Let Markets Be Markets

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”.

History: Chicago School Didn’t Always Support the Banks

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.

Even when banks pay back, they get bailed out.

Just sayin’…

Citigroup’s “Massive” Tax Break

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 …

Dubai Default: Nothing to see here, just move along.

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.

via The Incredible Lightness Of The U.S. Media | The New Republic.

Banks Failures: The 1920’s and The Great Depression

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

U.S. Bank Failures Exceed 100 for Year, First Time Since 1992 – Bloomberg.com

via U.S. Bank Failures Exceed 100 for Year, First Time Since 1992 – Bloomberg.com.

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.”