Timmy, Jamie and Paul…..

Okay, a couple of thoughts about this report that people are considering Jamie Dimon from JP Morgan Chase as a successor to current Treasury Secretary Geithner:

• Do they know something that we don’t?  The last that I had heard, he wasn’t up for renomination or anything like that…..
• Please tell me they aren’t thinking of Geithner replacing Bernanke?   Heaven help us all if that happens.
• This brings to mind one of my favorite videos ever made about an economist….. (See below)

Tom Vanderwell

JPMorgan’s Dimon Could Succeed Geithner: Report – Financials * US * News * Story – CNBC.com

Several U.S. policy makers consider JPMorgan Chase Chief Executive Jamie Dimon as a potential successor to U.S. Treasury Secretary Timothy Geithner, the New York Post said, citing sources.

Hey Paul Krugman (A song, A plea)Technorati Tags: Paul Krugman, Jamie Dimon, Tim Geithner

Quote of the Day – Barry Ritholtz on Paul Krugman

Mish vs ECRI vs Krugman | The Big Picture

“Traders and Investors should always be looking for the most interesting lesson to be gleaned. In this case, it comes from the Nobel laurelate: There are times when conditions vary so much from prior circumstances that usual metrics are no longer reliable.

Advantage Krugman.”

Hey Paul Krugman (A song, A plea)

Technorati Tags: Paul Krugman, Barry Ritholtz

When should the Fed raise rates? (Hint – what I’ve been saying might be early…..)

An interesting analysis of what the Fed should do and when they should start raising rates.   A couple of thoughts about it:

• Krugman, in saying that short term rates should say on hold for at least two more years, admits he’s using standard conventional analysis of the numbers.
• The standard, conventional analysis of the numbers doesn’t take into consideration the impact of what the government has done in borrowing boatloads of money in an effort to keep the economy moving.

So, would I be willing to guarantee that Krugman is right?   Nope, not a chance.   But given his track record, it seems to me to be significantly more likely that rates will stay the same (short term rates that is ) for longer rather than shorter time periods yet.

I’m still sticking with my 12 to 18 month estimation but this is pushing it out towards the 18 month end of things.

Tom Vanderwell
When should the Fed raise rates? (even more wonkish) – Paul Krugman Blog – NYTimes.com

Even so, unemployment should fall only 2.5 points, to 7.3. In other words, even with a really strong recovery (which almost nobody expects), the Fed should keep rates on hold for at least two years.

Technorati Tags: Fed, Paul Krugman, Interest Rates

Disagreeing with Paul Krugman?

I believe I’ve said before that arguing with a Nobel Prize winner in economics like Paul Krugman is not a smart thing.   Well, I’m going to pick a few things to disagree with on this article.

First, what I do agree with:

• We appear, for now, to have averted the worst.   The economy is at least slowing down it’s pace rather than hurtling towards the cliff at an accelerating speed.
• I do believe, as he does, that the unemployment rate is going to remain high for a substantial length of time and it’s not going to be easy or fast to pull out of this.

What I don’t agree with:

• I don’t agree that Big Government is the reason why we’ve backed up from the edge of the precipice.  Yes, government did play a very important role in “plugging the holes” to keep the ship from sinking, but I’m not sure that history will show that Big Government did us any favors in the long run.
• Many people (present company included) have used the “patient” analogy in describing what is happening.   After reading Paul Krugman’s column, let me offer a new variation on the patient theme:
   - Patient is in an awful car crash, is pinned in the vehicle and is bleeding profusely.   Death is approaching quite quickly and action is needed soon.    Fire Department and EMS answer the call, rush in, amputate the patient’s leg and pull him to safety.   He’s safe, but he’s never going to walk again.     OR – Patient is in awful car crash……. Fire Department and EMS answer the call, rush in, take 30 seconds to assess the situation, determine that the jaws of life could save the patient, get the jaws of life and is able to free the patient and a full recovery is ahead.

In both situations, the patient is saved, but in the first situation, the heavy handed, rushing approach cost the patient severe damage and long term problems.

That’s the difference between Big Government and smaller government and that’s where I don’t agree with Paul Krugman.

Tom Vanderwell

Op-Ed Columnist – Averting the Worst – NYTimes.com

So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.

Just to be clear: the economic situation remains terrible, indeed worse than almost anyone thought possible not long ago. The nation has lost 6.7 million jobs since the recession began. Once you take into account the need to find employment for a growing working-age population, we’re probably around nine million jobs short of where we should be.

And the job market still hasn’t turned around — that slight dip in the measured unemployment rate last month was probably a statistical fluke. We haven’t yet reached the point at which things are actually improving; for now, all we have to celebrate are indications that things are getting worse more slowly.

For all that, however, the latest flurry of economic reports suggests that the economy has backed up several paces from the edge of the abyss……..

I’m still very worried about the economy. There’s still, I fear, a substantial chance that unemployment will remain high for a very long time. But we appear to have averted the worst: utter catastrophe no longer seems likely.

And Big Government, run by people who understand its virtues, is the reason why.

Hey Paul Krugman (A song, A plea)

Paul Krugman

Paul Krugman Blues…..

Enjoy!

The Krugman Blues ~ Loudon Wainwright III

Paul Krugman

Hey Paul Krugman!

It makes you wonder what’s happening when you get an avowed liberal and an avowed conservative both agreeing that the reasons we’re facing higher interest rates has to do with the fact that we’re spending way more money than we have.

Got to make you wonder…..

Tom Vanderwell

Retire Rich 2009: America’s great debt threat – Jun. 9, 2009

Normally Paul Krugman, the liberal pundit and Nobel laureate in economics, and Paul Ryan, a conservative Republican congressman from Wisconsin, share little in common except their first names and a scorching passion for views they champion from opposite political poles. So when the two combatants agree on a fundamental threat to the U.S. economy, Americans should heed this alarm as the real thing. What’s worrying both Krugman and Ryan is the rapid increase in the federal debt – not so much the stimulus-driven rise to mountainous levels in the next few years, but the huge structural deficits that, under all projections, keep building the burden far into the future to unsustainable, ruinous heights.

Paul Krugman

Krugman on “Utter Catastrophe.” Is the Worst Over?

Paul Krugman made a speech in the United Arab Emirates on Monday.   A couple of “high points” to what he said:

• we’ve avoided the total meltdown that the financial systems of the world were teetering on.   That’s truly good news.
• How we go about returning to growth is a more challenging issue.  Due to the total international deleveraging that is occurring, there isn’t anywhere that is growing well that would allow other nations to “export” their way to health.

So, financial Armageddon might have been avoided, but we’ve still got a long hard economic winter to get through…..

Tom Vanderwell

World economy stabilising says Krugman | Reuters

The world economy has avoided “utter catastrophe” and industrialised countries could register growth this year, Nobel Prize-winning economist Paul Krugman said on Monday.

“I will not be surprised to see world trade stabilise, world industrial production stabilise and start to grow two months from now,” Krugman told a seminar.

“I would not be surprised to see flat to positive GDP growth in the United States, and maybe even in Europe, in the second half of the year.” “In some sense we may be past the worst but there is a big difference between stabilising and actually making up the lost ground,” he said.

“We have averted utter catastrophe, but how do we get real recovery?

“We can’t all export our way to recovery. There’s no other planet to trade with. So the road Japan took is not available to us all,” Krugman said.

Hey Paul Krugman and the Zombie Banks – Be Very Afraid

I’m going to start this post with a couple of videos and then we’ll have the serious stuff after that…..

Hey Paul Krugman (A song, A plea)

And now…..

Zombie Bank

Now here’s the “serious” part.   Paul Krugman (if he was on Facebook, I’d be a “fan” of his, even though he’s a liberal and I’m not) wrote the following op ed piece in the New York Times today.   You can find the entire article here.   As usual, my comments are in bold and italics……

Hooray! The banking crisis is over! Let’s party! O.K., maybe not.

Tom here – the very fact that Paul Krugman says the party isn’t over should give us all a second thought about what’s going on…..

……Even before the results were announced, Tim Geithner, the Treasury secretary, told us they would be “reassuring.”

But whether you actually should feel reassured depends on who you are: a banker, or someone trying to make a living in another profession.

Tom here – I’d change that statement to be “a banker on Wall Street” rather than just a banker.   Those of us who are bankers on Main St. are more concerned with being able to help the people we live and work with.

I won’t weigh in on the debate over the quality of the stress tests themselves, except to repeat what many observers have noted: the regulators didn’t have the resources to make a really careful assessment of the banks’ assets, and in any case they allowed the banks to bargain over what the results would say. A rigorous audit it wasn’t.

But focusing on the process can distract from the larger picture. What we’re really seeing here is a decision on the part of President Obama and his officials to muddle through the financial crisis, hoping that the banks can earn their way back to health.  (My emphasis added)

It’s a strategy that might work. After all, right now the banks are lending at high interest rates, while paying virtually no interest on their (government-insured) deposits. Given enough time, the banks could be flush again.  Tom here – the entire premise of the banking system is exactly that.  Pay low rates on deposits and loan money out at higher rates.   The question is how long is that going to take for them to get healthy?

But it’s important to see the strategy for what it is and to understand the risks.

Remember, it was the markets, not the government, that in effect declared the banks undercapitalized. And while market indicators of distrust in banks, like the interest rates on bank bonds and the prices of bank credit-default swaps, have fallen somewhat in recent weeks, they’re still at levels that would have been considered inconceivable before the crisis.

It’s not the government that thinks the banks are undercapitalized, it’s the markets that do.

As a result, the odds are that the financial system won’t function normally until the crucial players get much stronger financially than they are now. Yet the Obama administration has decided not to do anything dramatic to recapitalize the banks.

It’s sort of like the knee surgery analogy.   You can do 9 to 12 months worth of physical therapy and if all goes perfectly, you’ll have a healthy knee at the end of that.   Or you can do surgery and 4 to 6 weeks worth of rehabiliation and then you’ll be fine.

Can the economy recover even with weak banks? Maybe. Banks won’t be expanding credit any time soon, but government-backed lenders have stepped in to fill the gap. The Federal Reserve has expanded its credit by $1.2 trillion over the past year; Fannie Mae and Freddie Mac have become the principal sources of mortgage finance. So maybe we can let the economy fix the banks instead of the other way around.

Tom here – remember how Bernanke said earlier this week that the economy should start turning around in early 2010?  Well, the media paid attention to that, but they didn’t pay attention to the part of his speech that came next.  I call it the big “IF.”   “If the banking system returns to health.”

So we have the administration making a decision to let the banking world limp along and the entire economy is at risk because of it?  Yikes…..

But there are many things that could go wrong.

It’s not at all clear that credit from the Fed, Fannie and Freddie can fully substitute for a healthy banking system. If it can’t, the muddle-through strategy will turn out to be a recipe for a prolonged, Japanese-style era of high unemployment and weak growth.

Actually, a multiyear period of economic weakness looks likely in any case. The economy may no longer be plunging, but it’s very hard to see where a real recovery will come from. And if the economy does stay depressed for a long time, banks will be in much bigger trouble than the stress tests — which looked only two years ahead — are able to capture.

Finally, given the possibility of bigger losses in the future, the government’s evident unwillingness either to own banks or let them fail creates a heads-they-win-tails-we-lose situation. If all goes well, the bankers will win big. If the current strategy fails, taxpayers will be forced to pay for another bailout.

But what worries me most about the way policy is going isn’t any of these things. It’s my sense that the prospects for fundamental financial reform are fading.

Tom here – as you read more of what I’ve got lined up to post today, you’ll see that there is a recurring theme among many of the top writers.   What they are afraid of is that we have lost the opportunity to make the changes that are needed to prevent this from happening again.

Does anyone remember the case of H. Rodgin Cohen, a prominent New York lawyer whom The Times has described as a “Wall Street éminence grise”? He briefly made the news in March when he reportedly withdrew his name after being considered a top pick for deputy Treasury secretary.

Well, earlier this week, Mr. Cohen told an audience that the future of Wall Street won’t be very different from its recent past, declaring, “I am far from convinced there was something inherently wrong with the system.” Hey, that little thing about causing the worst global slump since the Great Depression? Never mind.

Those are frightening words. They suggest that while the Federal Reserve and the Obama administration continue to insist that they’re committed to tighter financial regulation and greater oversight, Wall Street insiders are taking the mildness of bank policy so far as a sign that they’ll soon be able to go back to playing the same games as before.

I don’t ever want to go back to the way things were, if the way things were is what caused so many of us to experience so much pain.

So as I said, while bankers may find the results of the stress tests “reassuring,” the rest of us should be very, very afraid.

Paul Krugman

TARP is your mother……

You’ll probably be hearing a lot about preferred shares in banks being transferred to common equity relatively soon.   Paul Krugman has a great analogy that explains it well.

You know, I’m not a liberal, but I really like what he has to say……

Tom Vanderwell

Preferred shares to common equity: an analogy – Paul Krugman Blog – NYTimes.com

Preferred shares to common equity: an analogy

A followup to my previous post. Here’s how I think about it: you started a business with a bunch of borrowed money, but of course had to put some of your own money in. Now, actually some of the money you put in was borrowed from your mother, but the original lenders don’t care about that, since they have prior claim.

Eventually you run into some business difficulties, and your creditworthiness is in doubt — which in turn is making it hard for you to do business. What you need is evidence of ability to repay the money you already owe.

So does it help if your mother converts her loan into a share of the business? Not really, because she won’t get repaid anyway unless all your other creditors get paid first. So the terms of her agreement with you don’t affect their prospects of payment.

And in this case, the TARP is your mother.

Hey Paul Krugman (A song, A plea)

Paul Krugman

Banking is anything but……

I have to say that right now, banking is anything but boring and that Paul just might be right.   If we had a banking industry that was more stable, less “high flying” and less greedy, we might not have as much of a problem as we do now.

Read the rest of the Op Ed piece, it’s food for thought…..

Op-Ed Columnist – Making Banking Boring – NYTimes.com

Thirty-plus years ago, when I was a graduate student in economics, only the least ambitious of my classmates sought careers in the financial world. Even then, investment banks paid more than teaching or public service — but not that much more, and anyway, everyone knew that banking was, well, boring.

Paul Krugman, Banking

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