This is a guest post by Edward Harrison.
There has been quite a lot of to-do about President Obama’s fat cat remarks and his meeting with bankers exhorting them to lend (which some attended via conference call only, ouch). Let me tie these events in with a few other themes into a comprehensive picture of what is happening in politics and banking.
In a nutshell, we are getting a bunch of populist rhetoric which is pure politics to induce banks to lend recklessly and save the economy when basic economics would tell you that there is a deficit of lending capacity and demand for credit. It is the absurd kabuki theater of depression economics.
Just to review:
- Two days ago, President Obama used his weekly address to the nation to sound off on banking reform, using unusually aggressive and populist language.
- The President then ratcheted up the populist rhetoric, calling bankers “fat cats” on a 60 Minutes episode which aired last night.
- Overnight news came that famed Nobel Prize-winning economist Paul Samuelson, the king of the mid-century Keynesians, had died.
- Early this morning, we learned that Citigroup was exiting TARP and was due to raise $20 billion to do so.
- Then later today came news that the President exhorted those same fat cat bankers to start lending more money to help kick start the economy.
- Still later in the day came news that Wells Fargo was the last big bank to exit TARP.
It was quite a day for the economics profession and all of these events are related.
Playing politics
The first relationship comes via David Rosenberg, who lamented the damned if you do, damned if you don’t message that politicians like Obama are sending banks with their empty populist rhetoric. Rosenberg wrote:
Below we highlight President Obama’s weekly address, in which he blames the big bad banks for luring borrowers into the myriad of products during the credit bubble, a bubble that in our view was promulgated by the nation’s policymakers.
When things go awry, however, it is very easy for those in Washington to point the fingers at somebody else. What did Congress, the SEC, the Fed, and the White House think in that 2002-07 bubble period except that excess credit was creating jobs; in turn, those jobs were creating prosperity and that prosperity led to votes. Now the borrowers, who signed contracts, and as adults should also be held accountable, are being treated as “victims” by politicians and the media.
He then goes on to highlight these snippets of anti-Banker language in the President’s weekly address statements at the weekend (see full text here):
- But much of it was due to the irresponsibility of large financial institutions on Wall Street that gambled on risky loans and complex financial products, seeking short-term profits and big bonuses with little regard for long-term consequences.
- financial reforms that would target the abuses
- of risky dealings that sparked the crisis
- the authority to put an end to misleading and dishonest practices of banks and institutions that market financial products like credit and debit cards; mortgage, auto and payday loans
- But Americans don’t choose to be victimized by mysterious fees, changing terms, and pages and pages of fine print. And while innovation should be encouraged, risky schemes that threaten our entire economy should not
- I urge both houses to act as quickly as possible to pass real reform that restores free and fair markets in which recklessness and greed are thwarted
- That’s how we’ll restore a sense of responsibility and accountability to both Wall Street and Washington
I see these quotes as Marshall Auerback does, all hat and no cattle – populist rhetoric only now that the President is on the back foot over unemployment and banker pay. But Rosenberg sees something altogether more cynical – an orchestrated campaign to shame and bully banks into going against their fiduciary responsibility and lending irresponsibly again!
As a long-time reader of our research and valued friend told us over the weekend, “he [Obama] finally threw the banks under the bus”. While not suggesting the adjectives are undeserved, I am afraid that the U.S. President has invited all consumer borrowers, creditworthy or not, to abdicate their financial responsibility. We now have borrowers as victims.” Ain’t it the truth. And the consequences will be profound. Our friend reminded us that in regard to our theme of “frugality”, the current reality is that “frugal” represents just the first wave in a fundamental change in behaviour towards complete self-interest and risks morphing into something a little more troubling, such as abdication of individual responsibility.
Meanwhile, the adjective used to describe the banks and their actions, were, in a word, scary (and if you want more on ‘scary’, read the WSJ assessment on Obama’s appearance on the television show 60 Minutes yesterday — talk about being completely out of control and inciting divisiveness — see Obama’s Slams ‘Fat Cat’ Bankers). This backlash against the banks, whose behaviour was condoned by the government when the credit and housing bubble was in full swing, is surreal.
As we said, the media has no problem in running articles that complain about the lack of credit being extended by the evil banks, even though it was excess debt taken on by a profligate consumer that got us into this mess to begin with. The front page of the Sunday NYT runs with Rates Are Low, But Banks Balk at Refinancing. Basically, 60% of mortgage borrowers carry interest rates that are above the current market cost, but refinancings are still down 57% from year-ago levels because the banks have battened down the hatches on their lending guidelines; “The plight of homeowners has become a volatile political issue”, according to the NYT. Well, that’s probably not the case for the 30 million Americans who own a home with no debt or the countless others who have a mortgage but also know how to live within their means. The article says “the banks that once handed out home loans freely are imposing such restrictions that many homeowners who might want to refinance are effectively locked out.” So, because the banks lent freely in the recent past, and this excess was at the root of today’s problems, then the banks should go back to those days of reckless lending behaviour.
Come again? Nowhere in the article is there any reason provided as to why the banks are “stricter” — maybe it has something to do with the amount of equity the borrower has in his/her house, or what his/her credit-rating has been cut to, among others. The way the media and politicians are portraying the situation is that it is every citizen’s god-given right to have credit. This is amazing. We aren’t exactly recommending a return to Calvin or Kant puritanical behaviour, but what we are seeing unfold right now is very disturbing.
TARP repayments
The President is playing politics of course. And he is using the TARP repayments by Wells and Citi to do so. It is quite crafty, if you asked me.
The message to banks is loud and clear:
You bankers are now free of TARP restrictions. That means you have been given a green light by the government to return to business as usual. Under no circumstances should you think this means a return to large bonus payments while everyone else is hurting. I will pillory you with verbal abuse. And while I don’t want to tax you, I may be forced to resort to action. On the other hand, the green light means you had better start lending or you will get the stick.
Back in June I warned this is what was likely to occur. When BofA repaid it’s TARP money, I repeated this warning. But now that the President is all but ordering the bankers to lend, the narrative is even more compelling. This is how I presented the idea from a banking CEO’s perspective. I have highlighted the points consistent with Rosenberg’s statements:
the stress tests showed that Phil’s bank was in relatively good shape – at least compared to Big Bank’s peers. On the back of this information, Big Bank was able to issue a huge slug of new shares at a price 200% above its trough share price and fill any apparent gaps in Big Bank’s capital. In fact, under the guidelines of the stress test, Big Bank could pay back all of the TARP money it received and return to business as usual.
There was one problem, however, and Phil knew it. You see, Phil had become a lot more worried about the health of his bank after being caught flat-footed when the credit crisis hit. The company had done a significant amount of work to get to grips with likely credit exposure. And while the situation was good for Big Bank under the conditions predicted in the government’s stress tests, Phil knew that the conditions were not good at all in more adverse scenarios. What should Phil do?
Before, we get into what Phil actually does, I should point out that this is a classic case of asymmetric information in which Phil, as a bank insider, has a lot more knowledge of Big Bank’s financial condition than the government, shareholders, or the investing public at large. Well, I would like to believe that Phil would do the prudent thing and remain ‘over-capitalized’ until he was sure that he could lend prudently without jeopardizing his firm’s capital base. But, there is clearly no incentive for that. After all, hadn’t Phil been beaten over the head before Congress for ‘not’ lending money. Why did Phil have so many billions of dollars in excess reserves at the Fed? Why was he preventing the economy from regaining its footing? Was Phil hiding something? Perhaps Phil and his executive team need to be replaced? On second thought, Phil decides the over-capitalization route is suicidal…
Big Banks lawyers and accountants have told Phil that he can legitimately claim to the public that Big Bank is well-capitalized and proceed lending…
Phil, who has zero incentive to restrict lending, has a lot of incentives to increase lending: threats from the government and a huge options pay package being the most obvious.
Do you think the toxic assets have magically disappeared – or perhaps become less toxic due to asset price inflation? The government obviously does and this is why they are telling banks to lend more money. The New York Times quotes the President after his fat cats meeting as saying:
America’s banks received extraordinary assistance from American taxpayers to rebuild their industry. Now that they’re back on their feet, we expect an extraordinary commitment from them to help rebuild our economy.
This and zero percent interest rates are only sowing the seeds of the next credit bust down the line, of course. But, who cares? We’ll just act as if no one could have possibly imagined or predicted this turn of events.
(video of Obama below: note how somber he is. He sounds disappointed and let down. He does pay lip service to the need for prudent lending but then goes on to exhort the banks to “go back and take a third and fourth look.”)
Enter Samuelson
That’s where Paul Samuelson enters the picture. The old Keynesian had an interesting twist on depression economics, something Paul Krugman pointed out in an ode to Samuelson today. On page 353-4 of his 1948 textbook, Samuelson writes:
Today few economists regard Federal Reserve monetary policy as a panacea for controlling the business cycle. Purely monetary factors are considered to be as much symptoms as causes, albeit symptoms with aggravating effects that should not be completely neglected.
By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel. For in the middle of a deep depression just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans. If the Reserve authorities buy government bonds in the open market and thereby swell bank reserves, the banks will not put these funds to work but will simply hold reserves. Result: no 5 for 1, “no nothing,” simply a substitution on the bank’s balance sheet of idle cash for old government bonds.
Krugman uses this quote to talk about interest rates, but it also goes full circle back to Rosenberg’s point – namely that banks are not lending because they or their borrowers are capital-constrained. Forget about the phony stress tests. Bankers know the true state of both their own financial health and that of potential borrowers. Large corporations are relatively flush with cash and have the opportunity to borrow in spades. However, small business and individuals have seen difficult economic times and this is where the problem lies. Are you telling me banks should just turn on the credit spigot and let ‘er rip?
Easy money is not the solution, it is the problem. Jobs are the solution.
The corollary of this is statement is that fiscal policy is more effective than monetary policy in a depressionary environment. Quantitative easing is overrated.
Source
Breakfast with Dave – David Rosenberg, Gluskin Sheff
A version of this post originally appeared at Credit Writedowns. Also see “Christmas spirit Wall Street edition” for the stylized Obama Administration version of events yesterday.
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I know you are a fan of the Neo-chartalists, where monetary policy and fiscal policy are strongly related. And of course, there is the mosler idea that bank lending is never capital constrained but only constrained by the quality of the potential borrowers.
In this current environment, govt spending not only increases the total money supply but provides demand that isn’t currently there.
Like Taibbi has said, we could have purchased every underwater mortgage for about $1.5T and the credit problem would have been solved.
We have a situation where people think that having a nice water bottle will quench our thirst. But really, you just need water.
Trickle up economics, remember and repeat the phrase. A surplus of trickle down economic theory got us into this mess, it can be solved by trickle up. I hope when I am 80, I’ll have to be pounding the drum for a return to trickle down economics.
Calling Samuelson a Keynesian is debatable. IIRC his biggest contribution was creating the Neoclassical synthesis which tries to marry Keynesian macro with neoclassical micro. Some orthodox Keynesians and others (e.g. Steve Keen) question how Keynesian the result is. IIRC a major complaint is that it doesn’t deal with uncertainty (as opposed to risk).
I’m not saying anything for or against Samuelson here, just trying to classify where he falls in the spectrum of economic thought.
That’s a fair comment about Samuelson. In this blog entry, Keen talks about just that point:
http://www.debtdeflation.com/blogs/2009/09/15/it%e2%80%99s-hard-being-a-bear-part-four-good-economic-theory/
Its bonus time on Wall Street! Record trading profits!
I love the finger pointing, It’s the greedy banks, no it’s the foolish borrowers, round and round it goes, and it will continue this way until, the regulators grow a set and start the criminal prosecutions of the fraudsters that built up and securetised the mess as AAA investments sold into 401k’s and Municipal funds.
Let’s keep blowing smoke, while the crooks and fraudsters continue to manipulate the media.
I sympathize at least somewhat with complaints about the banker’s conundrum. But what evidence exists as to why banks aren’t lending? There seems to be a lot of speculation about this but little evidence to show why they aren’t (at least that I’ve seen). Is it because they’re undercapitalized, because people/businesses don’t want to borrow, or because banks have raised their lending standards to avoid future losses. If the last, then have they raised them prudently or have they gone from the extreme of no standards to ridiculously high standards?
Alex, this is quite anecdotal but two years ago when my small business was turning over about 3m a year we expanded using a line of credit putting us in the hole about 200k. That did not seem like such a deep hole then. We’ve retrenched to about 1m a year and the debt service, while not deadly, is not attractive. The last thing we want is more debt. We want more business. If I was foolish enough to think a loan would solve some of my problems, I am certain my bank would look at what has happened to me in the last two years laugh!
So while the enormous demand side slack remains, assets have been pumped back up into bubble territory. Fortunately for those who worry about inflation, the asset holding segment of the economy is so well insulated from the actual working economy that assets can rise to the stratosphere with little risk of leakage into the real economy. On the other hand, assets have been decoupled from real wealth creation for so long that there aren’t many businesses left that actually look like value adding propositions that would make good loan prospects. Under the rubric of free trade, businesses that look like that were exported to where labor was cheap fifteen years ago.
So the musical chairs begin again, lucky Chuck Prince, he’s not invited to this party. But at some point it seems to me that all that valuation in the markets will evaporate again leaving only unserviceable debt obligations. But what do I know I”m just some chump trying to run a business.
Thanks for the reply. I wouldn’t be surprised if what you’re saying is true for many businesses. It certainly seems to be true for people I know. Of course given some large firm orders I imagine you’d be willing to take on some debt if needed to fulfill them. That support’s Edward’s idea that fiscal stimulus is what’s really needed.
The crisis of Wall Street investment banking has unleashed a tsunami of unwelcome expectation on the conventional banking industry. However, today as banks retreat from high yield financial derivatives and begin to search for solid collateral they are facing, head on, the transformation of the underlying asset foundation in western economies.
Instead of the bankable assets of old, real property, plant or inventory, corporations in the modern economy are underpinned by host of non-traditional ‘assets’. These new assets include many of the ‘harder’ (potentially bankable) forms such as patented new technologies, copyrighted software, but they also include many new contractual based assets, not least those ‘sophisticated’ financial derivatives we’ve all read about, and a variety of unfamiliar relationship based assets such as ‘brands’, trademarks, social networks and related assets that are becoming more and more important in our economy.
The scale of this economic revolution and the immaturity of the actual assets (from the banking perspective) make it extremely difficult for banks to move quickly, to adequately fulfill the rising expectations of business, governments, regulators and an increasingly impatient public.
Edward Harrison says; “Easy money is not the solution, it is the problem. Jobs are the solution.
Jobs are NOT the solution.
The government has been hijacked from the plain old vanilla greed gangsters (the Samuelson gangsters) by the pernicious greed neocon gangsters (the Krugman gangsters). Neocon puppet Obama, with his populist bullshit meant to lather up the rubes, is right on script with the divisiveness game plan meant to get the marks into a perpetual conflict mode. The solution is to see that vanilla greed is history (it was never a fair economic system in the first place) and that pernicious greed must be eliminated.
That will not happen with the present hijacked government.
Maybe if a lot more of the wealthy ruling elite gangsters are Berlusconied it will hasten the change …
http://www.timesonline.co.uk/tol/news/photo_galleries/article6955826.ece?slideshowPopup=true&articleId=6955826&nSlide=1§ionName=WorldEurope
Deception is the strongest political force on the planet.
Bought and payed for politicians giving lip service to their employers[!]….really?
Suspicious Minds:
http://www.youtube.com/watch?v=Q2aha4uEpEQ
Sadly more like a bad case of Mirror in the Bathroom on both partys:
http://www.youtube.com/watch?v=UTNpaaPHENE
Obama lacks the grit, integrity and balls to use populist rhetoric!
Re: “The President then ratcheted up the populist rhetoric, calling bankers “fat cats” on a 60 Minutes episode which aired last night.”
Populist liberal rhetoric, associated with TARP, politicians and bankers, almost always connects the terms fucking fat cats, fucking bankers and fucking politicians! Sugar coating this multi-Trillion shit-fest is nothing but pure obscenity and protecting these banker crooks by giving them bonuses is a fucking crime against humanity!
None of us should be convinced that Obama will really get tough with the bankers, will really kick their butts, until he stands behind the bully pulpit with some really tough-looking marines standing behind him and gives a speech to us about how these “fat cats on Wall Street” are a threat to our national security and if they don’t start lending to us, he’ll do what he does to all terrorists who are out to take down the West — sic our armed forces onto them. But as I hear bankers who’ll be at the presidential dress-down openly admit that what Obama is doing is just a “p.r. stunt” and what he is giving them is just a “public spanking,” I’m pretty much convinced that Obama will remain as a faithful lap dog for our Masters of the Universe.
http://www.salon.com/news/opinion/glenn_greenwald/2009/12/14/bankers/index.html
Just a collection of links about the same topic..
http://dissention.wordpress.com/2009/12/15/linkfest-december-15-2009/ (The disillusionment with Obama continues..)
“But now that the President is all but ordering the bankers to lend”
I realize that is rhetorical hyperbole but the fact is that the surviving banks are, as Simon Johnson predicted, more powerful politically now than before the credit crisis. Three of the CEO’s of the largest banks used the lame excuse of bad weather to not even bother to show up in person at the White House and Obama was his usual placid self. You don’t need Cesar Millan to tell you who the alpha dogs are.
Very hyperbolic as Yves new post attests.
http://www.nakedcapitalism.com/2009/12/quelle-surprise-banks-see-meeting-with-obama-as-a-pr-stunt-for-administration.html
I say Bravo to Gasparino for calling a spade a spade. You may have seen Simon Johnson’s comments today about Volcker saying he will get his way in the end. Let’s hope so.
Obama (with the help of a different set of economic advisors) could have used populist rhetoric against bankers last winter to justify wiping out shareholders of failed banks, making their bondholders and counterparties take their losses, nationalizing the worst off of them, and breaking up the ones that were too big to fail. He could have saved a lot of taxpayer money by doing this, and he could have used the money he borrowed from our kids to try to clean up the Bush-Clinton-Reagan-Greenspan-Bernanke-Rubin-Summers mess and finance a rational bank bailout that was linked to serious bank reform, along with a job stimulus program that created jobs. He could have transitioned our sad country, after we took our lumps, to an economy and standard of living that aren’t based on pretending things are okay when they aren’t. He could have gained popular support for national health care reform and the rest of what should have been his agenda by doing all this, instead of squandering his mandate by spending so much bailing out Wall Street that the tea baggers get to blame him for the mess. But he didn’t. Now, a year too late, he is beating the populist drum to try to get bankers to reinflate the credit bubble. He is toast, as are we.
“As we said, the media has no problem in running articles that complain about the lack of credit being extended by the evil banks, even though it was excess debt taken on by a profligate consumer that got us into this mess to begin with.”
Baloney.
The wall street needed something else to pump up after tech boom and 911. Guess what they picked? Then they gave credit to marginal buyers, guess what that did to home prices?
And its not like those buyers got “bailed out.” They have received nothing but foreclosure notices. The workout plans have produced a whopping 50K mortgage repayment plans since it was announced a year ago, and millions of eviction notices and rigged courthouse sales where the bank buys the house back from itself.
In contrast, the banks, and AIG in particular, have all been bailed out for their derivative contracts, after what they knew, or should have known, would occur in the housing market.
Who knows better about what is really going on in the economy? The average joe schmoe, or the bankers? Who knows the longer term trends, and profits off it, joe schmoe, or the bankers?
I also think Rosenburg was using his tin ear when he wrote those paragraphs. His point was, I guess, that massive lending to uncreditworthy borrowers caused a lot of the credit crisis and that it would be a bad idea to coerce bankers into starting that kind of lending up again. He seems to be saying that a preponderance of the blame for this lies with the borrowers for taking the loans rather than with the finance professionals at many levels who used every trick in the book, including massive fraud, to profit from the bad loans and pass the risk on to suckers, with Uncle Sucker at the end of the line. If he thinks that, he is being dumb, but he is so smart about so many things that I will give him the benefit of the doubt and assume that he was writing too fast for his own good. He does crank out those newsletters every day and most of the time he is on the mark.
You have to take some of those comments with a grain of salt. Rosenberg is a banker through and through and has zero interest in anti-bank populist rhetoric. He sticks to his knitting which is how excessive risk and a burst asset bubble have caused a depression which is ongoing. When it comes to the details he is rather more likely to blame this on government and reckless borrowers than on government and reckless lenders.
It wasnt reckless, it was fraudulent. Neither one is good for an economy.
Yes, Rosenburg is pretty focused on where various asset prices are likely to move and doesn’t have too much time for other things. I also thought, however, that in his post he got his main point wrong by overstating the likelihood of Obama being serious about jawboning bankers and about there being much chance that the bankers would respond to such jawboning by lending money to people who are likely to default. They would need some way to take a quick profit and move the high risk loans to others before they get back into that game, and the market for that kind of paper has dried up, as I understand it.
To say that Obama’s anti-banker rhetoric is “scary,” that government policies caused the crisis, and that profligate borrowers are the cause of our troubles is preposterous.
Obama’s rhetoric is just that: empty posturing that seeks to divert the justified anger over his captivity by finance capital. Blankfein and Mack couldn’t even be bothered to show up for the president’s little dog-and-pony show, a fact even the New York Times had to acknowledge. To say that government policies were responsible for the crisis without mentioning thirty years of pro-usury, pro-finance legislation and deregulation, all at the behest of finance itself is disingenuous. Add to that the bipartisan attacks on labor for the past thirty five years and here we are.
And while we can justifiably attack mindless, rampant consumerism – itself teased out by a multi-billion dollar advertising and marketing industry – the fact remains that most people went into debt because their falling real wages and rising costs of necessities such as housing and health care did not allow them to maintain their living standards without going into debt.
What’s “scary”is not the rhetoric that the president uses, which is nothing more than political theater, and pales before the rhetoric and actions of the 1930’s, but the fact that these sons of bitches on Wall Street blew up the world, have been rewarded for it, and are more powerful than ever.
Now that’s scary.
So it’s either “Banks aren’t lending because the economy is weak” or “The economy is weak because banks aren’t lending.”
Hmmm, I guess that’s why they call it “Political Economy”. ha ha ha. Glad I don’t vex myself with anything except for NFL football. Honest to God. I just channel everything right from the Mind of the Lord and watch it appear like magic on the Big Mind Screen. Yes, I’m a good Protestant boy.
No vain glory rituals and no incense and no equations and fuzzy theories of economic reality. When it’s 16 equations and 19 unknowns there’s lots of wiggle room when the shale hits the fan. ha ha.
– Dr. Olin L.V. de Hoevenstoop, PhD Anthropology and Master Brewer