A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Sunday, September 16, 2012

Transcript: 518 Banking with Ben

It may be boring to hear us saying the same thing, but at least it's confirmation of the forecast.

Today, before we get to our predictable reaction to the news of a new QE, we have a relay of Tom Keene and Jonathan Weil of Bloomberg and top banking analyst Chris Whalen of Tangent Capital. Talking about the banks. American and European. Do they have enough capital? Has bailing them out stabilized them or led to more instability as they reach for yield? Is pushing investors into risk a good plan for recovery? It inflates the value of stocks, so the financial sector is happy. But the American people are backstopping the whole mess, or at least they are below them and unable to get out of the way when they fall again. Foaming the runway.
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The immediate news event which begins the discussion is the announcement of downsizing – "restructuring" – at Deutschebank.


Bouncing along the bottom with downside risks. It's amusing that the consensus is catching up, but discouraging to realize this is seen as the new normal, not a condition to be remedied as fast as possible, not a refutation of the supply side monetarism.

We've been saying, too, that Europe is all about the banks. The ECB is trying to do what the Fed is trying to do, reflate a credit bubble, a bubble it fomented itself. Europe had housing overbuilding in Spain, Ireland, and elsewhere, but it also had the sovereign bond bubble. The ECB encouraged this second bubble explicitly, just as the Fed under Alan Greenspan encouraged and abetted the housing bubble. Low rates. Low risk. Pile in. Same message.

Now, in the same way Bernanke is trying to reflate housing at tremendous cost and no prospect of success, the ECB is trying to reflate the bond values. Just as the Fed is now and probably in perpetuity the owner of massive amounts of mortgage backed securities, the ECB is becoming the holder of tremendous amounts of sovereign bonds.

What is the effect? In trying to make mortgages and bonds attractive, the central banks are killing the future of those who depend on some return on savings. That would be boomer retirees and pension funds. These are the sources of security and potential demand.

The ECB has taken it one step further, and is promoting depression in the affected countries by mandating austerity in those countries to which it proposes to lend. We heard this week that those nations, Spain and Italy, are not eager to follow Greece and Ireland into ruin. Or at least they're not going to obey the ECB.

These nations know it is not they who are most vulnerable to bond defaults. It is the banks. As we heard here with Whalen, Weil and Keene, the banks are extremely vulnerable. The ECB will fund the nations on the front end with bond purchases, and it will fund the banks on the back end by covering the capital flight with loans against collateral. What they will not do, and cannot do, is turn the flows back to the positive side. The Germans will not allow themselves to a deficit trading nation.

There are answers, financial answers, economic answers, but there is no political answer to the power of the entrenched interests of the banks, nor to the institutions such as the ECB and IMF who are in thrall to the completely discredited supply side Neoliberal ideology.

That is a good segue to this last week's announcement of more QE. Yikes. It didn't work so far, it costs trillions, but we have to do something, so let's do more of the same.

Ben Bernanke is not a bad person, he is not insincere, he is not particularly dumb, but he is wedded to a save the banks first theory. This is why he is where he is. He is the choice of a politically powerful financial sector. It is sad to think that he will be the scapegoat for the next crisis.

What is QE 3?. Quoting from the Fed's statement:
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
So, yes, it is trying to reflate the housing market. They have apparently given up on the idea of corporations expanding and hiring or banks actually lending to business.

What if we were to offer 4% interest on infrastructure bonds? That is, government guarantees on specified long-term projects in roads, bridges, rail, electrical transmission and other infrastructure that would improve or even maintain current transportation and energy infrastructure. Big advantage is that it creates the value which can be monetized to repay the bonds. Residential investment is overbuilt, and it is purely a financial game to increase its price.

What will be the real effect of QE 3? Higher stock prices, higher commodity prices (see inflation), and nothing in terms of jobs. There are still those who argue "Great. Higher stocks. More wealth for stock holders. They will spend." Phooey. Double phooey.

Most interesting is to speculate on the political fallout.

I am most uncomfortable being in the please don't shoot again, Ben, camp, because it seems to be littered with pamphlets from Ron Paul and the Republican Right. I say don't do it because it doesn't work and in fact reduces incomes. They say don't do it because it means inflation. But we both say don't do it.

We're going to get another intelligent argument in front of you soon. From Bill White, formerly of the BIS, Bank for International Settlements, the one international institution with some sense. White is going to go over some of the unintended consequences.

But lastly, if I could add, it is amazing and disgusting that the people who predicted the crisis – the Steve Keens of the world and the Nouriel Roubinis – are ignored when their analysis proves out. The People and banks who caused and fomented the crisis are still in charge and their increasingly absurd analysis is that which gets the air time, and the results will be hard.

1 comment:

  1. David Lazarus writes:

    Personally I do not think that the housing market has really reached the bottom yet. So bouncing along the bottom is not quite accurate. I do think that there is another 10 to 20% to fall, if not a lot more. Housing is still massively overpriced, especially if you compare it to median wages. If economies were to revert to that measure then housing would have a lot further to fall.

    As for the banks, especially in Europe they are still over-leveraged, and all the efforts by the ECB has been to recapitalize them without the public becoming aware of the process. Ultimately Europe's politicians have to decide who to save, The Euro or the banks. If they save the banks the euro becomes unworkable, as banks will have to be recapitalized at the tax payers expense. This is what has been done up till now. The back door bailouts of the banks has not worked. It has lead to a silent run on the periphery's banks for months. The money has been turning up in Germany and in the London property market. Last year the Greeks were the big buyers now it is the Italians.

    The problem is that since so many "supply-siders"/neo-classical economists are entrenched in the big institutions that decide policy that the world is doomed to another depression because they do not understand what they are dealing with. All the so called Keynesian stimulus packages have been too small and badly designed to be very effective. In fact the best that can be said is that all they have done is stop the rebalancing of the economy.

    One major difference between now and the thirties was that the bulk of the writedowns had been achieved before the New Deal had started. So unlike this time it was not all siphoned off to maintain asset bubbles. This time the Fed are siphoning off all the support to maintain those asset bubbles to save the banks. It still has not been a massive success. The banks are no stronger than they were as they have maintained big bonuses and not really changed their business models.