Bob Carlson

It was clear to at least some of us that many aspects of the financial bailouts during the fiscal crisis of 2008 and afterward were designed to help foreign banks and investors. I believe the AIG bailout and the federal takeovers of Fannie Mae and Freddie Mac were at the bidding of overseas investors. Here’s a more detailed look at how the bailouts and quantitative easing have helped foreign banks and investors.

Too bad that quantitative easing doesn’t help Main Street or the average American. It only helps big banks, giant corporations, and big investors. And by causing food and gas prices skyrocket, it takes a bigger bite out of the little guy’s paycheck, and thus makes the poor even poorer.

And it’s a shame that a study of 124 banking crises by the International Monetary Fund foundthat bailing out banks which are only pretending to be solvent  – like most of the big banks – harms the economy.

The residential housing market improved faster than many people expected. By now, many people are aware that home prices are higher than a year ago and are well above the lows. But there are other improvements in the market that paint a more attractive picture. Defaults rates are down. Fewer and fewer homeowners are “under water” with home worth less than their mortgages. (Though many still have home worth less than they paid for them.) As the labor market improves, these numbers also will improve. Bloomberg.com has a good review of the many changes in housing.Housing still is a long way from being healthy or resembling its peak levels, but it is improving and contributing to economic growth.

U.S. home prices climbed at the fastest pace since May 2006, rising 9.3 percent in February from a year earlier, according to an April 30 report by the S&P/Case-Shiller index of property values.

There’s a “feeding frenzy in housing” as Americans seek to take advantage of prices about 29 percent below their 2006 peak and mortgage rates near record lows, said Ross Perot Jr., 54, chairman of Dallas-based real estate company Hillwood Development Co., in a telephone interview. Perot’s father, H. Ross Perot, twice ran for president as an independent candidate.

“The big picture: this economy is coming back,” Perot said during a telephone interview from Newport Beach, California, where he was breaking ground on a condo project backed by his Dallas-based company. “The American people are very shrewd and they realize it’s a great time to borrow to buy a home because pricing is very cheap.”

The average rate for a 30-year fixed mortgage dropped to 3.35 percent last week, down from 3.84 percent a year ago as the Federal Reserve has bought $85 billion of bonds to stimulate the economy. The average 15-year rate is a record low 2.56 percent.

The economists Reinhart and Rogoff made headlines by publishing a book in the middle of the financial crisis titled This Time Is Different. They presented research indicating that when a country’s debt level gets too high, economic growth slows. They also said financial crises tend to cause debt to balloon and take 10 years and longer to recover from.

Now some researchers went through R&Rs work and concluded they made some errors. Here’s a very good summary of the issues with some good commentary. I tend to think Tyler Cowen’s right. The problem is lack of economic growth, not the debt itself. That’s why the arguments of so many fiscal conservatives are troubling. They don’t seek measures to increase growth. Instead, they focus on reducing budget deficits and spending. Done improperly, such measures can hinder growth and actually increase debt.

John Makin of AEI is strongly against the “bail-in” solution used Cyprus. Briefly, the solution avoided using taxpayer money to bail out failing banks by taking money from depositors of the institutions, effectively reducing the values of their accounts. The initial proposal was to reduce the balances of all accounts, but after protests the bail-in was restricted to larger depositors, taking upwards of 60% of balances.

Makin doesn’t seem to disagree that depositors are creditors the same as any one else who lends money to a bank. But he believes that causing depositors to lose confidence in their bank deposits and withdraw money from banks could trigger a series of events that reduce global economic growth and perhaps worse. Makin’s solution is to reduce the risk banks are allowed to take with depositors’ money.

In 1933, when the Federal Reserve Bank refused to bail out the Bank of the United States, it triggered a run on American banks. The principal was the same. No bailout for depositors in bad banks. The result of a run on the banks was a collapse in the US money supply by a third. After all, bank deposits are supposed to be a part of the money supply used to effect transactions and store value over short periods of time. The collapse in the money supply resulted in an economic collapse that ultimately morphed into the Great Depression. Let’s not even think about going there by using the Cyprus “template” for dealing with weak banks.

If the EU-ECB-IMF “troika”, the gang that can’t shoot straight, wants to subject all Euro depositors to “bail-in” they should say so. Then depositors in European banks and elsewhere can act accordingly. That is, rush into cash in times of real or perceived crisis in order to preserve their assets. That would constitute a run on Europe’s banks, starting in Greece, then in Spain, Italy and Portugal and eventually reaching France, bank that would collapse Europe’s money supply and its economy. The run and economic collapse would spread rapidly throughout the global economy.

Jamie Dimon, head of JP Morgan, issued a widely-publicized shareholder letter recently. There was a lot of news about his apology and explanation for the large losses incurred in the firm’s Chief Investment Office. But this post spots a line that didn’t receive hardly any attention but should have received a lot.

Dimon basically says that there’s certain to be another financial crisis. And it’s probably not too far in the future, because he promises that JPM won’t suffer during the crisis. He obviously doesn’t believe that all the policy actions taken since the last crisis will avoid another one. It would be interesting to know if he has an idea about how the crisis might evolve or other particulars.

In a single sentence, Dimon is telling not just shareholders, but the world really, that another financial disaster is inevitable. When it arrives, his bank will be “a source of strength, not weakness, for the global economy” much like it was in 2007 an 2008 during the financial crisis when it bought Bear Stearns and Washington Mutual.

That’s a bold statement coming from the executive whose own reputation has been tarnished over the last year. Whether or not he’s right about JPM’s role during the next crisis is anyone’s guess but he’s dead on about another storm. The worst part about it is we don’t have our act together as a nation if the storm hits sooner than later.

Recently I linked to a post offering some explanations on the decline in labor force participation. It concluded that a lot of the decline in participation is due to demographic trends that have been in place for a while and generally are positive.

Here’s another view, focusing on the sharp rise in Social Security’s disability rolls. Some people argue that this is part of the aging work force. People are more likely to be disabled as they get older. But others argue that disability becomes a substitute for unemployment benefits after those benefits run out.

As I said before, analysts should focus on assigning the extent to which the decline in participation is due to each factor: disability, structural changes, cyclical changes, giving up, and demographics.

What you have here is a permanent move for many from the workforce to the dole, what economists call “hysteresis.” Not only are average annual payments some $2,000 more than full-time work at minimum wage, but after two years ”people on disability are eligible for Medicare health insurance—another government benefit that encourages recipients to stay put.”

So at least part of SSDI now functions as long-term unemployment compensation. The costs? SSDI payments ($137 billion) + related Medicare payments ($80 billion) + loss of economic output ($95 billion, according to Feroli) = $312 billion a year in annual costs.

You might be familiar with Jim the Realtor, He’s, as you would expect, a realtor. He works in the San Diego, Calif. area. During the early stages of the real estate crash he began posting on YouTube videos of his tours of foreclosed and distressed sale homes in the San Diego area. The videos were either tragic or comical, depending on your perspective. The homes often were trashed by previous residents. Key appliances and fixtures would be removed or defaced. There were lots of other problems with the homes. Other media picked up his videos.

Now, Jim is posting videos on the bidding frenzy taking place for some homes. It’s an interesting turn of events.

Take a look at this summary of some publicity on Jim the Realtor.

Income and wealth inequality are one of the prime political and policy topics these days. The discussions, however, generally are dissatisfactory. One one side are those who say the way to reduce inequality is to have the government take more from those who are doing well and give that money to the rest of us through various programs and mechanisms. On the other side are those who mostly debate the statistics and say inequality isn’t as bad as some say. I’ve looked at the numbers and believe they are right, but the argument is incomplete. There still is substantial inequality, more so than in the past.

Here’s a good post that mostly makes the right argument. Most of our inequality these days results from the government. It subsidizes and benefits wealthy people in different ways. Because the government is so powerful, wealthy people and companies tend to be what economists call rent-seekers. They make political contributions and pay lobbyists to get favorable law, regulations, subsidies, and protections from government.

We’ve seen this in a big way in the financial crisis and its aftermath. Government focused on saving the system by saving its biggest players. Those who have done the best in the recovery are those who already had wealth and invested along with government programs. Reducing inequality requires less government, not more.

You remember the flash crash. That’s the day in May 2010 when the Dow suddenly declined about 1000 points. The Washington Post recently ran an excerpt from a book that describes how the world’s central bankers acted behind the scenes during that period. The headline says it was “Three days that saved the world financial system.” That might be a bit of an overstatement. But it is an interesting take on what the central bankers were doing while the media talking heads and politicians were making their statements.

But in fact, what happened over three days and four nights in May 2010 is essential to understanding the economic predicament in which the world still finds itself. In that moment, the major Western central banks — and their leaders, Ben S. Bernanke of the U.S. Federal Reserve, Mervyn King of the Bank of England, and Trichet of the ECB — made a series of decisions that created the world economy we inhabit today, and likely far into the future.

Through half a decade of crisis that spanned every continent on Earth, it was this triumvirate of central bankers who responded on a scale and with a speed that presidents and parliaments could never muster. They deployed trillions of dollars, pounds and euros, often in concert, always trying to contain the damage. They made plenty of mistakes, some of them costly. But they also have kept the world from a disastrous economic collapse of the sort their predecessors had allowed eight decades earlier, setting the stage for the rise of the Nazis and World War II.

This move in Portugal hasn’t received much attention, partly because a government official denied it was in the works. But it presents an interesting way that some of the distressed countries might use this or a similar route. The governments could create a new form of debt and use that to fully or partially pay salaries and other amounts it owes. That reduces the need to obtain euros and also effectively creates a new currency in the debt or script. There are a lot of potential effects from and implications of the financial crisis and the future of the euro.

If indeed this happens (one government spokesperson has denied the report) and perhaps then continues, at what point do we conclude that the Portuguese have opted for a dual currency?

Would the new scrip currency push out the euro or vice versa or can they coexist?  One central question is at what rate the government would accept the new scrip for payments and taxes or otherwise offer to redeem or convert it.