Interesting post from Yves at Naked Capitalism about Wall Street in the 1920′s just before the Great Crash and Great Depression. Read it here.
Joseph Stiglitz is a Nobel-prize winning economist. He is also a former Chief Economist of the World Bank. He resigned / was forced out in 2000 because of his criticism of IMF and US Treasury policies in forcing “free-market fundamentalism” onto developing and emerging market countries in the 1990′s. He has been a sharp critic throughout his career of the free-markets-are-always-right view that has often characterized the “Chicago boys”. Indeed, the theoretical work for which he was awarded the Nobel Memorial Prize demonstrates how markets will not achieve desirably outcomes without some forms of government regulations and institutional restrictions.
In this short video (8 min) he talks about how U.S. financial markets aren’t really “free markets” – they don’t meet the conditions for a functioning “market”.
In the previous montrous, global financial meltdown (the Great Depression), the leading economists at University of Chicago sang a very different tune from what they promote today. They actually called for nationalizing the Federal Reserve Banks and giving total control of money creation to government. They argued it was necessary to provide the proper environment for free markets. Total opposite of today’s descended-from-Milton-Friedman-and-Hayek position. Fascinating. See Monetary.org – Chicago Plan for the full story.
by CalculatedRisk on 12/15/2009 11:11:00 PM
The WaPo has an article about a tax break for Citigroup: U.S. gave up billions in tax money in deal for Citigroup’s bailout repayment
The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors.
While the Obama administration has said taxpayers are likely to profit from the sale of the Citigroup shares, accounting experts said the lost tax revenue could easily outstrip those profits.
Federal tax law lets companies reduce taxable income in a good year by the amount of losses in bad years. But the law limits the transfer of those benefits to new ownership as a way of preventing profitable companies from buying losers to avoid taxes. Under the law, the government’s sale of its 34 percent stake in Citigroup, combined with the company’s recent sales of stock to raise money, qualified as a change in ownership.
The IRS notice issued Friday saves Citigroup from the consequences by stipulating that the government’s share sale does not count toward the definition of an ownership change.
Who benefits? The value of the shares the U.S. owns should increase, but only 34% of the share price increase accrues to U.S. taxpayers The other current shareholders receive the rest. So this doesn’t seem to make sense …
It’s too early to tell, but a second leg of crisis could be just around the corner. It’ll come as a surprise to most Americans, though. It always does.
If you just read American newspapers, you might not know that financial markets around the world plunged over news that the government-owned Dubai World – upon which that emirate’s claim to economic non-oil leadership in the Middle East rests — may be on the verge of collapse. I followed the Dubai story in The Financial Times, which headlined it on its web page from the early morning yesterday. Today, they have a three page spread. And what about the Washington Post? They have a short AP story on page A22. Is it a more important story than the tale of these poseurs who crashed a White House dinner, which is featured on page one? Just maybe. You have to remember that the Great Depression only became “great,” that is, global, when an obscure Austrian bank went under in 1931, and set off a massive financial explosion around Europe. Capitalism is an irrational system that is often full of unpleasant surprises. The collapse of Dubai World may turn out to be nothing. But it could also turn out be one of those unpleasant surprises.
From the FDIC (Federal Deposit Insurance Corp.) itself, a great brief history of banking failures in the 1920′s and the Great Depression. see: FDIC: Managing the Crisis: The FDIC and RTC Experience.
On average, more than 600 banks failed each year between 1921 and 1929. Those failures led to the end of many state deposit insurance programs. The failed banks were primarily small, rural banks, and people in metropolitan areas were generally unconcerned. Investors and other businessmen thought that the failing institutions were weak and badly managed and that those failures served to strengthen the banking system. A major wave of bank failures during the last few months of 1930 triggered widespread attempts to convert deposits to cash. Confidence in the banking system began to erode, and bank runs became more common. In all, 1,350 banks suspended operations during 1930. Some simply closed their doors due to financial difficulties, while others were placed into receivership.
To begin to understand both the severity of the crisis and the impact it had on everyday Americans, it is necessary to try to come to grips with its magnitude. In the four years of 1930-1933 alone, nearly 10,000 banks failed or were suspended. These banks held deposits of over $6.8 billion (equivalent to perhaps $60 billion today’s dollars, but representing a much larger share of depositor’s wealth then). The depositors in these banks lost nearly 20% of these deposits when the banks failed. Since there was no FDIC yet, and most state deposit insurance schemes had shut down already, this meant that everyday folks lost their savings, their money. Imagine that impact. You’ve worked hard. Saved money to buy a house on one of those shiny new Ford Model A’s or a Chevrolet. Then one day, your money is just gone. Disappeared. It’s a life-changing event for many of those depositors. But then consider that the monies lost by these unfortunate bank customers represented (over the 4 years) approximately 4% of ALL DEPOSITS at ALL BANKS. Even those fortunate (or lucky) enough to have their money in a sound bank would be scared. Were they next? With the Hoover administration and The Federal Reserve seemingly doing nothing to slow the accelerating trend of bank failures, it is no wonder that FDR won a landslide election in 1932 and that a bank holiday and bank reforms were job #1 of his New Deal.
Details in the table after the Continue reading
Oct. 24 (Bloomberg) — U.S. regulators closed more than 100 banks in a single year for the first time since 1992, signaling the financial crisis hasn’t abated for lenders struggling with mounting losses tied to commercial real estate.
Seven banks — three in Florida and one each in Georgia, Wisconsin, Minnesota and Illinois — were shut yesterday, according to the Federal Deposit Insurance Corp., pushing this year’s total to 106. That’s the most since the savings-and-loan crisis led regulators to shutter 179 institutions in 1992.
“It’s very painful, it costs a lot of money, it ruins careers,” said Gerard Cassidy, an RBC Capital Markets analyst in Portland, Maine. “But shutting down failed banks and writing off the bad loans is a necessary solution that has to be done to get the economy and the banking system back on its feet.”
Wall Street hasn’t learned and isn’t repentant. We’re likely to have another crisis. Maybe this year, maybe next. Maybe they keep it together for a few years. But sooner or later this house of cards falls.
Derivatives is one of the dirty words of the financial crisis. Though these often-risky bets were blamed by many for helping fuel the credit crunch and the downfall of Lehman Brothers and AIG, it seems that Wall Street has yet to learn its lesson.
U.S. commercial banks earned $5.2 billion trading derivatives in the second quarter of 2009, a 225 percent increase from the same period last year, according to the Treasury Department.
More than 1,100 banks now trade in derivatives, a 14 percent increase from last year. Four banks control the market: JPMorgan Chase, Goldman Sachs, Bank of America and Citibank account for 94 percent of the total derivatives reported to be held by U.S. commercial banks, according to national bank regulator the Office of the Comptroller of the Currency.
The credit risk posed by derivatives in the banking system now stands at $555 billion, a 37 percent increase from 2008. “By any standard these [credit] exposures remain very high,” Kathryn E. Dick, the OCC’s deputy comptroller for credit and market risk, said in a statement.
Steven Pearlstein of the The Washington Post explains via this story in the Hamilton Spectator why the run-up in the stock exchange of the last 6 months isn’ t necessarily a good thing. Instead of being a predictor of good times to come, the run-up in the stock market is more likely the latest in a series of financial bubbles. We started with real estate & S&L’s in the 80′s, then it was dot-com’s and tech stocks in the nineties, then back to real estate and houses until 2006, then oil and commodities in 2007-8 (remember $130 barrel oil?). We still aren’t reforming our financial system and we’re still letting speculators, bubble-blowers, and Wall St drive our policies.
Less encouraging is what’s happening on Wall Street. It turns out that all those bold and necessary steps by the Federal Reserve to prevent the financial system from collapsing wound up creating so much liquidity that it has now spawned another financial bubble.
Let’s start with the $1.45 trillion that the Fed has committed to propping up the mortgage market – money that, for the most part, was simply printed. Effectively, most of that has been used to buy up bonds issued by Fannie Mae and Freddie Mac from investors, who turned around and used the proceeds to buy “safer” U.S. Treasury bonds. At the same time, the Fed used an additional $300 billion to buy Treasurys directly. With all that money pouring into the market, you begin to understand why Treasury prices have risen, and interest rates have fallen, even at a time when the government is borrowing record amounts of new money.
At the same time it was printing all that money, the Fed was also lowering the interest rate at which banks borrow from the Fed and each other, to pretty close to zero. What didn’t change was the interest rate banks charged for everyone else. As a result, “spreads” between what banks pay for money and what they charge are near record highs.So who is doing the borrowing? By and large, it’s not households and businesses, which are reluctant to borrow during a recession. Rather, it’s hedge funds and other investors, who have been using the money to buy stocks, corporate bonds and commodities, driving prices to levels unsupported by the business and economic fundamentals.
I recommend reading the full story at the link.
From the Huffington Post:
Hmmm. This isn’t exactly confidence inspiring.
Tim Geithner’s new nominee for number two at the Treasury Department, Neal Wolin, played a key role in drafting legislation in the late 1990s deregulating the banking system, a former Treasury Department official confirms to us.
We aren’t going to fix the mess in banking (and the economy) by turning to the same cast of characters whose lack of vision and deregulatory ideology got us into the mess.