Econ 2009

[Fusion_power]

No homework needed. This would result in precisely the scenario we see playing out with credit default swaps. One company sold $trillions of them and now that company is having to be bailed out by the govt. The objective of deposit insurance is to prevent bank failure from wiping out the depositor. That risk has to go somewhere. In this case, it goes to the FDIC. The only effective way of managing risk at this level is via a govt backed organization. Any industry led organization would ultimately be underfunded and would fail. In essence, FDIC spreads the risk among all banks and therefore among all bank depositors.

DarJones

[__HRB__]

Originally Posted by Fusion_power

No homework needed.

That's a recipe for disaster.

Originally Posted by Fusion_power

This would result in precisely the scenario we see playing out with credit default swaps. One company sold $trillions of them and now that company is having to be bailed out by the govt.

No, if the deposits are not insured there is less incentive for the depositor to deposit at all. This means that systematic risk in this sector is smaller.

Originally Posted by Fusion_power

The objective of deposit insurance is to prevent bank failure from wiping out the depositor. That risk has to go somewhere.

No, the issue is that banking insurance actually creates risk by adversely selecting financial intermediaries. If deposits are just as safe with a bank that has poor quality reserves, then banks have no incentive to compete for deposits with more costly high quality reserves, so you end up with a bunch of lousy banks.

Information asymmetry guarantees that the bank knows more about the quality of its assets than the insurer, so frequently you have banks 'gambling for resurrection', i.e. their reserves are zero or negative, which means that high-risk investments are preferred, even if the expected payoff is negative.

The FDIC itself has been 'gambling for resurrection' by raising the deposit insurance from 50.000 to 250.000. If you can't survive a bank-run with 50.000 coverage, you can't survive a bank-run with 250.000 either, but you can stay in operation longer, creating even higher costs for society.

Originally Posted by Fusion_power

In this case, it goes to the FDIC. The only effective way of managing risk at this level is via a govt backed organization. Any industry led organization would ultimately be underfunded and would fail.

No, if there is a mechanism that leads industry funded organizations to fail, then the same mechanism leads government backed organizations to fail. To make matters worse, the government backed organization doesn't have to prove itself worthy of existence by a selection mechanism based on its merits.

Originally Posted by Fusion_power

In essence, FDIC spreads the risk among all banks and therefore among all bank depositors.

No, since there is risk of the FDIC failing, this risk gets spread among taxpayers, who are not all depositors, so you are advocating an insurance that insures people, who do not require it, and therefore the allocation of resources is inefficient.

Do your homework, or you'll get another F.

[ewmayer]

Originally Posted by fivemack

The FDIC is clearly going to run out of money by the end of the year; on the other hand, by this point that's basically an accounting issue, I suspect they will get grants rather than loans from the central government in order to keep working, since losing the ability to bail out broken banks is something of an election-loser.

The FDIC received a $500B line of credit from Treasury earlier this year, to allow them to take down even the biggest insolvent financial institution (e.g. Citigroup) should it prove necessary. But I find the fact that the FDIC itself is about to be propped up by presto-magico-printed-monopoly-money (actually since it`s the Treasury they would actually have to issue bonds, unlike the Fed, which can simply "expand its balance sheet" by a few keystrokes containing as many trailing zeros as they like) rather telling.

I don't know if the insurance payments from banks to FDIC have gone up

They have, and for all banks, not just the diciest ones - some consider this yet another form of punishing the prudent to bail out the profligate.

insuring banks is a quintessentially bursty business, where you get lots of income in many years (and banks infuriated at having to pay some fraction of 1% of their deposits annually in insurance when no bank has failed for a decade)

"Past performance is no guarantee of future results". ;)

Originally Posted by __HRB__

Or one could simply let the depositors lose their deposits. Or let the depositors insure themselves.

The first is precisely the kind of scenario which leads to Depression-style bank runs - been there, tried that, it ended very, very badly. The second is similalrly a non-starter for the simple reason that 99.999% of depositors have neither the time nor wherewithal to determine a bank`s solvency. You propose making every would-be depositor an auditor of a bank`s books, no matter how little money they plan to deposit, when a organization like FDIC can do it vastly more efficiently, by having to do it just once every quarter for each bank. Which is the more workable approach, would you say? But feel free to march down to your local Citigroup branch office and demand to see their books, and oh, in particular tell them you'd be keen to see details about that Trillion $ in off-balance-sheet assets they hold. Make sure to let us know how that works out for you.

-------------------

Former Chinese Central Bank Advisor Questions Geithner's Math, Calls Federal Reserve Assets "Rubbish": A former Chinese central bank adviser says Global Crisis ‘Inevitable’ Unless U.S. Starts Saving.

Another global financial crisis triggered by a loss of confidence in the dollar may be inevitable unless the U.S. saves more, said Yu Yongding, a former Chinese central bank adviser.

It’s “very natural” for the world to be concerned about the U.S. government’s spending and planned record fiscal deficit, Yu said in e-mailed comments yesterday relating to a visit to Beijing by U.S. Treasury Secretary Timothy Geithner.

The Obama administration aims to reduce the fiscal deficit to “roughly” 3 percent of gross domestic product from a projected 12.9 percent this year, Geithner reaffirmed today. The treasury secretary added that China’s investments in U.S. financial assets are very safe, and that the Obama administration is committed to a strong dollar.

It may be helpful if “Geithner can show us some arithmetic,” said Yu. “We need to know how the U.S. government can achieve this objective.”

The deficit is projected to reach $1.75 trillion in the year ending Sept. 30 from last year’s $455 billion shortfall, according to the Congressional Budget Office.

The U.S. needs a higher savings rate and a smaller deficit on the current account, which is the broadest measure of trade, or “another financial crisis triggered by a dollar crisis could be inevitable,” the Chinese academic said.

Referring to the Federal Reserve “as the world’s biggest junk investor,” and to Chairman Ben S. Bernanke as “helicopter Ben,” Yu said the Fed has dropped “tons of money from the sky since the subprime crisis.”

“The balance sheet of the Federal Reserve not only has expanded like mad but is also ridden with ‘rubbish’ assets,” he said

My Comment: What`s that Yu say? Ha, ha, a million laughs ... Interestingly, none of the mainstream media in which I saw coverage of Terrible Timmay`s visit to Beijing seemed to mention the little bit about his statement (in a speech to a group of Peking University students) that "China`s dollar assets are safe" being greeted with loud laughter. Apparently Chinese students know bullshit government propaganda [anyone know the Chinese translation for that?] when they see it.


"Green Shoots" Propaganda du Jour:

Pending home sales rebounding: Number of signed sales contracts continues bounce off record lows for third consecutive month.

The number of home sales contracts signed in April continued to bounce back from record lows hit last winter, according to a widely watched industry report. This is the third consecutive month of gains.

The Pending Home Sales Index from the National Association of Realtors rose 6.7% in April after jumping 3.2% in March. That was far above the forecasts of experts surveyed by Briefing.com, who predicted a 0.5% increase. The index was 3.3% higher than 12 months earlier.

Pending home sales are a forward-looking indicator since many of the contracts don't result in completed deals for many weeks or months.

My Comment: ...especially if interest rates start to rise above the government-engineered artificially low levels, as they have been doing in the past week as the bond markets start "misbehaving" much as the aforementioned Chinese students did, and for the same reason: That they see no way in hell the U.S. will come anywhere close to those Obama/Geithner-touted (and patently ridiculous) deficit-reduction targets. Barry Ritholtz [url=comments on the month-over-month statistics scam[/url] used by the NAR. Interesting that no one seems terribly interested in some kind of widely-disseminated "Pending home sales which actually turned into real home sales" statistical barometer. It must be that actual home sales are about "being stuck in the present", whereas the pendings are about "looking toward the future". Funny how the markets are so gosh-awful "forward-looking" that they back in 2005-2006 they completely forgot to peek in their rear-view mirror and failed to see that giant out-of-control Semi truck of Unsustainable Housing Prices and Debt Levels about to rear-end them in spectacular fashion. Keep that whiplash neck brace the doctor gave you boys, because it looks like y`all are setting up to do the same thing once again, by ignoring the overwhelming amount of bad news and bidding up prices of still-deeply-distressed financial and homebuilder firms, many of which will eventually go under or not turn a real profit for years, even though "the worst is behind us".


Image of the Day: "You`ve been pink-sheeted"...BTW, to put the U.S. government`s "investment" of $50 Billion into GM into perspective - Note that is roughly 90% of GM`s market cap in 2000, when GM shares hit their all-time high of $94.62. In other words, we (as in the U.S. taxpayer) have so far paid/committed-to an amount that would have bought 90% of GM at its all-time high in 2000 for JUST 60% OF A DEEPLY DISTRESSED, INSOLVENT AUTOMAKER whose market cap immediately prior to yesterday`s reorganization-bankruptcy filing was LESS THAN $1 BILLION. Oh yeah, that`s a really good deal there. Even if a radically restructured GM manages to survive (and that`s a huge if, given that they have to actually start making cars Americans will want to pay profit-making prices for, in the midst of the biggest economic downturn in 80 years), the U.S. will be lucky to recoup even 10% of their "investment".

[__HRB__]

Originally Posted by ewmayer

The first is precisely the kind of scenario which leads to Depression-style bank runs - been there, tried that, it ended very, very badly.

And what makes you think that is the worst case? And what makes you think that wasn't the result of the Fed's policy to trade several small crises for one big one?

Originally Posted by ewmayer

You propose making every would-be depositor an auditor of a bank`s books, no matter how little money they plan to deposit,

You don't have to see the books to learn something about a bank. I'd immediately be suspicious about banks that offer high interest rates on deposits.

If a bank offers low interest rates on deposits and low rates for loans, your money is pretty safe, because you can be sure that they had more choice to find credit worthy borrowers, and the low refinancing cost lets them make enough profits for them to make 'betting the bank' an irrational endeavor.

The other extreme is a bank that promises 100% interest for deposits and takes 1000000% for loans. People who take loans to those conditions are not intending to repay them (grab the money and run).

I also don't think your behavior is representative. Most people would risk having $1000.00 in their checking accounts and the bank failing, in the same way they would risk having $1000 in their wallet and getting mugged.

Personally, I would trust a friend's recommendation. With no other information I would diversify risk between several banks and hold a minimum of liquidity. If paranoid, I'd buy a bigger safe and store gold-bars instead of coins.

Originally Posted by ewmayer

when a organization like FDIC can do it vastly more efficiently, by having to do it just once every quarter for each bank.

It might surprise you, but I know more about my local banks than the FDIC. I see whom they lend money to and I know which projects they finance. I know people who are shareholders at some banks and their motives. I also know people who are NOT shareholders because they have met the CEO personally. Knowing that the CFO has recently gotten an ulcer is also something the FDIC doesn't know.

What's the incentive for the FDIC to do a good job? Do they have the information to do the job? Can they hire the right people to do the job?

If the FDIC would work, we could also have an organization to determine the fair value of stocks, offering a stock market insurance so that people can't lose.

Then everybody can have above-median income!

ewmayer for president!

(Please don't give the socialists any ideas, just to spite me)

Originally Posted by ewmayer

Which is the more workable approach, would you say? But feel free to march down to your local Citigroup branch office and demand to see their books, and oh, in particular tell them you'd be keen to see details about that Trillion $ in off-balance-sheet assets they hold. Make sure to let us know how that works out for you.

Why would I do that as long as deposits are FDIC insured? Also, local banks are much less secretive. Which is why I have never done business with Citigroup.

[Fusion_power]

Thank you hrb. Your posts are telling, though not necessarily lucid.

I would point out that the only way you can force a bank to do anything significant is with a ring through the nose. No bank would have deposit insurance if they could get away without it. Putting your money in a mattress aka sleeping on the gold stash is not acceptable because of that hidden thief called inflation. If I were to take your advice, the only intelligent thing to do would be to spend every $ I have as fast as I get it and let the govt bury me when I die. This is a real winner idea. I don't have to worry about banks failing, I don't have to worry about inflation, and above all, I don't have to worry about my kids fighting over an inheritance. Life is bliss.

On a separate topic, the highway fund is now officially insolvent. http://news.yahoo.com/s/ap/20090602/..._highway_money

I got a real kicker out of this line:

Sen. George Voinovich, R-Ohio, said it's clear that Congress must raise the federal gas tax, which is now 18.4 cents per gallon.

"I know that doesn't go down so well with some folks," but it's "the reality of the situation," Voinovich said at the hearing, which was on Obama's nomination of former Arizona highways director Victor Mendez to head the Federal Highway Administration.

Now where on earth did he get the idea that raising taxes is the only thing to do? and he is a Republican? Oh, and just so HRB doesn't misunderstand, "Sarcasm - a sharply ironical taunt; sneering or cutting remark".

On a reality note, if we raise the average fuel economy of the american car from the current @20 mpg up to @30 mpg, we would be shorting the highway fund of 33% of its much needed dollars. Obviously then, the only thing to do is raise taxes. Lol. Don't you love this line of logic? But then, what do we do with the electric car that uses the roads and pays $0 in taxes? Dear me, that will never do. They have to pay their fair share too. I have it, lets put gps in their cars and track their every mile. Then we can bill them by the mile driven. Yes folks, this is the very plan some states are evaluating and seriously considering implementing.

I don't like the path this economic merry-go-round is taking. Lets get off. Uh-oh. What is this? We are stuck on this ride!

DarJones

[__HRB__]

Originally Posted by Fusion_power

I would point out that the only way you can force a bank to do anything significant is with a ring through the nose. No bank would have deposit insurance if they could get away without it.

Minimum wage is $7.15 (I think), so why do companies pay the vast majority of employees more than that, if they are not required to?

The owners of companies wouldn't hire people or buy materials, and spend money on marketing, if they didn't need it to make money. So, consider two banks, one that decides to pay for deposit insurance and one that doesn't. Ceteris paribus, would you put your money?

Originally Posted by Fusion_power

Putting your money in a mattress aka sleeping on the gold stash is not acceptable because of that hidden thief called inflation.

Unless someone figures out how to make cheap gold (or getting gold-bars to mate), I wouldn't worry about humans not accepting gold as currency, if paper money becomes worthless.

But, if you sit on a sack of rice then you'll not get crops.

Originally Posted by Fusion_power

If I were to take your advice, the only intelligent thing to do would be to spend every $ I have as fast as I get it and let the govt bury me when I die.

Not really.

You could use your intelligence to figure out into what business to put your money. If people behaved the way you describe as intelligent, you could do very well by investing into companies that make cheap coffins or urns.

Originally Posted by Fusion_power

This is a real winner idea. I don't have to worry about banks failing, I don't have to worry about inflation, and above all, I don't have to worry about my kids fighting over an inheritance. Life is bliss.

Would you be interested in using my suicide booth? It's free, but I get to keep your organs, blood and bones for my Voodoo startup kits.

[Fusion_power]

Minimum wage is $7.15 (I think), so why do companies pay the vast majority of employees more than that, if they are not required to?

What makes you think they aren't required to?
Why is the ceo of a large company paid $millions?
Why am I worth $200/hr? (that is what I charge for my services)

DarJones

[Prime95]

Originally Posted by __HRB__

So, consider two banks, one that decides to pay for deposit insurance and one that doesn't. Ceteris paribus, would you put your money?

A false choice. In reality you will be faced with choosing between two banks, one has insurance from Company A, the other has cheapo insurance from sham Company B. Now instead of auditing banks to decide where to deposit your money you are faced with auditing insurance companies to decide where to deposit your money.

This is a common fallacy in many of your ideas. You assume the consumer has easy-to-access perfect information and companies have no incentive to deceive or obfuscate to get more market share (profits) than they deserve.

[__HRB__]

Originally Posted by Prime95

A false choice. In reality you will be faced with choosing between two banks, one has insurance from Company A, the other has cheapo insurance from sham Company B. Now instead of auditing banks to decide where to deposit your money you are faced with auditing insurance companies to decide where to deposit your money.

This solution is strictly better than the solution where both banks are being insured with a martingale strategy from ueber-sham government C.

Sham companies of type B can only exist, if they can mimic the signals of Company A, so evolutionary optimization in markets will eventually weed out sham companies of type B, because eventually companies of type A will figure out how to signal that they are not Company B.

Originally Posted by Prime95

This is a common fallacy in many of your ideas. You assume the consumer has easy-to-access perfect information and companies have no incentive to deceive or obfuscate to get more market share (profits) than they deserve.

If you think that the political process doesn't rely on obfuscation and deception to create the illusion that it can solve these problems more efficiently, you're a moron.

Choosing the second best is optimal and not a fallacy, if the first best is impossible to achieve under rational expectations. That a first best exists, namely that

1. A government can remove obfuscation, obtain information at zero cost and cannot be deceived
2. Scale economies compensate for inefficient allocations of monopolies
3. The government as an agent for the consumer has the same agenda as the consumer

is an irrational assumption made by a fool and/or the dishonest gospel of a dangerous demagogue.

[xilman]

Originally Posted by __HRB__

Sham companies of type B can only exist, if they can mimic the signals of Company A, so evolutionary optimization in markets will eventually weed out sham companies of type B, because eventually companies of type A will figure out how to signal that they are not Company B.

And in the mean time?

Paul

[R.D. Silverman]

Reported yesterday:

Well, this decision could set an interesting precedent. A jury in Michigan found the former head of Kmart, Charles Conaway, liable for misleading investors about company finances before a bankruptcy protection filing in 2002. The verdict was reached in a civil fraud trial, following 10 days of testimony in federal court.

The trial focused on a conference call with analysts and Kmart's quarterly report to regulators, both of which took place in November, 2001. The Securities and Exchange Commission (SEC) accused Conaway of withholding pertinent details from the analysts that had been highlighted in the management-analysis section of the report filed with the agency. On his call with the Wall Street analysts, Conaway did note that Kmart's sales were poor, leading to a 15 percent drop for the stock; however, he did not address any vendor strategy, or what has been deemed an "ill-timed purchase" of merchandise worth $800 million. In his defense (which obviously didn't go over too well with the jury), he testified that he had not written, or even read, the report and had relied on his CFO and others for its findings.



CEO Scandals


Virginia Mayo, AP
20 photos




On June 2, Chuck Conaway, former chairman and CEO of Kmart Corp, was found liable for misleading investors about company finances before a bankruptcy protection filing in 2002. For more on recent CEO scandals, click through this gallery.
(Note: Please disable your pop-up blocker)


Now that the guilty verdict has been handed down, U.S. Magistrate Judge Steven Pepe will handle the penalty phase. Conaway could be banned from ever serving as an executive at a public company -- which would be a great loss for the corporate world (said with tongue in cheek, of course).

I noted that this could be an interesting precedent -- and it very well could be. Imagine if the managers of GM or Chrysler could be held accountable for the current state of their companies. You mean that executives could actually be held responsible for their actions? Could we apply this retroactively to the banks that got us into the credit crisis?




I'm not sure which is worse -- that Conaway truly misled investors or was so completely asleep at the switch that he didn't know what was in his own company's SEC filings. I think maybe the latter, and the thing is it's actually believable. I think there are lots of executives who regularly leave such "details" to their CFO and other underlings. Of course, it's interesting that one of the punishments under consideration is to prevent Conaway from being an executive anywhere else. Do we really need to tell other companies to stay away form this guy? Sadly, yes. I'm guessing that there is some company out there that would have hired him for one reason or another, and they would have bragged about how good a job he did in the past.

The court's decision highlights the weaknesses of executives and the companies that hire them. It is well past time to get rid of the good old boys' network and bring some fresh blood into the C-suite. Now we'll see whether it actually happens.