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?”

A Worthy Charge for Both Sanders and Paul

Bernie Sanders quixotic charge at the Federal Reserve Bank is as pointless as Rand Paul’s demand for an audit of its books.  The bank is so far from the reality of everyday life that its followers are just reading tea leaves. Bernie showed some understanding of the Wall Street problem when he described in the first Democratic primary debate the phenomenon of regulatees regulating the regulators.  Its called Regulatory Capture defined by Nobel laureate economist George Stigler, “Regulatory capture is a form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure; it creates an opening for firms or political groups to behave in ways injurious to the public (e.g., producing negative externalities). The agencies are called captured agencies.”  Yet he still believes regulating the captured finance industry is still possible!

Though they approach it from diametrically opposed ideological views Sanders and Paul agree that TBTF (Too Big To Fail) banks need to be converted to NTBTF (Not Too Big To Fail) as soon as possible.  A very simple suggested law written in the manner of our forefathers with general markers and no attempt to micromanage would be that financial institutions; be they bank, insurance or fund, control no more than one percent of GDP (Gross Domestic Product) in assets.  Those in charge of assets greater than that would be required to split into a sufficient number of separate companies with each at or below the legal limit.  Companies that grow from below 1% to over 1.5% would be required to split in two bring both halves to a level below 1%. The splits can be inexpensively done for its stockholders by distributing shares of all 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”.  

If the law is kept simple with no exceptions worked in by the powerful Wall Street lobby in Washington then in one fell swoop the concentration in banking is reduced to a level that prudence, fear of failure, is ingrained in the system.  The NTBTF value in a $18 trillion dollar economy would be $180 billion which would give approximately ten J P Morgan Chase banks units for distribution to its stockholders. Think of it as the banker’s employment opportunity act which would require ten Jamie Dimons et cetera, et cetera but less dependence on the profit from risky derivative instruments built on hair trigger slivers of leveraged assets. Instead of a government guarantee banks would have to rely on counterparties with strong balance sheets and honest dealing and no more dependence on a credit agency’s rating coerced with a wink wink as pictured in “The Big Short”, Hollywood’s latest and very good explanation of what hit us in the Great Recession of 2008.

Reduced concentration in banking would do much to alleviate the other political bugaboo, income inequality. With fewer assets under each bank’s control the less the incentive for brainless control of assets so that fewer assets sustain stagnant accounts and more effort is put into productive Investments.  Banker’s income would be more of a reflection good management rather than the automatic doling out of a sliver from a giant asset base under management.  Also with many small banks, the lobby in Washington would have a much harder time to practice regulatory capture. Politically this proposed simple bank law would be opposed by the establishment, that would be Republican elites and Hillary Clinton. it’s a worthy charge for both Sanders and Paul.

Greenspan let a Market Killing Machine Develop under his Watch

My response to Paul Krugman's comment that many influential, seemingly authoritative players, from Alan Greenspan on down, insisted not only that there was no bubble but that no bubble was even possible.


Former Federal Reserve Chairman Alan Greenspan was confident that the market would self regulate but his confidence was misplaced during the housing bubble when a grotesque concentration in banking developed because of the perception that the government would not let big banks fail. In other words, he betrayed his Ayn Rand Libertarian heritage by letting a market killing machine develop under his watch.

Quantitative Easing Could Be a useful Tool

The Federal reserve has the dual roles of checking inflation and promoting job growth and today's End of the Line for Easy Money  suggests that the opportunity for infrastructure investment has been squandered. It doesn't have to be so.  Quantitative Easing was a program developed by former Chairman Ben Bernanke to the ease the Great Recession by having the Federal Reserve buy Bonds.  This very same tool could be used selectively today where the Fed would buy the complete set of bonds financing an infrastructure project at a below market rate.  It would bring down the average yield of its portfolio minimally yet give a cash inducement for job creating construction work to repair our decaying infrastructure.

Fixing Fannie & Freddie

Jim Parrott and Mark Zandi just scratch the surface of the Fannie and Freddie question which should first eliminate the home ownership bias of the tax code that favors just the top ten percent of income earners.