If yer not cheatin', then yer not tryin'... (לא הוגן, לא מנסה)
Naomi Klein wants "to banish Larry Summers. Not from the planet. That wouldn't be nice. Just from public life."
HERE at WaPofor simple facts. Summers is vastly Brain Bubble impressive -- helluva president-collector -- for a reality-tested-and-failed incompetent.
Summers's advice is straight rehash of Alan Greenspan:
-- "Privatization," extracting profit from public functions
-- "Stabilization," here meaning public debt, and
-- "Liberalization," meaning unbridled financier lawlessness
Democratic Party pols all fall for Summers, the Economics Turd Blossom. They give him support, same scale as Bernie Madoff got support at the West Palm Country Club. He's a living legend.
Not from Naomi Klein. Not Harvard University. Not California.
For them, Summers is dangerous the way Bernie Madoff was dangerous.
More-with-history-from-Howard-Marks-and-a-Stiglitz-lesson-BTF:::
We all knew that President Obama lacked experience on the national stage. He is smart and he is a good guy. But still, he was meeting many of these people for the first time.
Let's review what top-level Wall Street financiers and economists have wrought. A huge technology expansion happens after WW II, but lately life gets worse for the poor and unstable for whole nations. Capitalism gets turned into a shell game for the derivatives traders and frontrunners:
From Howard Marks. Old-style financial advisor, history buff, and fund manager in a reference at ZeroHedge:
In the mid-1960s, growth investing was invented, along with the belief that if you bought the stocks of the "nifty-fifty" fastest-growing companies, you didn’t have to worry about paying the right price.
The first of the investment boutiques was created in 1969, as I recall, when highly respected portfolio managers from a number of traditional firms joined together to form Jennison Associates. For the first time, institutional investing was sexy.
We started to hear more about investment personalities. There were the "Oscars" (Schafer and Tang) and the "Freds" (Carr, Mates and Alger) – big personalities with big performance, often working outside the institutional mainstream.
In the early 1970s, modern portfolio theory began to seep from the University of Chicago to Wall Street. With it came indexation, risk-adjusted returns, efficient frontiers and risk/return optimization.
Around 1973, put and call options escaped from obscurity and began to trade on exchanges like the Chicago Board Options Exchange.
Given options’ widely varying time frames, strike prices and underlying stocks, a tool for valuing them was required, and the Black-Scholes model filled the bill.
A small number of leveraged buyouts took place starting in the mid-1970s, but they attracted little attention.
1977-79 saw the birth of the high yield bond market. Up to that time, bonds rated below investment grade couldn’t be issued. That changed with the spread of the argument – associated primarily with Michael Milken – that incremental credit risk could responsibly be borne if offset by more-than-commensurate yield spreads.
Around 1980, debt securitization began to occur, with packages of mortgages sliced into securities of varying risk and return, with the highest-priority tranche carrying the lowest yield, and so forth. This process was an example of disintermediation, in which the making of loans moved out of the banks; 25 years later, this would be called the shadow banking system.
One of the first "quant" miracles came along in the 1980s: portfolio insurance. Under this automated strategy, investors could ride stocks up but avoid losses by entering stop-loss orders if they fell. It looked good on paper, but it failed on Black Monday in 1987 when brokers didn’t answer their phones.
In the mid- to late 1980s, the ability to borrow large amounts of money through high yield bond offerings made it possible for minor players to effect buyouts of large, iconic companies, and "leverage" became part of investors’ everyday vocabulary.
When many of those buyouts proved too highly levered to get through the 1990 recession and went bust, investing in distressed debt gained currency.
Real estate had boomed because of excessive tax incentives and the admission of real estate to the portfolios of S&Ls, but it collapsed in 1991-92. When the Resolution Trust Corporation took failed properties from S&Ls and sold them off, "opportunistic" real estate investing was born.
Mainstream investment managers made the big time, with Peter Lynch and Warren Buffett becoming famous for consistently beating the equity indices.
In the 1990s, emerging market investing became the hot new thing, wowing people until it took its knocks in the mid- to late 1990s due to the Mexican peso devaluation, Asian financial crisis and Russian debt disavowal.
Quant investing arrived, too, achieving its first real fame with the success of Long-Term Capital Management. This Nobel Prize-laden firm used computer models to identify fixed income arbitrage opportunities. Like most other investment miracles, it worked until it didn’t. Thanks to its use of enormous leverage, LTCM melted down spectacularly in 1998.
Investors’ real interest in the last half of the ’90s was in common stocks, with the frenzy accelerating but narrowing to tech-media-telecom stocks around 1997 and narrowing further to Internet stocks in 1999. The "limitless potential" of these instruments was debunked in 2000, and the equity market went into its first three-year decline since the Great Crash of ’29.
Venture capital funds, blessed with triple-digit returns thanks to the fevered appetite for tech stocks, soared in the late 1990s and crashed soon thereafter.
After their three-year slump, the loss of faith in common stocks caused investors to shift their hopes to hedge funds – "absolute return" vehicles expected to make money regardless of what went on in the world.
With the bifurcation of strategies and managers into "beta-based" (market-driven) and "alpha-based" (skill-driven), investors concluded they could identify managers capable of alpha investing, emphasize it, perhaps synthesize it, and "port" or carry it to their portfolios in additive combinations.
Private equity – sporting a new label free from the unpleasant history of "leveraged buyouts" – became another popular alternative to traditional stocks and bonds, and funds of $20 billion and more were raised at the apex in 2006-07.
Wall Street came forward with a plan to package prosaic, reliable home mortgages into collateralized debt obligations – the next high-return, low-risk free lunch – with help from tranching, securitization and selling onward.
The key to the purported success of this latest miracle lay in computer modeling. It quantified the risk, assuming that mortgage defaults would remain uncorrelated and benign as historically had been the case. But because careless mortgage lending practices unknowingly had altered the probabilities, the default experience turned out to be much worse than the models suggested or the modelers thought possible.
Issuers of collateralized loan obligations bought corporate loans using the same processes that had been applied to CDOs. Their buying facilitated vast issuance of syndicated bank loans carrying low interest rates and few protective covenants, now called leveraged loans because the lending banks promptly sold off the majority.
Options were joined by futures and swaps under a new heading: derivatives. Heralded for their ability to de-risk the financial system by shifting risk to those best able to bear it, derivatives led to vast losses and something new: counterparty risk.
The common thread running through hedge funds, private equity funds and many other of these investment innovations was incentive compensation. Expected to align the interests of investment managers and their clients, in many cases it encouraged excessive risk taking.
Computer modeling was further harnessed to create "value at risk" and other risk management tools designed to quantify how much would be lost if the investment environment soured. This fooled people into thinking risk was under control – a belief that, if acted on, has the potential to vastly increase risk.
At the end of this progression we find an institutional investing world that bears little resemblance to the quaint cottage industry with which the chronology began more than forty years ago.
And Summers still doesn't think the main body of these processes require strong-arm regulation. He is saying the same things that he told Gray Davis during the ENRON energy fraud crisis. (More below.)
Good luck with that.
I don't think that Obama knows much more about these events than the typical lawyer. A little more, maybe. And probably less than most of us with roots in the financial industry. Its not his area.
Take a moment. Re-read the list above. How many of you have professional experience that gives you a practical, hands-on understanding of what is involved with this one:
1977-79 saw the birth of the high yield bond market. Up to that time, bonds rated below investment grade couldn’t be issued. That changed with the spread of the argument – associated primarily with Michael Milken – that incremental credit risk could responsibly be borne if offset by more-than-commensurate yield spreads.
Prior to 1977, very straightforward mathematics in Financial Economics had demonstrated the risks and multiplier effects -- positive feedback -- that could develop when such bonds collapsed. Milken got it done, of course.
When I hear Obama talk about the current financial crisis, I know he has not studied the Milken junk-bond historical development. He is listening to the "risk analysis" fakes.
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When Larry Summers was appointed Director of the White House's National Economic Council, last January, Summers was rebounding from getting fired in 2006. Simply enough, he had been President of Harvard University and got canned in the middle of several scandals, the least of which involved women.
As it turns out, looking back, Summers's single most important action at Harvard was worse than anything that was known in 2006 when faculty issued the No Confidence vote against him. Quite surreptitiously, Summers had set up a disastrous high-tech derivatives deal between Harvard and his former employer Goldman Sachs.
For no logically compelling reason and no precedent for it, Summers arranged a hidden contract with GS. When the pre-2008-election stimulus (out of the Fed) resulted in a falling prime interest rate, Summers's contract cost Harvard a loss of more than $1,000,000,000. (A contract to cover for a rising interest rate would have made some sense, for Harvard. Making a $1-billion bet against a falling interest rate in a Presidential Election year ??? That was a giveaway to GS.)
Summers also wrote contracts for a massive expansion to Harvard's physical plant -- spending trust money that was never there except in his own personal fantasies. Summers would have needed a 20% annual rate of return on the Harvard Trust investments, compounded for ever.
Summers lifted $1,000,000,000 out of Harvard and into Goldman Sachs. He is roundly hated for this deal at Harvard. No other university president in world history has been in Summers's class, as a financial failure.
You'd have to think that lying about Summers's history at Harvard was a main plank of the Goldman alumnae efforts with Obama. That, and hiding his repetition of the Alan Greenspan doctrines while he worked for Clinton.
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Now, for the opposition.
Naomi Klein contributes ideas that are both correct and of enormous impact. She continues the traditions of Political Economy.
This is the economics of Adam Smith and Karl Marx and Joseph Stiglitz. This is reality-based analysis. With exceptions of a few microeconomic and financial economic questions, these people couldn't care less for the precious fantasies of the risk-hedge mathematicians or the market-interfering smash-and-grabs of the Exchange co-located frontrunners.
Stiglitz's book, "The Roaring Nineties," gives a simple, comprehensive look at what happened with early Globalization and why.
With the end of the cold war and the coming of globalisation we had the opportunity to create a new international order based on American values, reflecting our sense of the balance between government and markets, one which promoted social justice and democracy on a global scale.
The Clinton administration had some notable successes... but... it becomes clear that something again had gone wrong, badly wrong....
Globalisation had often not produced the benefits that were promised. Except in Asia.. poverty was up, in some places dramatically so. ...
The gap between the haves and have-nots - both between the United States and the developing world, and between the rich and the poor within the developing countries - was growing.
HERE for Guardian exceptand links to "The Roaring Nineties: Seeds of Destruction."
Not surprisingly, the policies we pushed and the way we pushed them generated enormous resentment. The already visible results include growing anti-Americanism.... the endorsement of a policy by the US government is almost certain to lead to its defeat.
Even if our economy had not faltered, our global strategy was not likely to succeed. It was based on forcing countries in the third world to adopt policies that were markedly different from those we ourselves had adopted. It was based on our putting aside principles - principles of social justice, equity, fairness, that we stressed at home - to get the best bargain we could for American special interests.
What we were doing to Russia and parts of South America and Eastern Europe -- trumpeting capitalism, yielding decline -- we were also doing to our own banking system. Russian economic output had fallen by 40%. That sounds like the modern 2009 American 401(k).
Shock Doctrine VERSUS Privatization-Stabilization-Liberalization.
The risk of having Larry Summers around, simply, is that he will do to America's economy in 2009/2010 what he and his crew did in 1992 and 1994 or to California in 2003. Or what he did to Harvard. here's Summers and ENROPN, misusing his position at Treasury to help ENRON steal billions:
Alex Gibney at dailybeast:
Even as blackouts shut down dialysis machines and traffic lights from Sacramento to San Diego, Summers and the Federal Reserve chairman, Alan Greenspan, decided to take a few moments to teach the California governor a lesson or two about free markets. In an emergency meeting the day after Christmas 2000, Summers and Greenspan, responding to the governor’s complaints about corporate tampering, lectured the governor that price manipulation was only possible because California had improperly regulated its markets. They urged the governor to take it easy on Enron and the other power companies because, in effect, being too critical of them might make them reluctant to do business in California. Summers and Greenspan pressured the governor to remove state caps on consumer rates.
A second meeting took place a few weeks later, via video teleconference, with Summers, California’s governor, and energy providers—including Enron’s Ken Lay. This time, Summers not only called for consumer rate increases, he also urged the governor to reassure the markets by relaxing environmental controls (Ken Lay’s suggestion) so that more power plants could be built quickly.
Once again, the California governor protested, refusing to raise electricity rates for consumers, declining to eviscerate environmental controls, and instead requested federal price caps on the electricity that power companies sold to California. Remarkably, Summers defended the energy executives, including Ken Lay, as doing "a pretty good job" of serving California, and dismissed the possibility that they were colluding to drive prices up—even though, as we know now, that’s precisely what they were doing, Summers disparaged the governor’s plan; it wouldn’t work because such government intervention would inevitably "distort the market," he said.
Clearly, Summers is a salesman. A narcissistic, self-aggrandizing know-it-all. Friend of thieves, over and over. What he had going for him, getting the Obama appointment, was backing from the Goldman Sachs alumnae club. The $1-billion grab out of Harvard assured him of that support. He also got overwhelming "bipartisan" support from GOPer Treasury raiders.
Summary from Klein:
Back in 1991, Summers argued that the subject of economics was no longer up for debate: The answers had all been found by men like him. "The laws of economics are like the laws of engineering," he said. "One set of laws works everywhere." Summers subsequently laid out those laws as the three "-ations": privatization, stabilization and liberalization. Some "kinds of ideas," he explained a few years later in a PBS interview, have already become too "passé" for discussion. Like "the idea that a huge spending program is the way to stimulate the economy."
And that's the problem with Larry. For all his appeals to absolute truths, he has been spectacularly wrong again and again. He was wrong about not regulating derivatives. Wrong when he helped kill Depression-era banking laws, turning banks into too-big-to-fail welfare monsters. And as he helps devise ever more complex tricks and spends ever more taxpayer dollars to keep the financial casino running, he remains wrong today.
Klein also relays gossip that Summers wants to be Chairman of the Federal Reserve. Mirror image to Greenspan. Disciple, to be accurate.
As much as Lincoln liked his "Team of Rivals" concept, there is such a thing as overdoing it. Summers is not a "rival" to pro-democracy economists. He has spent his whole career opposing them. His very first work showed how to cherry-pick statistics so he could attack capital gains taxes and corporate taxes generally. The deregulation debacles blamed on Phil Graham ? Summers backed every part of it. Want to know why Clinton signed those bills without asking questions ? Summers is the biggest part of where to look.
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There's Sun Tzu for all tactical situations: "Keep your friends close, and your enemies closer." Summers is the enemy ??? Well, based on a look at his professional history... YES !! And too damn close.
There are also similarities to audience domination by Limbaugh:
Basso profondo + parrot shit =EQ= Dittohead.
Nobody, including Obama, is immune to being somebody's dittohead. You keep hearing Obama parrot the propaganda that capitalism is always the most efficient way to do economic activity. Obama remains enamored with this oversimplification:
Capitalism + Modernization =EQ= Solution to every problem.
Well... no way. The capitalism-invented derivatives accelerate instability in every economy where they are traded. "Modernization" of the U.S. banking system has translated to massive public debt -- swamping every other economic factor.
Can Summers. Fire him ASAP.
Harvard did it, Obama should do it. Summers is a known ideologue with Greenspan credentials, all the way back. Ripping off Harvard for $1,000,000,000 makes him a Local Hero on Wall Street, but no where else. Now his big push is to hide what has happened to the bail-out money.
Heaven Forbid... the SOB should get into The Fed.
Defend democracy.
Get people in there who know that job and understand how to do it. Joseph Stiglitz... first choice. The alternative is that we'll end up looking like California by 2012 or 2016.
What else ???