2009 June 17 » New Jersey CFO

G8 signals the end of the financial crisis, but what caused it?

AIG and all that....., Analysis & Commentary, If I Only Knew It Was This Easy!, Integrity and Responsibility, It Is Nice To Be Part of the Elite!, Management-Discussion, No Bank Is Indispensable, Our phony middle class, TARP fruit loops, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Joy of Being A Bank, The New American Socialism, Those Quarky Accounting Rules, Who Guarantees the Guarantor?-You Do! No Responses »

Jun 172009

The weekend G8 communiqué, coming after four months of stabilisation in most financial markets, seemed to mark the official end of the financial crisis. If so, what lessons should be learnt for economic and financial policies in the months ahead? The history of the crisis in the next few paragraphs may not be the standard version presented by most commentators and economists, yet recent events suggest it to be a plausible account of what went wrong.

The blunders that produced last autumn’s financial crisis had nothing to do with the supposedly inflationary monetary policies of Alan Greenspan, or the fiscal profligacy of Gordon Brown, or with Mervyn King’s lack of practical market experience, or Hu Jintao’s mercantilist approach to currencies and exports. All these and many other factors contributed to the vulnerability of the world economy, but none of them would have been enough to cause its near-collapse last autumn. For that we can blame the unforced errors of a man almost forgotten since he slipped quietly out of office at the beginning of this year: Henry Paulson, the former US Treasury Secretary and ex-chairman of Goldman Sachs.

To understand how a localised financial problem in one segment of the US mortgage market turned into a near-collapse of the global financial system we need to recall Mr Paulson’s astonishing misuse of mark-to-market accounting standards to expropriate the shareholders of Fannie Mae and then to bankrupt Lehman Brothers. What made matters even worse was his inability to understand the systemic consequences of what he was doing. Anyone who doubts the importance of individuals in economic history should recall that the single worst day of last autumn’s entire financial crisis, as measured by the widening of risk spreads on interbank credit, was September 23. That was the day Mr Paulson appeared before the Senate Finance Committee to explain what he wanted to do with the $700 billion he had requested from Congress. This was the moment when everyone realised the world’s most powerful economic official did not know what he was doing.

Once the key role of personalities and financial policies is recognised, it is hardly surprising that things began to improve almost as soon as Mr Paulson was replaced by a competent Treasury Secretary, Tim Geithner. A collapse of share prices on Wall Street triggered by the Lehman bankruptcy in September ended the very day after President Obama responded to attacks on Mr Geithner’s personal probity by offering his unqualified support. A week later, the suicidal mark-to-market accounting regulations were dismantled. And it is no coincidence that the financial crisis, at least in America and Britain, effectively ended that week. From that point onwards, the US Government found itself collecting tens of billions of dollars in repayments from supposedly insolvent banks. Far from being forced to nationalise almost every bank and running out of money with which to refinance toxic assets, as predicted by panic-mongering Nobel Laureate economists, the US Treasury now finds itself almost embarrassed by the hundreds of billions of dollars it has budgeted for supporting a banking system that no longer needs state support.

Paulson Caused the Financial Crisis – Anatole Kaletsky, Times of London

Short Sales and Politically Connected Firms – Caroline Baum, Bloomberg

Analysis & Commentary, Integrity and Responsibility No Responses »

Jun 172009

June 15 (Bloomberg) — Everyone knows money buys influence. The entire lobbying industry is based on that premise.

Businesses hire teams of people to represent their “interests” to members of Congress. Lawmakers listen, and should they find those interests compelling enough to warrant, say, a tax credit or the insertion of another loophole in the already holey tax code, said lawmakers may find themselves richly rewarded.

Knowing a quid-pro-quo exists and quantifying the value of political connections are two different matters. For example, earlier this month Barney Frank, the powerful Democratic chairman of the House Financial Services Committee, persuaded General Motors Corp. Chief Executive Fritz Henderson to delay the closing of a GM parts distribution center in Norton, Massachusetts, which is in Frank’s district. (Frank also intervened to secure a $12 million cash injection from the Treasury’s Troubled Asset Relief Program for OneUnited, a troubled Massachusetts bank.)

It sure looks as if the government’s stake in GM helped to persuade Henderson of the importance of saving the 80 jobs at the Norton center. Is there a way to determine how much it was worth to him?

Academics have tried to put a price tag on political connections, but often the ties between business and politicians are unknown or too hard to uncover. In many countries, information on lobbying and political contributions isn’t available to the public the way it is in the U.S.

Sudden Death Syndrome

Vanderbilt University economics professors David C. Parsley and Mara Faccio use a new approach to quantify political influence. In “Sudden Deaths: Taking Stock of Geographic Ties,” a paper that will appear in the June issue of the Journal of Financial and Quantitative Analysis, the authors put a price on how much local politicians help their local constituencies.

Specifically, they examine the stock price reactions following the sudden death of a local politician.

Parsley and Faccio begin with the premise that politicians favor local enterprises for obvious reasons: They need votes to get re-elected, they have family and friends in the district, they care about local jobs, etc.

Using geographic location as the framework for their analysis, the economists then use an unanticipated event — the sudden death of a politician — to tease out the effect on companies based in the same town. (Because the stock market incorporates all available information, only an unexpected event can be used to measure the reaction.)

‘Statistically Robust’

What they found from their worldwide study of 8,191 companies and 122 sudden deaths since 1973 was a 1.7 percent decline in geographically connected firms, meaning those companies headquartered in the town in which the politician was born or lived.

That didn’t sound like a lot to me, so I called Parsley with some questions.

“Political connections do have an impact, they are measurable, and it’s not just isolated cases,” he said. “By looking at sudden deaths, we get an idea of what the market thinks the connection is worth. Now it’s worthless because the person is dead.”

Is a 1.7 percent decline in the stock prices of those companies relative to the overall market “statistically robust,” as economists like to say?

“We haven’t been able to make it go away even though we tried different specifications and controlled for everything we could think of,” he said.

Zimbabwe Is Last

Parsley said the effect was greater if the politician sat or chaired an important committee. In those cases — if the geographically connected company was a bank, and the politician was chairman of the Senate Banking Committee — sudden death produced an average 4 percent decline in the stock price relative to the overall market.

Not surprisingly, there was wide variation across countries, with sudden death leading to an average 4 percent decline in politically connected companies in the U.S. and 10 percent in Zimbabwe. Connections matter a lot more to publicly traded family-owned businesses, which has implications for the overall economy.

“To the extent that politicians favor inefficient (family) firms by allocating resources to them, long-term economic growth will also be reduced,” according to the paper.

In addition, the authors found that politically connected firms “suffer a statistically significant decline in sales growth” and access to credit between the year prior to the sudden death and the year after.

Health Care Initiative

Is there a message in all this?

“Stock prices should be unpredictable; nobody can predict them,” Parsley said. “Yet we have a model that can predict stock returns.”

He’s not suggesting we commit murder most foul and trade off it. It is possible, based on the results of the study, to stay on top of the obituaries, short some politically connected companies and walk away with a profit.

I started to think about the broader implications, now that many of the nation’s largest companies, including banks, insurance companies and auto manufacturers, are connected not only to their local politician but to the federal government, up to and including the president. What happens if Barney departs for that great domed chamber in the sky?

Given the impact of sudden-death syndrome on a company’s stock price, we might want to mandate and underwrite more health and wellness programs for our elected representatives.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)

The threat of politicization hangs over the Federal Reserve Board like the Sword of Damocles

Analysis & Commentary, Coup d'etat in America No Responses »

Jun 172009

COMMENTARY:

The threat of politicization hangs over the Federal Reserve Board like the Sword of Damocles. It’s Capitol Hill’s response to the Fed’s proliferation of new programs to unglue credit markets. The Fed’s innovations threaten to create enough acronyms to tax the limits of the alphabet.

Rep. Barney Frank, Massachusetts Democrat and chairman of the House Financial Services Committee, which oversees the Federal Reserve, has warned, “There is a problem with too much power going to an entity that is not subject to democratic powers.” The Fed should be “accountable to voters.”

Rep. Ron Paul, Texas Republican, has authored a Fed transparency bill calling for Fed audits. The bill has more than 200 co-sponsors, and the number is rising daily. It’s just a “first step,” Mr. Paul says.

Sen. Christopher J. Dodd, Connecticut Democrat and chairman of the Senate Banking Committee, which shares oversight responsibilities for the Federal Reserve System, also wants more Fed transparency as well as an evaluation and closer scrutiny of regional Federal Reserve banks.

Questions have been raised about the location of the regional banks and whether they should be more evenly distributed around the country and whether Senate confirmation should be required of Federal Reserve Bank presidents. Some in Congress are angry because the Fed won’t name the companies participating in its programs. And if the Fed gets new regulatory powers over the financial economy, that will inspire yet more attacks on its independence.

Some observers say the Fed already has slipped over the edge politically. The innuendo in German Chancellor Angela Merkel’s recent remarks was telling when she said, “We must return together to an independent central-bank policy.”

The Fed’s political conundrum has become deadly serious, and the stakes are high. Fed Chairman Ben S. Bernanke knew the risks when he and his colleagues on the Federal Open Market Committee (FOMC) embarked upon a bold new scheme to unlock credit flows, but they believed the risks were unavoidable. Financial markets were frozen, the economy was in deep trouble, and the Fed policymakers became convinced that bold new programs were essential to provide liquidity and stimulate economic growth.

Almost overnight, the macroeconomic Fed became the microeconomic manager, involving itself in the destinies of individual businesses, such as Bear Stearns Cos. Inc., Merrill Lynch & Co. Inc., American International Group Inc. and Citigroup Inc. Did the Fed go too far? Some analysts say yes and argue that at least part of the Fed’s cleanup work could have been handled by the Treasury Department.

There’s no question: Politicization of our nation’s central bank will seriously damage the effectiveness of monetary policy, the very heart and soul of the Fed’s mission.

Members of Congress and presidents are elected for relatively short terms and thus have short time horizons, but Fed policy of necessity is also based on long-term trends and goals. Imagine what would happen if greater political control over the Fed led to suspicions that the central bank was being prodded to push up inflation to cheapen the dollar in order to ease an unsustainable rise in the federal debt. Suspicion that the debt was being monetized because of political pressures would trigger a flight from the dollar and a sharp loss in its value, among other negative outcomes. The fallout would be disastrous.

Mr. Bernanke has clearly said the Fed will not monetize the debt. That’s believable as long as he remains Fed chairman. But his very declaration may have provoked some in Congress to step up their campaign to limit the Fed’s discretion and independence.

From what is not being said, one senses the Obama administration understands the risks of Fed politicization, or even its appearance, and will stay clear of making inroads into the Fed’s authority. Indeed, the questions being asked about the motives of legislators seeking to constrain the Fed and where it might lead are raising a specter that, ironically, puts pressure on the president to reappoint Mr. Bernanke – the image of independence – as chairman when his term expires in January.

Confidence in the future is a great asset that adds strength to the argument that the Fed should adopt a policy of explicit inflation targeting, which Mr. Bernanke favors. In addition to its economic merits, long-term targeting would be self-protecting.

Honest arithmetic tells us expected economic growth in the next decade will be insufficient to bring projected ratios of debt to gross domestic product down to acceptable levels, so taxes will have to be raised and entitlement programs cut back. Taxes alone can’t be raised enough to reduce the debt ratio without doing serious injury to the economy. Members of Congress know this. Thus, a partial backdoor solution, via the hidden tax of higher inflation – if it could be blamed on the Fed – might seem to them an attractive choice.

How the Fed fares in the months and years ahead will depend very much on whether its new programs and policies prove effective. If they help save the day, there’s a good chance the Fed’s independence will remain intact. Let’s hope so.

Alfred Tella is former Georgetown University research professor of economics.

Politics and the Federal Reserve – Alfred Tella, Washington Times

Mosquito Alert!

Back to the basics No Responses »

Jun 172009

With a bumper crop of the pesky, biting bugs breeding in the rain-soaked state, exterminators are taking the battle to swamps, wetlands and river flood plains statewide to try and stem the tide of a massive mosquito invasion this summer.

Despite their best efforts, mosquito experts are a bit pessimistic, suggesting people buy plenty of bug repellant and prepare to get bit a lot if you go outdoors.

View the Mosquito Life Cycle

“It’s not just that it’s been wet, but the cooler weather is giving mosquitos more time to develop. So, we’re seeing more mosquitos, and they are bigger than usual,” said Bob Kent, administrator of the state’s Office of Mosquito Control Coordination.

But neither Kent nor other mosquito fighters are about to cede control of the state to Aedes Vexans, or any of the other approximately 40 species of mosquito that live in New Jersey. They are working overtime to prevent larvae from hatching and trying to exterminate those that have made it to adulthood.

In Morris and Essex counties, crews have sprayed hundreds of acres from the air in the mosquito-prone Passaic River flood plain, while sending crews out on foot and in all-terrain vehicles to spray hard-to-reach areas known as prime mosquito habitats.

Mark Vlazny, biologist for the Morris County Mosquito Extermination Commission, joined Ron Foster, a senior inspector with the agency, to set up operations today in a wooded area of East Hanover, near the Essex County border, suspected of being a mosquito hot spot.

To check it out, Foster walked in the tall grass along the edge of the woods. He immediately caused a stir in the mosquito population and was surrounded by a thick swarm of newly born muskies.

“This is one of the worst months for mosquitos I’ve ever seen,” said Vlazny, as he observed the attack on Foster, and promised a quick response.

Foster, armed with a mild pesticide, rode into the woods, weaving through trees and around large rocks, followed by a foggy fatal spray that he released. In moments, the woods were alive with mosquitoes, flying wildly in great numbers as they tried to escape. Most gradually fell to the ground and died.

“It’s like a war of attrition,” said Vlazny. “Our goal is to eradicate them. I can tell you I don’t lose any sleep at night about what we’re doing here.”

But the county and state mosquito crews can’t do the job alone. Officials from across the state today asked for the public’s help in eliminating backyard mosquito breeding grounds.

“We need people to check their yards, get rid of standing water in wheelbarrows and planters and toys and buckets, and clean the water from their gutters where mosquitos are breeding,” said Paul McCall, superintendent of roads and bridges in Somerset County.

“We can deal with big things, like flood plains, that residents can’t handle,” added Louis Lynch, superintendent of Essex County’s Division of Mosquito Control. “But we have to ask people to help us where they can. We need their help.”

http://www.bloomberg.com/index.html?Intro=intro3