It's been a great news cycle this week, eh?
St. John the Irish Temper rails against the MSM, the Democratic Primary Horse Race continues to entertain, and Bush pounds his cup on his high-chair and pretends to hold his breath until he gets telco amnesty.
A progressive News junkie's dream!
But back to Earth. Have been following the economy closely for the last year, reading at least 6 sites a day. (There are also some great Economic diaries posted on Kos - in particular Bondad).
Lately I've noticed an increasingly Apocalyptic edge to several of the Blog sites I patronize. And they're starting to make a believer out of me...
Some fundamental changes have occurred in the Financial sector in the last 7 years. In spite of the Enron/Worldcom fiascoes, the Bush administration has deliberately taken the teeth out of the core regulatory structures governing Banking & Finance for the last 70 years. Most significant is repeal of the Glass-Steagall act. Without boring you with Econo-speak, let's just say that Glass-Steagall forced a "fire-walling" between consumer banking and commercial banking/brokerages. This was a direct response to the excesses on Wall Street that created the great Depression.
With the repeal of Glass-Steagall, the Credit boom shot off like a rocket. The ability of both Commercial and Consumer Banks to leverage securities (read: Speculate with borrowed money) created a Credit Boom that we now see crashing in the Housing sector.
But if you listen carefully, there are Cassandras out there who posit that the rot goes far deeper than the Housing market; that the Credit Crisis will spare no one in the financial community. And it will have International repercussions.
From an article by Martin Wolf (shout out to Calculated Risk) of the FT commenting on the latest by Economist (& Cassandra) Nouriel Roubini:
Recently, Professor Roubini’s scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US recession in July 2006*. At that time, his view was extremely controversial. It is so no longer. Now he states that there is "a rising probability of a ‘catastrophic’ financial and economic outcome"**. The characteristics of this scenario are, he argues: "A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe."
Ironically, one of the main perpetrators of this mess (Hedge Funds) went wall-eyed at the notion that their profits should be taxed at the same rate as American Consumers. From Paul Krugman of the NYT:
The hedge fund tax loophole is a crystal-clear example of unjustified privilege. Because of a quirk in the law, the people who run these funds don’t pay taxes like ordinary mortals.
For example, the salaries that pension fund employees receive for managing other peoples’ money are taxed as ordinary income, at rates up to 35 percent. But if that money is invested with a hedge fund — and 40 percent of the money in hedge funds comes from public, corporate and union pension plans — the fees the hedge fund manager receives for his services are mainly taxed as capital gains, with a maximum rate of 15 percent.
The arguments usually made on behalf of this unique privilege make no sense. We’re told that the tax rate on hedge fund managers has to be kept low to encourage risk-taking. But the managers aren’t risking their own money. The only risk they face is the uncertainty of their fees — and as any waitress who depends on tips or salesman who depends on commissions can tell you, most people with uncertain incomes don’t get any special tax breaks.
Its all about Free Markets(tm) kids. Private Enterprise! Without the hidden hand of the Market, we'd be a Third World country. Risk/reward. Which is why these folks deserve incentive bonuses. From Bob Herbert of the NYT:
Forget the turbulence in the financial markets and the subprime debacle. Forget the dark clouds of a possible recession. Bloomberg News tells us that the top securities firms are handing out nearly $38 billion in seasonal bonuses, the highest total ever.
Risks? I always assumed that the equation of risk is based on who suffers in the event of a negative outcome. "But that's different", says the Financial community. If things go bad, we need the Government to intervene (Socialism anyone?). Again, from the NYT:
Over the last two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business and to obtain freer rein for "financial innovation."
But as losses from bad mortgages and mortgage-backed securities climb past $200 billion, talk among banking executives for an epic government rescue plan is suddenly coming into fashion.
A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble.
The same clowns who just wrote themselves record bonus checks and a 50% tax break are now saying the Government should bail them out.
You couldn't make this stuff up.
I wish America had the institutional memory to remember the S&L crisis. Though I believe what's coming will be far more severe. But, as they say; "History never repeats itself, it just rhymes..."
Regards;