Archive for February, 2007|Monthly archive page
The Financial Markets Center has published a very nice list of questions for Federal Reserve Chairman, Ben Bernanke.
Chris Baehrend left a comment on the blog, asking a number of interesting questions. In an earlier post, I referred to the old German system of bank-centered capitalism. In Germany, until recently companies did not rely on raising money on the stock market. Instead they turned to banks. To protect their interests, the banks insisted on considerable control over the companies. Because the few large banks had many interests throughout the economy, they took a broader view of their actions.
Chris also asks: “If the S&P companies hold 2.5 trillion USD in capital (which equates to a huge percentage of world GDP) how much of the US debt are they financing?” Here I confess that I do not know, but it is very interesting question.
Next he asks: “And what sort of leverage does a foreign power to whom we owe trillions hold over us economically or otherwise?” Here, I suspect that nobody knows. A company holding hundreds of billions of dollars of US debt could severely injure the US economy, but to do so would destroy a considerable part of the value of its holdings. Besides, taking such actions would also make their currencies more expensive. For a country like China, which is having trouble finding employment for millions of people, making their currencies more expensive could reduce the demand for their exports.
Chris’s next question also stumps me: “Third, I understand that multi-national corporations hold enormous sums of wealth and that many are based outside the US for tax purposes (etc). Does this mean that wealth is being transferred out of this country? And what effect would that have on our economy?”
Maybe one of you has a good answer.
The last question is also difficult: “My last question is, perhaps, too broad for easy explanation. I presume that a shareholder on average probably holds shares for only a few years. A corporation is legally obliged to make money for its shareholders. Corporations hold more power over our government than at any time since the late 19c. While I recognize that officers and board members
usually live here, have ethics, and may want to have jobs in the long-run, does this mean that corporate influence is, on the whole, necessarily, legally, and irremediably detrimental to the long-term interests of the average US citizen?”
Here, Chris probably knows as well as I do, that corporate officers and board members is have no reason to be socially responsible. Here is a short extract from my book: Manufacturing Discontent:
BusinessWeek had a very interesting cover story on the Carlyle group.
Thornton, Emily. 2007. “Carlyle Changes Its Stripes.” Business Week (12 February): pp. 46-59.
The gist of the story is that: “By the end of this year it expects to have an unprecedented $85 billion in investor commitments under management, up sixfold from 2001.”
In a BusinessWeek podcast, the author suggests that private equity firms may end up running a large share of corporate America, rather than just flipping companies for a quick profit. In effect than, managerialism may be giving way to something more like the old German system, where the banks were in control.
Part of this transition is fueled by cheap capital, the cover story of this week’s edition of BusinessWeek, which I have not had time to read. But cheap capital also eventually means excessive capitalization, leading to huge busts.
All this is speculative, but I think it bears watching.
“… members of the Standard & Poor’s 500-stock index alone had more than $2.6 trillion in cash and equivalents at the end of 2006.”
Stein, Ben. 2007. “It’s a Great Country, Especially if You’re Rich.” New York Times (11 February).
Mollenkamp, Carrick. 2007. “In Home-Lending Push, Banks Misjudged Risk.” Wall Street Journal (8 February): p. A 1.
“When the U.S. housing market was booming, HSBC Holdings PLC raced to join the party. Sensing opportunity in the bottom end of the mortgage market, the giant British bank bet big on borrowers with sketchy credit records. Such subprime customers have always been risky, but HSBC figured it could control that risk. In 2005 and 2006, it bought billions of dollars of subprime loans from other lenders, lured by the higher interest rates they carry.”
“Assessing the quality of big mortgage pools and predicting how many of the loans will go bad is a tricky business. Typically, HSBC would first specify to a mortgage wholesaler what kind of loan pool it was looking for, based on the income and credit scores of borrowers. Then it would send in its analysts to review the portfolio.”
“After the deal was announced, Household’s then-chief executive, William Aldinger, bragged that Household employed 150 Ph.D.s skilled at modeling credit risk. Household had developed a system for assessing consumer-lending risk — called the Worldwide Household International Revolving Lending System, or Whirl — which it used to underwrite credit-card debt and to collect from consumers in the U.S., United Kingdom, Middle East and Mexico.”
[The good book tells us: "For they sow the wind, and they reap the whirlwind.]
“The mortgage market in the U.S. is a complicated web of mutually dependent businesses. Mortgages are frequently bought and sold several times over, and the default risk often lands far from the institution that originated a mortgage. Banks and mortgage brokers size up would-be borrowers and make the loans. These lenders sell many of the loans to mortgage wholesalers, which gather them into pools and flip them to large financial institutions or banks like HSBC.”
“Assessing the quality of big mortgage pools and predicting how many of the loans will go bad is a tricky business. Typically, HSBC would first specify to a mortgage wholesaler what kind of loan pool it was looking for, based on the income and credit scores of borrowers. Then it would send in its analysts to review the portfolio …. To speed up these purchases from other lenders, HSBC accepted loan paperwork that didn’t verify whether borrowers made as much as they claimed. Mortgages that rely on the borrower’s word about that are called “stated-income” loans.”
[Of course, people who processed the loan, working for companies that flipped the loans, had good reason to encourage borrowers to overstate their income. Alas, the Ph. D's never figured that out.]
Isn’t 1.4 million realtors enough?
David Lereah, chief economist of the National Association of Realtors, said membership in the trade group was nearly 1.4 million in 2006.
Hagerty, James R. and Anjali Athavaley. 2007. “Amid Slump, Real-Estate Agents Hang Up Their Blazers.” Wall Street Journal (7 February): p. B 6.
In my new book, The Confiscation of American Prosperity: From Right Wing Extremism and Economic Ideology to the Next Great Depression, I wrote about the Koch Foundation. Imagine my surprise, when the foundation mailed me the following announcement. Read more about Koch & the announcement:
I read in the Washington Post
“According to the nonpartisan Congressional Budget Office, Congress has appropriated more than $500 billion for the “Global War on Terror” since the Sept. 11, 2001, terrorist attacks, and the new funding request would increase that figure to nearly $745 billion through fiscal 2008.”
“Bush Plan Reins In Domestic Spending Proposal Aims to Balance Budget And Fund Wars.” Michael Abramowitz and Lori Montgomery, Washington Post, Tuesday, February 6, 2007; Page A01
But we cannot forget all the Homeland Security pork. What a racket! Also, the war costs will inevitably escalate. The only remedy will be more tax cuts and the elimination of wasteful support for the poor.
Some people are critical of our current policy. They just do not understand. Let us turn to President Bush’s own words, which will clarify everything.
INTERVIEW WITH PRESIDENT GEORGE W. BUSH NEWSHOUR WITH JIM LEHRER January 16, 2007
MR. LEHRER: Let me ask you a bottom-line question, Mr. President. If it is as important as you’ve just said – and you’ve said it many times – as all of this is, particularly the struggle in Iraq, if it’s that important to all of us and to the future of our country, if not the world, why have you not, as president of the United States, asked more Americans and more American interests to sacrifice something? The people who are now sacrificing are, you know, the volunteer military – the Army and the U.S. Marines and their families. They’re the only people who are actually sacrificing anything at this point.
PRESIDENT BUSH: Well, you know, I think a lot of people are in this fight. I mean, they sacrifice peace of mind when they see the terrible images of violence on TV every night. I mean, we’ve got a fantastic economy here in the United States, but yet, when you think about the psychology of the country, it is somewhat down because of this war.
Now, here in Washington when I say, “What do you mean by that?”; they say, “Well, why don’t you raise their taxes; that’ll cause there to be a sacrifice.” I strongly oppose that. If that’s the kind of sacrifice people are talking about, I’m not for it because raising taxes will hurt this growing economy. And one thing we want during this war on terror is for people to feel like their life’s moving on, that they’re able to make a living and send their kids to college and put more money on the table. And you know, I am interested and open-minded to the suggestion, but this is going to be ….. I mean, Iraq is only a part of a larger ideological struggle. But it’s a totally different kind of war, than ones we’re used to.”
Palley, Thomas I. 2007. “Manipulating the Oil Reserve.”
“The last three years have seen rapidly rising oil prices, and a tight oil market has meant that even small increases in demand have had large price impacts. During this period the Bush administration purposely expanded inventories of the strategic oil reserve, which rose from 600 million barrels in May 2003 to 700 million barrels in August 2005. The administration therefore increased demand by 125,000 barrels per day, and oil prices rose from $30 dollars per barrel to $70 dollars.”
“As oil prices rose, Wall Street became increasingly engaged in commodity speculation (the destructive effects of which is a story for another day), and this is where storage matters. As speculators entered the market the spot price of crude oil rose above the futures price. However, buying spot oil means taking delivery, which requires storage capacity. By adding to the strategic reserve, the administration not only increased oil demand but also increased storage capacity because the oil it bought was stored in the strategic reserve’s caverns. That helped speculators by adding storage capacity vital for cornering the market.”