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

Friday, March 8, 2013

Transcript: Banking, Credit, TARP, Where is the success?

Today on the podcast, in the midst of a fever about cutting government, we look back at the financial collapse that caused the Great Recession.

This week at reMacroBaseline.com was Banking and Credit week. We haven't posted there yet. We may just post this podcast.

Our bottom line is that we haven't fixed anything with regard to the banks, that we have preferred they stay in their favored positions in their current forms and the rest of the economy stagnate. We haven't restructured credit, nor made it available to finance the infrastructure and massive change needed for the society to survive climate change. We've made it available for education only in the form of criminally burdening our young people with debt.
Listen to this episode
It's hard to engage the subject. We've got banker fatigue, and the country has moved on to fight about the deficit because EVERYBODY KNOWS that the federal deficit reached back from the future to cause all our problems. Sorry.

Let's take off from some comments Alan Blinder, Princeton economist, and former vice chair of the Fed under Alan Greenspan, a liberal, quote unquote. Here he is with Arthur Levitt, apologizing for TARP.


"TARP was a success."

No, it wasn't. Sure shoveling money at the banks to stabilize them did result in institutions still standing. But productive lending? Not so much. In spite of proclamations from the White House steps, first the banks, then the economy did not work. And in the first place, TARP was not sold as a bailout to banks, it was sold as a Troubled Asset Relief Program. It was EXECUTED as a cash infusion to banks, as Blinder describes here. All the banks were forced to take it, but it was Citigroup, Bank of America and Morgan Stanley who were teetering on the edge.

It was also sold as a means to help distressed homeowners. That was bait and switch. As soon as TARP was passed, that mandate was forgotten, in particular, by Tim Geithner.

Reading Shiela Bair's book "Bull by the Horns," one cannot help being discouraged. All of the big things we said here at Demand Side during the crisis, 2007 and onward, many of which we echoed from other observers, were right. At least the big things. And we see from Bair's book that these things were being said on the inside as well. They were just ignored to favor the big banks, particularly Citi and particularly by Tim Geithner.

Main Street would have come out of the crisis into a real recovery had principle reduction or some other form of real relief to homeowners happened. Blinder says in our audio that the fact that interest rates re-set to lower rates means it wasn't the junk mortgages that was the problem. Oops. Those mortgages bid housing prices up to record highs. That easy money is embedded in prices that are 40 percent above the current price in many markets. Those are the millstones the household sector is trying to swim with.

The Citigroup protective association, led by Tim Geithner, prevented meaningful help to real people. In case after case, incident after incident, he fought for the poorly run, poorly capitalized, over-leveraged institution and kept it afloat.

Some say it was his association with Robert Rubin, some say it was the fact that Geithner's New York Fed was responsible for oversight and he did not want to be blamed for such a high profile failure. But the rise of Giethner as Treasury Secretary was the fall of a coherent, effective response to the financial crisis. Now we have profitable banks and stagnation on Main Street.

One of the things we were wrong about at Demand Side was the notion that loans had to be unpacked one at a time in order to negotiate a reduction in principle and this was prevented by the fact that most of them were embedded in securities, mortgage backed securities. Bair's book points out that because the owners of those securities as a whole would have benefited from such re-negotiation, the servicers had the obligation to pursue it. They were not done because they had no sponsor (other than the FDIC) among the regulators and because the different tranches of the securities had competing interests. A systematic adjustment to mortgages and their terms was done by the FDIC at IndyMac and worked. Such a process was never -- in spite of presidential assurances that it would be -- done at the national level.

The discouraging, larger lesson is that the corporate goons were always in charge. Rolling out a TARP to save them, rolling back the TARP so the could get their big bonuses. Massive purchases of dodgy mortgage backed securities by the Fed. The meaningful parts of Dodd-Frank now being rolled back by anti-government Republicans operating with pro-Wall Street Democrats and Republicans. Socialism for the rich and anti-socialism for the rest of us.

I'm not as apocalyptic as Chris Hedges, yet, but the corporate control and the absence of any voice to counter it -- maybe Bill Moyers or Bill McKibbon -- is a doomsday scenario.

The precedent for the Great Financial Crisis was set only three decades ago in the 1980s with the Savings & Loan Debacle. In the early 1980s, the S&L’s or “thrifts” saw their business model undermined by high interest rates. The thrifts borrowed short, chiefly by taking deposits, and lent long, chiefly for mortgages. When interest rates ballooned from the Fed’s war on inflation under Paul Volcker, the thrift’s borrowing rate ran up well above the rate of its lending.

The answer under Ronald Reagan was not to admit insolvency and deal with the crisis in its infancy, but instead was to deregulate the thrifts in an effort to let them “grow” out of their problems. Instead it was the problem that would grow. Deregulated thrifts offered high rates and attracted massive amounts of capital, which they were then compelled to lend at even higher rates to make their profits. With the lax regulation they enjoyed, the environment was set for fraud and irrational, or at least rash, lending, and within a few years the spectacular collapse of the industry.

By 1995, half the thrifts had gone out of business. The Federal Savings & Loan Insurance Corporation (FSLIC) was abolished and replaced by the Office of Thrift Supervision (OTS). A massive takeover and rationalization of the industry took place, with the determination, “This will never happen again.” Twenty years later the OTS was abolished in the wake of a second and far greater financial sector collapse. Deregulation had returned within a decade, in even more complete form, with the repeal of New Deal banking laws (Glass-Steagal) and the rise of the anti-regulators of the George W. Bush administration.

The housing boom of the 2000’s depended on mortgage originators and mortgage lenders who were virtually unregulated, but it also depended on the banks and Wall Street. Originators found takers for fraudulent, onerous and undocumented mortgages and sold them to mortgage lenders. The banks provided the short-term “warehouse” loans to bridge the deal on into the Wall Street securitization market. Here the individual mortgages were combined to form securities that were sold as solid investments around the world. At the same time, banks themselves originated their own somewhat better, but still suspect, subprime and non-traditional mortgages to turn into securities.

When the inherent weakness of the mortgages came to the top and the securities found their true value, the Great Financial Crisis was triggered.

In the S&L debacle it was high interest rates instigated by the Fed’s war on inflation that led to a Wild West of fraud and excess. In the Great Financial Crisis, it was low interest rates forced by the Fed in fear of deflation that created another Wild West, as massive amounts of capital searching for yield flooded into the “safe” mortgage market.

Regulators who saw each crisis forming and who advocated strong action at the outset or strict rules governing lending activities were muted and frustrated by other, “captured” regulators and pressured directly by elected politicians acting on behalf of big donors. The “Keating Five” was a memorable example from the S&L debacle. Five Senators were censured for their efforts to protect Charles Keating, an S&L billionaire. When the S&aL debacle was over, more than 3,000 bankers and thrift officers went to jail.

That number is about 3,000 more than the Great Financial Crisis. Many banks have failed, but a certain class is still with us – the too big to fail. (These now include JP Morgan Chase, Wells Fargo, Bank of America, Goldman Sachs, Morgan Stanley, and Citigroup.) These institutions continue to receive special concessions, but more than anything else, it is the too big to fail insurance they enjoy that gives these enormous companies lower cost capital and an advantage over their smaller rivals. (Banking is not an industry with economies of scale.)

That favoritism arises in part from the efforts of Fed Chairman Ben Bernanke, one of the economists who has failed. Bernanke himself, or the Fed itself, took over the original mandate of TARP, or one of them, and bought one and quarter trillion dollars of mortgage backed securities. This year the Fed is ready to take another trillion dollars on to its balance sheet. Thus we see incredible efforts to expand credit to the private sector at the same time we are determined that the public sector do nothing of the sort.

The recent turn in the housing market, in terms of price and volume, is thought of as a recovery. Indeed, it is. As in going up. The chart online shows however, that the upturn is a blip with respect to the long term, and the foregoing shows that every effort has been made to do this without recognizing it in the lives of the underwater homeowners. What that means is that as prices recover, at each step, shadow inventory will come back on line.

So credit and banking, success or failure?


  1. You continue to do good work and I look forward to your podcasts.

    Call me paranoid if you want, but I tend to think that easy money, low interest, and an incredible absence of critical thinking on behalf of the general public, are a perfect recipe for disaster. If money is made so easy to get that people can rack up Tens of Thousands of dollars of personal debt for purchases of such things as Flat Screen TV’s, flashy cars, and over priced houses... Well... Then what are they going to do?

    I can tell you what they’re NOT going to do. They will NOT speak out or march in the streets for fear of losing their all too precious job. Without that income they will lose everything... never realizing they never really “had” it in the first place. They will be sooooo stressed out all the time that they won’t think clearly, they won’t be able to solve complex problems, and they are likely to fall into depression.

    Talk about “Killing them with Sugar”. What better way is there to CONTROL a population?

    My wife is from Brazil and she’s asked me more than once, “If you guys are so mad about this, why don’t you take to the streets until something is done to fix it?”
    The best reason I can give her is that people are tired, stressed, and in fear of losing everything they’ve ever worked for. On top of that, the majority of them don’t take the time to educate themselves on much of anything... afterall, if they did (educate themselves and think critically), they wouldn’t be in this position right now.

    Irresponsible citizens + Irresponsible ‘leaders’ + Too much easy money.

    What else can we expect but a world run by the 1%. I pretty much think the 1% has been at this for a very long time and they are getting better and better at it.

    If you’ve ever travelled around the world and seen how MOST people live (in extremely humble, if not outright impoverished conditions) then you have seen the future.
    Every time I get in an airplane and fly to Brazil, I always think of the plane as a “Time Machine” that shoots me into the future... America has no idea what it’s doing to itself, and it doesn’t seem to care.

    Enter the barbarians.


    1. Well said.

      There is also the fact of no leadership. Chris Hedges, who I mentioned in the podcast, wrote the book "Death of the Liberal Class," which identifies the co-opting and neutering of the liberal class and the consequent absence of opposition to the rise of the corporate state as the necessary condition for complete collapse.

      I think his book is free online. It's a difficult read, not because it is obscure, but because it is so plain and convincing and uncompromising in its pessimism.