Bob Carlson

October 6, 2015

Bernanke vs. Financial Executives

Filed under: Economy,Financial crisis — Bob @ 5:20 pm

Former Fed Chairman Ben Bernanke has a book out. The book is basically his autobiography with special emphasis on the financial crisis period. I’ve read several reviews and article on the book. It sounds like the main problem is that Bernanke waited until this book to say things that would have been helpful during the financial crisis and in the years after. This article emphasizes his view that more financial executives should have been prosecuted and sent to prison. He also wrote piece for The Wall Street Journal in which he said that other branches of the government should have helped the Fed with better actions to restore economic growth.

With publication of his memoir, The Courage to Act, on Tuesday by W.W. Norton & Co., Bernanke has some thoughts about what went right and what went wrong. For one thing, he says that more corporate executives should have gone to jail for their misdeeds. The Justice Department and other law-enforcement agencies focused on indicting or threatening to indict financial firms, he notes, “but it would have been my preference to have more investigation of individual action, since obviously everything what went wrong or was illegal was done by some individual, not by an abstract firm.”

He also offers a detailed rebuttal to critics who argue the government could and should have done more to rescue Lehman Brothers from bankruptcy in the worst weekend of a tumultuous time. “We were very, very determined not to let it collapse,” he says. “But we were out of bullets at that point.”

October 5, 2015

The Only Mortgage Banker to be Punished

Filed under: Financial crisis — Bob @ 12:20 pm

None of the bankers behind the mortgage and housing crisis faced criminal charges, and only a few faced civil suits from the government. Most of those suits were settled. This articles updates the story of the only mortgage banker to be sued by the government and found liable at trial. She owes a $1 million fine to the government. She’s appealing her case now.

While jurors pinned liability on Mairone and her employer, Countrywide acquirer Bank of America Corp., they, too, questioned why she was the only individual named in U.S. Attorney Preet Bharara’s complaint. Angelo Mozilo, Countrywide’s chief executive officer, settled out of court despite billions in mortgage-related losses. And Mairone’s supervisor, subprime-mortgage unit CEO Greg Lumsden, wasn’t sued.

“Rebecca was part of a group of mid-level and senior managers that made every decision together,” Lumsden said in an interview. “There’d be no value created for anyone there to do anything that wasn’t ethical or right.”

August 31, 2015

Can China Engineer a Turnaround?

Filed under: Emerging stock markets,Financial crisis — Bob @ 5:28 pm

Some analysts are pointing out that back in 2009 when China led the world with a large, bold stimulus plan, that they warned us back then. They said that China was stimulating artificial growth, generating a lot of debt, and that at some point the chickens would come home to roost. They’re saying China might be in the same position the U.S. was in 2007 with too much debt, some assets in bubble territory, and not a lot of options for dealing with it. Here’s one example and here’s another example.

In the meantime, the consumption sector in China seems to be faring poorly.  On the way up, investment rose at the expense of consumption, but on the way down they are falling together.  Funny how things like that work out, and it does suggest that a consumption-oriented stimulus maybe can break the fall but it won’t restore prosperity.

It’s striking how little recent discussion I’ve seen of China’s much-heralded fiscal stimulus of 2008-2009.

August 20, 2015

Did QE Help the Economy

Filed under: Economy,Financial crisis — Bob @ 12:20 pm

There’s a lot of debate around that question. It certainly helped the stock market. The official theory from the Fed and others is that boosting asset prices makes people more confident. They spend and invest more. It’s called the wealth effect. But one Fed official recently questioned the theory. He says the three main arguments in favor of zero interest rates and QE aren’t supported by the data. He’s especially critical of the zero interest rate policy, saying it might have the opposite of its intended effect.

But as for spurring inflation, reducing employment or otherwise generating sustained economic activity, the results, particularly for QE, are “at best best mixed.” In addition to muted inflation, gross domestic product has yet to eclipse 2.5 percent for any calendar year during the recovery, while wage gains, and consequently living standards, have been mired around 2 percent or less.

“There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed—inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation,” Williamson wrote.

August 18, 2015

The Weakness of Europe

Filed under: Economy,Financial crisis — Bob @ 12:33 pm

Europe has a long way to go to climb out of the hole of the financial crisis. While Americans complain about our slow growth in this recovery, things are much worse in Europe. Even countries that are considered to be doing well, aren’t in good shape, such as Germany and many of the Scandinavian countries. Take a look at the quick data in this post.

And that is with a lot of QE (more than a trillion), a weaker euro, and a favorable oil price shock.

Overall the eurozone economies are one percent smaller than they were in 2008.

July 29, 2015

Inside the Greek Crisis

Filed under: Emerging stock markets,Financial crisis — Bob @ 8:20 am

The former Finance Minister of Greece allowed a writer from The New Yorker to spend time with him in the months preceding the historic July referendum in which a majority of Greeks voted to reject the terms offered by European authorities regarding their debt. The article has interesting insights, including that the minister expected the Greeks to buckle under pressure and vote to approve the debt terms.

When the crisis hit Greece, Varoufakis began his blog, and, with Stuart Holland, a British academic and former politician, published an essay, “A Modest Proposal.” It suggested ways in which the E.C.B. and the E.U. could press the banks holding bonds of struggling eurozone countries to forgive much of this debt, and envisaged a Europe that could issue its own bonds and fund stimulus investments—effectively putting German savings to work in Ireland and Greece. Varoufakis, who had argued against Greece’s decision, in 2001, to adopt the euro, wrote that if there was going to be a currency union then it should not be half-baked, and should function more like the one that joins California and Alabama.

Varoufakis recognized the many frailties in Greece’s economy, but he preferred to talk of a banking crisis rather than a debt crisis, and of a European crisis rather than a Greek one. If Greece had over-borrowed, the real villains were the lenders standing in line for bailout funds. The euro had created a delusion: banks had lent to Greece as if it were a student backed by wealthy parental guarantors. But there were no such guarantees, and when the lending stopped Greece was trapped by the currency that had indulged it. The country couldn’t painfully devalue its currency, like, say, Argentina at the start of the century. (A devaluation makes your people poor but your goods enticingly cheap.) And the euro lacked a body like the Federal Reserve, or the Bank of England, that could feed newly minted cash into the Greek economy; to Varoufakis’s frustration, the E.C.B. wasn’t that kind of bank.

July 18, 2015

Germany vs. Greece

Filed under: Financial crisis — Bob @ 8:45 am

George Friedman of gives us perspective on the recent negotiation concerning Greece’s debts. He views the situation as Germany vs. Greece, with the rest of Europe not having much influence on either side. Friedman also says that the issues aren’t resolved. It’s interesting reading, whether you agree with it or not.

There were two sides of the Greek position that frightened the Germans. The first was that Athens was trying to use its national sovereignty to compel the European Union to allow Greece to avoid the pain of austerity. This would, in effect, shift the burden of the Greek debt from the Greeks to the European Union, which meant Germany. For the Germans, the bloc was an instrument of economic growth. If Germany accepted the principle that it had to assume responsibility for national financial problems, the European Union — which has more than a few countries with national financial problems — could drain German resources and undermine a core reason for the bloc, at least from the German point of view. If Greece demonstrated it could compel Germany to assume responsibility for the debt in the long term, it is not clear where it would have ended — and that is precisely what the Greek vote intended.

On the other hand, if the Greeks left the European Union, it would have created a precedent that would in the end shatter the bloc. If the European Union was an elective affinity, in Goethe’s words, something you could enter and then leave, then the long-term viability of the bloc was in serious doubt.

July 2, 2015

Perspective on the Greece Situation

Filed under: Financial crisis — Bob @ 8:20 am

George Friedman of has some unique thoughts and comments on what he calls the Greek situation. He says both sides have made all the compromises they can and it is time to end the games of pretend and extend, as it is called in the U.S. His focus is on Germany’s role in the situation and especially its goals in the eventual resolution. The way Friedman paints the situation, there isn’t a good resolution left, especially if other financially troubled members of the European Union decide to follow the Greek example.

A Greek withdrawal from the eurozone would make sense. It would create havoc in Greece for a while, but it would allow the Greeks to negotiate with Europe on equal terms. They would pay Europe back in drachmas priced at what the Greek Central Bank determines, and they could unilaterally determine the payments. The financial markets would be closed to them, but the Greeks would have the power to enact currency controls as well as trade regulations, turning their attention from selling to Europe, for example, to buying from and selling to Russia or the Middle East. This is not a promising future, but neither is the one Greece is heading toward now.

Many have made a claim that a Greek exit could lead the euro to collapse. This claim seems baffling at first. After all, Greece is a small country, and there is no reason why its actions would have such far-reaching effects on the shared currency. But then we remember Germany’s primordial fear: that Greece could set a precedent for the rest of Europe.

June 12, 2015

Household Net Worth Hits New High

Filed under: Economy,Financial crisis — Bob @ 5:20 pm

American households continue to recover from the financial crisis, helped by rising stock and real estate prices. The latest Flow of Funds report from the Federal Reserve shows that in the first quarter household net worth rose to almost $85 trillion.

The Fed estimated that the value of household real estate increased to $21.1 trillion in Q1 2015. The value of household real estate is still $1.4 trillion below the peak in early 2006 (not adjusted for inflation).

April 27, 2015

End of the Debt Supercycle

Filed under: Economy,Financial crisis — Bob @ 8:20 am

Economic growth has been slow since the bottom in 2009. The debate among economists is whether this is due to something that’s been dubbed “secular stagnation” or something else. The secular stagnation crowd has several arguments but generally believes that the various drivers of growth in the last century are played out. The drivers include higher productivity, an expanding work force, and the transition from a rural to an industrial society. I’m more partial to those who argue that there’s a long-term debt cycle, or supercycle, that has mini booms and busts but over the long term produces a high rate of growth. But once debt levels reach a certain point, the debt supercycle reverses. Debt levels began a peak around 2007 and likely have to decline for a while. Shrinking debt levels will reduce growth rates. Here’s a good explanation from Kenneth Rogoff.

Modern macroeconomics has been slow to get to grips with the analytics of how to incorporate debt supercycles into canonical models, but there has been much progress in recent years (see Geanokoplos 2014 for a survey) and the broad contours help explain the now well-documented empirical regularities. As credit booms, asset prices rise, raising their value as collateral, thereby helping to expand credit and raise asset prices even more. When the bubble ultimately bursts, often catalysed by an underlying adverse shock to the real economy, the whole process spins into a harsh and precipitous reverse.

Of course, policy played an important role. However, there has been far too much focus on orthodox policy responses and not enough on heterodox responses that might have been better suited to a crisis greatly amplified by financial market breakdown. In particular, policymakers should have more vigorously pursued debt write-downs (e.g. subprime debt in the US and periphery-country debt in Europe), accompanied by bank restructuring and recapitalisation.

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