[P2P-F] Fwd: [gang8] Yves Smith's Naked Capitalism column from today

Wed Apr 13 14:23:08 CEST 2011

---------- Forwarded message ----------
From: Dante-Gabryell Monson <dante.monson at gmail.com>
Date: Wed, Apr 13, 2011 at 7:20 PM
Subject: Fwd: [gang8] Yves Smith's Naked Capitalism column from today
To: econowmix at googlegroups.com

*excerpted from article below :*
*
*
*
http://www.nakedcapitalism.com/2011/03/omg-greenspan-claims-financial-rent-seeking-promotes-prosperity.html
*
*
*
*"the defective growth model of the last 30 years, one that rested on
stagnant worker wages and relied on rising levels of debt which fueled
bigger and bigger asset bubbles, is now presented as a virtue."*
*
*

---------- Forwarded message ----------
From: Michael Hudson <michael.hudson at earthlink.net>
Date: Wed, Mar 30, 2011 at 3:19 PM
Subject: [gang8] Yves Smith's Naked Capitalism column from today
To: GANG8 <gang8 at yahoogroups.com>

*This column is so good that I must share it with you.
    Michael
**
WEDNESDAY, MARCH 30, 2011
**OMG, Greenspan Claims Financial Rent Seeking Promotes Prosperity!
*I was already mundo unhappy with an Alan Greenspan op-ed in the Financial
Times, which takes issue with Dodd Frank for ultimately one and only one
disingenuous and boneheaded reason: interfering with the rent seeking of the
financial sector is a Bad Idea. It might lead those wonderful financial
firms to go overseas! US companies and investors might not be able to get
their debt fix as regularly or in an many convenient colors and flavors as
they’ve become accustomed to! But the Maestro managed to outdo himself in
the category of tarting up the destructive behaviors of our new financial
overlords.

What about those regulators? Never never can they keep up with those clever
bankers. Greenspan airbrushes out the fact that he is the single person most
responsible for the need for massive catch-up. Not only due was he actively
hostile to supervision (and if you breed for incompetence, you are certain
to get it), but he also gave banks a green light to go hog wild in
derivatives land. And on top of that, he allowed banks to develop their ownrisk
models and metrics, which also insured the regulators would not be able to
oversee effectively (there would be a completely different attitude and
level of understanding if the regulators had adopted the posture that they
weren’t going to approve new products unless they understood them and could
also model the exposures).

And the most important omission is that the we just had a global economic
near-death experience thanks to the recklessness of the financial best and
brightest. You’d never know that if you read the Greenspan piece, which
merely argues against the idea of restricting financial activity under the
guise of objecting to certain provisions of Dodd Frank.

I keep referring to this passage of a 2010 paper by Andrew Haldane, the
Executive Director of Financial Stability for the Bank of England because
Greenspan, the Administration, and other banking industry cheerleaders keep
pretending that the crisis was a mere blip and their ongoing propagandizing
needs to be countered:

Table 1 looks at the present value of output losses for the world and the UK
assuming different fractions of the 2009 loss are permanent….

As Table 1 shows, these losses are multiples of the static costs, lying
anywhere between one and five times annual GDP. Put in money terms, that is
an output loss equivalent to between $60 trillion and $200 trillion for the
world economy and between £1.8 trillion and £7.4 trillion for the UK. As
Nobel-prize winning physicist Richard Feynman observed, to call these
numbers “astronomical” would be to do astronomy a disservice: there are only
hundreds of billions of stars in the galaxy. “Economical” might be a better
description.

It is clear that banks would not have deep enough pockets to foot this bill.
Assuming that a crisis occurs every 20 years, the systemic levy needed to
recoup these crisis costs would be in excess of $1.5 trillion per year. The
total market capitalisation of the largest global banks is currently only
around $1.2 trillion. Fully internalising the output costs of financial
crises would risk putting banks on the same trajectory as the dinosaurs,
with the levy playing the role of the meteorite.

In other words, the financial system as it is presently constituted is so
destructive to society at large that very radical interventions are
warranted to reduce the costs it imposes on others. To put it another way,
it is an extraordinarily inefficient at looting. And Haldane’s core
observation, that severe financial crises result in permanent output losses
(more colloquially, a permanent reduction in the standard of living) is not
controversial. And I’ve recently corresponded with Haldane and he stands by
this rough and ready estimate.

Yet as horrific as the Greenspan piece is, he manages to sink to
unimaginable new lows with the Big Lie he offers at its close:

The vexing question confronting regulators is whether this rising share of
finance has been a necessary condition of growth in the past half century,
or coincidence. In moving forward with regulatory repair, we may have to
address the as yet unproved tie between the degree of financial complexity
and higher standards of living.

In other words, the defective growth model of the last 30 years, one that
rested on stagnant worker wages and relied on rising levels of debt which
fueled bigger and bigger asset bubbles, is now presented as a virtue.

Consider this alternative formulation from ECONNED:

Let’s use a different metaphor to illustrate the problem. Say a biotech firm
creates a wonder crop, the most amazing creation in the history of
agriculture. It yields far more calories per acre than anything else, is
nutritionally extremely complete, and can be planted and harvested with far
less machinery and equipment than any other plant. It is tasty and can be
prepared in a wide variety of ways. It is sweet too, so it can be used in
place of sugar and high fructose corn syrup at lower cost. We’ll call this
XCrop.

XCrop is added as a new element in the food pyramid and endorsed by
nutritionists and public health officials all over the globe. It turns out
that XCrop also is an aphrodisiac and a stimulant (hmm, wonder how they
engineered that in) and between enhanced libido and more abundant food
supplies, the world population rises at a faster rate.

Sales of XCrop boom, displacing traditional agriculture. A large amount of
farmland is turned over from growing other types of produce to XCrop. XCrop
is so efficient that agricultural land is taken out of production and turned
to other uses, such as housing, malls, and parks. While some old-fashioned
farms still exist, they are on a much smaller scale and a lot of the
providers of equipment to traditional farms have gone out of business.

Twenty years into the widespread use of XCrop, doctors discover that
diabetes and some peculiar new hormonal ailments are growing at an explosive
rate. It turns out they are highly correlated with the level of XCrop
consumption in an individual’s diet. Long-term consumption of high levels of
XCrop interferes with the pituitary gland, which controls almost all the
other endocrine glands in the body and the pancreas.

The public faces a health crisis and no way back. It would be very difficult
and costly to put the repurposed farmland back into production. Some of the
types of equipment needed for old-fashioned farming are no longer made. And
with the population so much larger than before, you’d need even more
farmland than before. The world population has become dependent on the
calories produced by XCrop, so going off it quickly means starvation for
some. But staying
on it is toxic too. And expecting users simply to restrain themselves will
likely prove difficult. The aphrodisiac and stimulant effects of XCrop make
it addictive.

Advanced economies have become hooked on debt technology, which, like XCrop,
is habit forming and hard to wean oneself off of due to its lower cost and
the fact that other approaches have fallen into partial disuse (for
instance, use of FICO-based credit scoring has displaced evaluations that
include an assessment of the borrower’s character and knowledge of the
community, such as
stability of his employer). In fact, the current debt technology results in
information loss, via disincentives to do a thorough job of borrower due
diligence (why bother if you are reselling the paper?) and monitoring of the
credit over the life of the loan. And the proposed fixes are not workable.
The Obama proposal, that the originator retain 5% of the deal and take
correspondingly lower fees, is not high enough to change behavior. And a
level that would be high enough to make the originator feel the impact of a
bad decision would undercut the cost efficiencies that made securitization
popular in the first place. You’d have better decisions, but less lending,
and higher interest rates. That’s ultimately a desirable outcome, but as in
the XCrop situation, no one seems prepar*ed to accept that a move to
healthier practices will result in much more costly and less readil*y
available debt. The authorities want to believe they can somehow have their
cake and eat it too.

And in case you think this reading is a tad too downbeat, a very good piece
in the National Journal by Michael Hirsh, The Resurrection, demonstrates not
merely that perilous little has changed in the wake of the financial crisis,
but that in many respects, the pathology has gotten even worse:

Government data indicate that lending abroad is up even as investment in
plants and equipment at home continues to decline or remain flat as a
percentage of GDP. FDIC-insured banks loaned nearly twice as much, $62.7
billion, to banks in other countries as of the end of 2010 as they did the
year before…

Regulators in Washington, in Basel, Switzerland, and elsewhere have failed
to agree on rules for the much-touted “resolution authority” in the new law.
Theoretically, this rule is supposed to give the United States the right to
liquidate or unwind a failing firm, no matter how big, without the systemic
crash that nearly followed the Lehman bankruptcy of September 2008. The rule
is still just a draft, however, and so far it doesn’t look very workable
internationally.

That’s because countries are addressing the same issue in very different
ways….Straddling all these fractured lines are Citi and the other big global
banks. “Citibank is a $1.8 trillion company, in 171 countries with 550
clearance and settlement systems,” says one senior Federal Reserve Board
regulator who would speak frankly only on condition of anonymity. “We think
we’re going to effectively resolve that using Dodd-Frank? Good luck!”….Bove,
a widely followed banking analyst on Wall Street, calls Dodd-Frank “the
dumbest piece of legislation ever created by the U.S. Congress. They wanted
the big banks to have less control, yet they built in rules that ensure the
increased control of the financial sector by big banks…..“And there is
nothing in Dodd-Frank that will do anything to stop a meltdown from
occurring.”

We’ve been critical of the phony resolution authority as well as other
features of Dodd Frank. But the reason is, as the critics Hirsh cites remind
us, that the legislation failed to accomplish its stated aims and may be
increasing big bank power.

Greenspan, by contrast, clearly object to the basic premise of Dodd Frank,
that governments should have any meaningful say over the operation of
financial financial firms. Einstein defined insanity as doing the same thing
over and over again and expecting different results. But the true madness
isn’t that Greenspan’s remarks border on deranged; he’s merely a useful and
highly paid idiot. It’s that anything he says is still listened to after the
huge cost his misguided policies have inflicted on all of us.

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