Elizabeth Warren is the single person I most trust with understanding the problems of our current credit crisis and those who perpetuate the climate that created the crisis. Unfortunately those paying politicians are winning in their attempts to retain the current broken model. We can only hope we start implementing policies Elizabeth Warren supports – all of which seem sensible to me (except I am skeptical on her executive pay idea until I hear the specifics).
She is completely right that the congress giving hundreds of billions of dollars to those that give Congressmen big donations is wrong. Something needs to be done. Unfortunately it looks like the taxpayers are again looking to re-elect politicians writing rules to help those that pay the congressmen well (one of the problems is there is little alternative – often both the Democrat and Republican candidates will both provide favors to those giving them the largest bribes/donations – but you get the government you deserve and we don’t seem to deserve a very good one). We suffer now from the result of them doing so the last 20 years. Wall Street has a winning model and betting against their ability to turn Washington into a way for them to mint money and be favored by Washington rule making is probably a losing bet. If Wall Street wins the cost will again be in the Trillions for the damage caused to the economy.
Related: If you Can’t Explain it, You Can’t Sell It – Jim Rogers on the Financial Market Mess – Misuse of Statistics – Mania in Financial Markets – Skeptics Think Big Banks Should Not be Bailed Out
America Must ‘Reassert Stability and Leadership’
Volcker: I remember there were people, beggars and tramps as we called them, who wanted to be fed. So it’s true, today we also have people who are relying on food stamps and other payments but we are a long way from the Great Depression. We are in a serious, great recession. Today we have 10 percent unemployment, but at that time it was more like 20 or 25 percent. That’s a big difference. You had mass unemployment.
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SPIEGEL: Are you sure? The Wall Street businesses are doing well. The big bonuses are back.
Volcker: It’s amazing how quickly some people want to forget about the trouble and go back to business as usual. We face a real challenge in dealing with that feeling that the crisis is over. The need for reform is obviously not over. It’s hard to deny that we need some forward looking financial reform.
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SPIEGEL: But the American government seems to have lost some eagerness in setting a tougher regime of rules and regulations to control Wall Street. Everything is being watered down. Why?
Volcker: I will do the best I can to fight any tendency to water it down. What we need is broad international consensus to make things happen.
I am surprised how many people are trying to compare the economic situation today (often using unemployment rates) and say we are in nearly as bad a situation as the great depression. The economy is certainly struggling, great recession, is a good term for it, I think. But taking the high measures of unemployment and underemployment today and comparing it to unemployment in the 1930’s is not comparing like numbers. The employment situation is bad now. It was much worse in the great depression. As intended, support systems like unemployment pay, FDIC, food stamps… have worked to reduce the depth of the recession.
He is right that we need serious reform to the deregulation that allowed the credit crisis to explode the economy.
Related: Volcker: Economic Decline Faster Now Than Any Time He Remembers – The Economy is in Serious Trouble (Nov 2008) – Unemployment Rate Reached 10.2% – Canada’s Sound Regulation Resulted in a Sound Banking System Even During the Credit Crisis
Over the last few years Elizabeth Warren has become one of my favorite leaders. She is a leader in economic thought, ethical society and the law (she is a law professor at Harvard Law School). Far too many on Wall Street, Washington and in C-suites are leading us down a very bad path. She is a voice we need to heed.
If you can’t explain it, you can’t sell it
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The 1966 high school debate champion of Oklahoma may get what she wants. The House of Representatives will vote in December on her idea. She suggested a Financial Product Safety Commission in a 2007 article in the magazine Democracy [Unsafe at Any Rate]. President Barack Obama proposed it to Congress in June as the Consumer Financial Protection Agency.
Warren won’t discuss whether she may be a candidate to lead the authority, which would have the power to regulate $13.7 trillion of debt products. A Warren nomination would tell banks that Obama is determined to force reduced checking-account fees and limit lender claims in mortgage advertising, among other measures the industry opposes, said Thomas Cooley, dean of New York University’s Stern School of Business.
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In her role overseeing the TARP, Warren has been critical of the administration, accusing the Treasury Department of undervaluing the stock warrants that were supposed to compensate taxpayers when banks repay their bailouts. A lack of transparency about how TARP functions “erodes the very confidence” it was to restore, her committee said in a report.
I hope she can take her attempts to reduce political favors being granted huge financial institutions and those institution be forced to follow sensible rules to protect individuals and our economy. With a few more people like there we will have a much better chance of a positive economic future.
Related: Bogle on the Retirement Crisis – Bankruptcies Among Seniors Soaring – Don’t Let the Credit Card Companies Play You for a Fool – http://investing.curiouscatblog.net/2009/04/08/the-best-way-to-rob-a-bank-is-as-an-executive-at-one/
Is it cynical to think that politicians want to provide payments from the treasury to those that paid the politicians? More cynical to think the politicians that created huge Wall Street Welfare payments won’t actually do anything except talk about how they think it is bad that those they paid billions to are buying new mansions and yachts? More cynical to think they will continue to provide huge amounts of nearly free cash for those that paid them to speculate with? More cynical to think if any of those speculators lose money they will give them more welfare? More cynical to think those bought and paid for politicians won’t actually take any steps to tax or curtail speculation? I think maybe I am cynical about Washington doing anything other than talk about how they don’t want to provide huge amounts of cash to Wall Street all the while giving their Wall Street friends huge amounts of cash that will be paid back by our grandchildren.
Wouldn’t it be nice if the politicians actually took actions to fund a partial payback of the hundreds of billions (or maybe trillions) of bailout dollars by taxing financial speculation? I doubt it will happen. But maybe I am too cynical. Maybe politicians will not just do what they have been paid to do. But it seems the best predictor of what congress will do is based on what they are paid to do, based on their past and current behavior. Now what congress will say is very different. those paying Congressmen might not love it if the congressmen call them names but through a few billion more and they are happy to be called names while given the cash to buy new jets and sports teams and parties for their daughters.
Making Wall Street pay by Dean Baker
The logic of a financial transactions tax is simple. It would impose a modest fee on trades of stocks, futures, credit default swaps and other financial instruments. For example, the UK puts a 0.25% tax on the sale or purchase of shares of stock. This has very little impact on people who buy stock with the intent of holding it for a long period of time.
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We can raise more than $140bn a year taxing financial transactions, an amount equal to 1% of GDP.
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Since the financial sector is the source of the country’s current economic and budget problems it also makes sense to have this sector bear the brunt of any new taxes that may be needed. The economic collapse caused by Wall Street’s irrational exuberance has led to a huge increase in the country debt burden. It seems only fair that Wall Street bear the brunt of the clean-up costs. A financial transactions tax is the way to make sure that this happens.
Why delhi’s buses are so deadly: an economic analysis
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Which is why the last thing a Blueline driver ever wants to do is come to a stop. Every move he makes is done with the intent of keeping the bus in motion: slowing just enough so debarking passengers can jump off, then picking up speed as the new passengers run alongside the bus, swinging themselves up and in as the conductor screams at them to hurry.
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But with an estimated 2,200 Blueline buses careening across Delhi on any given day, it’s no wonder the newspaper reports are almost identical every day. After an accident, the driver tries to flee, an angry mob beats him, the police impound the bus, the driver is thrown in jail, the owner of the bus is not mentioned. Sometimes the driver escapes, in which case the mob finds its release in setting fire to the bus.
This is a good example of looking at problems economically. It also shows the problem with failure to regulate. I am perfectly happy to live with regulation that removes the economic pressure to risk human life.
Related: Failing Infrastructure in the USA – International Development Fair: The Human Factor – China May Take Car Sales Lead from USA in 2009
Retailers Ready for Fight on Credit-Card Fees
The report, released Thursday by a coalition of retailers, supermarkets, drugstores and other businesses, found that Americans currently pay about $2 in “interchange” fees for every $100 they spend using credit cards. The fee is actually paid by retailers, though consumers feel it in a higher retail price. This rate is twice that charged in the U.K. and New Zealand, four times the rate levied in Australia and more than six times the cross-border rate charged in the European Union, the study says..
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“If we paid the same low credit- and debit-card swipe fees as consumers in Australia pay, then the net benefit for American consumers would have totaled $125 billion over the last four years,” the report says.
It truly is amazing how incredibly poor the banking services in the USA are. The banks have managed to provide mediocre service at exceedingly high prices. It sure seems to be due to unfair trade practices (allowed by poor regulation). See our tips on how to avoid getting ripped off by credit card companies, though it won’t help with these excessive fees.
Related: Continued Credit Card Company Customer Dis-Service – More Outrageous Credit Card Fees – Hidden Credit Card Fees – Poor Customer Service by Discover Card
Five consumer laws you really ought to know if you live in the United Kingdom.
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Your iconic white MP3 player, the totemic centre of your life, breaks down precisely 366 days after you bought it. The large electronics firm that sold you the MP3 player says that because the one-year guarantee had elapsed, there’s nothing they can do to help you. You’ll just have to buy another one.
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if the player has been lovingly treated and has still conked out that suggests something may have been wrong with it at the very beginning.
It works like this. For the first four-five weeks you have a “right of rejection” – if the item you’ve bought breaks down, you can demand a refund.
For the next six months, you are entitled to replacement or repair of the goods. It is up to the retailer to prove there was nothing wrong with it if they wish to get out of having to do the work. And then after six months, there is still a duty to replace or repair faulty goods, but the onus is on you, the consumer, to prove that there was something wrong.
And the key time span is six years. That’s how long goods may be covered by the Sale of Goods Act. It all depends on what “sufficiently durable” means. If a light bulb goes after 13 months, the consumer is not going to be overly gutted.
Extended warranties are general a very bad personal finance move. I never purchase them. Many companies push them on customers because of the large profit margin and because they don’t want to provide value to customers.
Related: 10 Things Your Bank Won’t Tell You – Ohio Acts to Protect Citizens from Payday Loan Practices – Save Money on Printing – Don’t Let the Credit Card Companies Play You for a Fool – Student Credit Cards
Short selling stock is a tool that can help keep markets more stable. However, short selling can be used to manipulate the market and in the last decade naked short selling has contributed to such manipulation. The SEC has made permanent a temporary rule that was approved in 2008 in response to continuing concerns regarding “fails to deliver” and potentially abusive “naked” short selling. In particular, temporary Rule 204T made it a violation of Regulation SHO and imposes penalties if a clearing firm:
* does not purchase or borrow shares to close-out a “fail to deliver”
* resulting from a short sale in any equity security
* by no later than the beginning of trading on the day after the fail first occurs (Trade + 4 days).
Cutting Down Failures to Deliver: An analysis conducted by the SEC’s Office of Economic Analysis, which followed the adoption of the close-out requirement of Rule 204T and the elimination of the “options market maker” exception, showed the number of “fails” declined significantly.
For example, since the fall of 2008, fails to deliver in all equity securities has decreased by approximately 57 percent and the average daily number of threshold list securities has declined from a high of approximately 582 securities in July 2008 to 63 in March 2009. Which still is not acceptable, in my opinion. In general this is a good move by the SEC, but still not sufficient.
Transparency is increased some by the SEC with the new rules:
* Daily Publication of Short Sale Volume Information. It is expected in the next few weeks that the SROs will begin publishing on their Web sites the aggregate short selling volume in each individual equity security for that day.
* Disclosure of Short Sale Transaction Information. It is expected in the next few weeks that the SROs will begin publishing on their Web sites on a one-month delayed basis information regarding individual short sale transactions in all exchange-listed equity securities.
* Twice Monthly Disclosure of Fails Data. It is expected in the next few weeks that the Commission will enhance the publication on its Web site of fails to deliver data so that fails to deliver information is provided twice per month and for all equity securities, regardless of the fails level.
Full SEC press release: SEC Takes Steps to Curtail Abusive Short Sales and Increase Market Transparency
Related: SEC Temporarily Bans Short-selling Financial Stocks – Shorting Using Inverse Funds – Too Much Leverage Killed Mervyns
Mobius Says Derivatives, Stimulus to Spark New Crisis
“Political pressure from investment banks and all the people that make money in derivatives” will prevent adequate regulation, said Mobius, who oversees $25 billion as executive chairman of Templeton in Singapore. “Definitely we’re going to have another crisis coming down,”
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A “very bad” crisis may emerge within five to seven years as stimulus money adds to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending.
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“Banks have lobbied hard against any changes that would make them unable to take the kind of risks they took some time ago,” said Venkatraman Anantha-Nageswaran, global chief investment officer at Bank Julius Baer & Co. in Singapore. “Regulators are not winning the battle yet and I’m not sure if they are making a strong case yet for such changes.”
Mobius also predicted a number of short, “dramatic” corrections in stock markets in the short term, saying that “a 15 to 20 percent correction is nothing when people are nervous.” Emerging-market stocks “aren’t expensive” and will continue to climb
I share this concern for those we bailed out using the money we paid them to pay politicians for more favors. Those paying our politicians like very much paying themselves extremely well and then being bailed out by the taxpayers when their business fails. They are going to try to retain the system they have in place. And they are likely to win – politicians are more likely to provide favors to those giving them large amounts of money than they are to learn about proper management of an economy.
Related: Congress Eases Bank Laws for Big Donors (1999) – Lobbyists Keep Tax Off Billion Dollar Private Equities Deals and On For Our Grandchildren – General Air Travel Taxes Subsidizing Private Plane Airports – CEOs Plundering Corporate Coffers
The IMF 2009 country report on Canada discusses there current economic condition. As part of that they explore the success Canada had in regulating their banking sector (which stands in stark contract to the catastrophic regulatory failures in the USA and Europe). And also provide ample evidence of that wise regulation did indeed prevent the financial crisis.
- Sound supervision and regulation: The 2008 FSSA Update found that the regulatory and supervisory framework meets best practice in many dimensions, including with regard to
the revised Basel Core Principles for banking supervision. - Stringent capital requirements: Solvency standards apply to banks’ consolidated commercial and securities operations. Tier 1 capital generally significantly exceeds the required 7 percent target (which in turn exceeds the Basel Accord minimum of 4 percent). The leverage ratio is limited to 5 percent of total capital.
- Low risk tolerance and conservative balance sheet structures: Banks have a profitable and stable domestic retail market, and (like their customers) exhibit low risk tolerance. Banks had smaller exposures to “toxic” structured assets and relied less on volatile wholesale funding than many international peers.
- Conservative residential mortgage markets: Only 5 percent of mortgages are non- prime and only 25 percent are securitized (compared with 25 percent and 60 percent, respectively, in the United States). Almost half of residential loans are guaranteed, while the remaining have a loan-to-value ratio (LTV) below 80 percent—mortgages with LTV above this threshold must be insured for the full loan amount (rather than the portion above 80 percent LTV, as in the United States). Also mortgage interest is nondeductible, encouraging borrowers to repay quickly.
- Regulation reviews: To keep pace with financial innovation, federal authorities review financial sector legislation every five years (Ontario has a similar process for securities market legislation).
- Effective coordination between supervisory agencies: Officials meet regularly in the context of the Financial Institutions Supervisory Committee (FISC) and other fora to discuss issues and exchange information on financial stability matters.
- Proactive response to financial strains: The authorities have expanded liquidity facilities, provided liability guarantees, and purchased mortgage-backed securities. In addition, several provinces now provide unlimited deposit insurance for provincially-regulated credit unions. The 2009 Budget further expands support to credit markets, while providing authority for public capital injections and other transactions to support financial stability.
Related: Failure to Regulate Financial Markets Leads to Predictable Consequences – Sound Canadian Banking System – 2nd Largest Bank Failure in USA History – Easiest Countries for Doing Business 2008