddling the nation's families with mortgages that were impossible to pay off.

As a side note, another case of subprime reasoning is Paul Krugman's "Passive-Aggressive Two Step" blog post regarding Milton Friedman and Anna Schwartz's criticism of the Federal Reserves inaction in The Monetary History of the United States.  Monetarist are critical of the Fed for not being the lender of last resort so that banks failed and money contracted with a downward spiral into complete depression during the years 1931-33, well after the 1929 crash and the asset deflation. Krugman's dogmatic perspective to explain the facts unfairly is beneath a scientist and a Nobel Laureate, remember Milton got his long before and for enduring work; not so for Krugman.

Ratings Agencies are Conflicted

Gretchen Morgenson's Still Missing the Mark on Ratings brings into question whether the rating agency impartiality problem has been solved. As long as the agency's customer is the one asking for the rating there will be a conflict of interest.  Furthermore the requirement that an SEC approved rating agency be used to certify the credit worthiness of an instrument makes it all the more damming.

A Banker Who Eats What he Kills does more for the Public Good than a Fat Cat on Top of a Pile of Assets

A Personal Touch Lets Wall Street Boutique Banks Run With the Big Dogs is a headline that brings up a previously suggested law to split financial institutions into Not Too Big To Fail companies.   As explained before these splits could be inexpensively done by distributing shares of the different new entities to the shareholders of the original big company, very much in the same manner that the Bell Telephone company was split off into the various “Baby Bells”. Afterward consolidations up to one percent would be  allowed but the rule would further require that those who grow to 1.5% of assets to GDP would have to split again.  Such a rule would have many beneficial effects.

First and foremost is the benefit to the economy where diverse interests are fully served for the betterment of the public good.  For example, Sandy Weill’s vision of a one stop combined banking, investments and insurance company when forming Citigroup, and in the process eliminating the Depression era Glass Steagall act, was fatally flawed because it traded result for convenience.  The desultory perferomance came from what the boutique firm Evercore Partners founder Roger C Altman observed “at a big bank what you do or your group does, doesn’t move the needle” yet “people want to have impact.”  Without transparent result available big bank management sides towards the assets under management metric which is not a customer related measure.  Instead its the bank minions going out and convincing customers to save and invest in funds conveniently run by the bank and build a big books of assets to determine a manager’s bonus without ever asking, to paraphrase an old investment book title. “where are the customer’s bonuses?”