Market Talk

The Financial Crisis Inquiry Commission has seemed like an afterthought for some time now. It was especially telling that Congress didn’t even wait for the board’s findings before passing its financial-overhaul bill. There have been one or two moments that were television-worthy, but overall the group has worked in what can charitably be called a state of benign neglect. Nobody in Washington really wanted anything constructive to come out of this effort.

But the latest episode, in which the board’s four Republican members are publishing their own breakaway findings, really brings the point home that the entire thing has been a waste of time, and that the ultimate cause of the housing/credit/banking crash, while painfully obvious to anybody with an even slightly objective lens, is something that just isn’t talked about down in DC.

The bank-lobby apologists would have you believe it was the CRA, or government policy toward housing via Fannie Mae and Freddie Mac that caused the crisis. That is absolute horse manure. The causes of the crisis were, in no particular order: scuttling Glass-Steagall, not regulating derivatives in 2000, Greenspan cutting the fed funds rate in the early 2000s (ultimately to 1% in 2003) and leaving them low for too long, and the SEC’s decision to take the leverage caps of Wall Street banks in if memory serves correct 2005. Those are the four biggies, off the top of my head, and three of the four center on a specific philosophy: deregulating the financial system.

The Times reports today that:

The Republican members of the commission appointed by Congress to investigate the causes of the financial crisis plan to release on Wednesday a document that assigns government housing policies substantial blame for the origins of the 2008 financial crisis.

The release of the 13-page document is an indication of a major partisan division within the 10-member Financial Crisis Inquiry Commission, which was required to deliver its report on Dec. 15 but has pushed that deadline back to January.

This is pathetic. These jokers spent more than a year and I don’t know how much money, and in the end they’re no nearer any agreement than the left/right panelists on a Sunday morning talk show. What was the point of this whole exercise? It wasn’t to uncover the truth; that had come tumbling out in the panic of September 2008. Let’s be for real; Congress didn’t need this commission to find the truth. The truth smacked knocked them on their backsides the weekend of Sept. 12, 2008.

What it needed the commission for was to whitewash the truth, because the people who pay the bills in Washington (incidentally and largely the same people responsible for the crisis) want no part of the truth. They want business as usual.

This was never going to be a modern Pecora Commission. But it didn’t have to devolve into a total joke. Yves Smith over at naked capitalism goes pretty apoplectic over it, and rightly so:

The intent is pretty transparent: to discredit an effort at fact finding into the roots of the crisis, what was hoped to be a Pecora Commission, by making it appear partisan and launching an alternative narrative to muddy the waters. And the reason is clear. Even though FCIC is certain not to have the same effect that the Pecora Commission did, of discrediting major financial services industry figures and exposing various forms of chicanery, it appears that even lesser forms of criticism of the banksters must be sandbagged (the bizarre part of this drama is that at least some Democrats and very selectively, Republicans in office are willing to call out the predatory, extractive behavior of the large banks. But no one has the guts to buck an industry that is a major paymaster in a very serious way.)

This whole line of thinking is garbage, the financial policy equivalent of arguing that the sun revolves around the earth. Yes, the US and other countries provide overly generous subsidies to housing, and curtailing them over time would not be a bad idea. But that’s been our policy for decades. Calling that a major, let alone primary, cause of the crisis, is simply a highly coded “blame the poor” strategy, In reality, both the runup to the crisis and its aftermath were on of the greatest wealth transfers from the citizenry at large to a comparatively small group of rentiers in the history of man.

Yves Smith over at naked capitalism raises a great point: our electoral process leaves a few things to be desired. In a word, my word not hers, it stinks. Smith reflects on the process in Australia, where she lived for a few years, and notes how the policies there produced a better informed, more engaged electorate:

One of their strong points was politicking and voting. Australia didn’t, and I hope still does not, permit paid TV ads. Each party (or was it candidate? I never was clear on the mechanics) who scored above a very low threshold got a certain amount of free air time. This took the big reason for fundraising out of the picture. And the result, a limit on how much TV advertising their was in total, seemed to have the effect that people got proportionately more of their information about politics via print, which allows for longer form discussion.

Another interesting feature was that voting is a duty not a right. I was surprised at about month three in my apartment there to get a sternly-worded official notice, which wanted to know who the hell I was and why hadn’t I voted. If you don’t vote, you get fined.

The net effect of these policies, in combination with native Australian skepticism, was an informed and engaged electorate.

When’s the last time you heard a politician here talking about changing how we vote? That’s not a rhetorical question; I’m serious. If you have an example, email it to me. Nobody talks about reforming the electoral process, despite the fact that barely half the voting population turns out to actually vote, meaning that essentially one quarter of the population is electing the representatives.

There is, of course, a very good reason why nobody running for office wants to change the process of getting elected. It’s easier when fewer people vote. Want to know when you’ve got a candidate on your hands who really wants to rock the vote? When you have someone who wants to change how we vote.

There’s a new movie about Wall Street and big business coming to theaters. No, not Oliver Stone’s over-hyped sequel to “Wall Street,” which as we all know gets released today (honestly, I feel like the only business reporter who hasn’t already seen it, seems like everybody in this ro0m except for John, Steve and I got invited to some press screening.) It also isn’t “The Social Network,” the anti-Zuckerberg screed being released today as well.

(Great side note: Zuckerberg is going on Oprah today to announce a $100 million donation to the Newark, N.J., school system. Of course, we’re all supposed to believe it has absolutely nothing to do with that movie. Of course not.)

No, the movie I’m talking about is “Inside Job,” which is being released here Oct. 8. It’s a positively scathing documentary about the financial crisis, and makes no bones about who is to blame: just about everybody inside banking and the government. I’ve seen only the trailer, again, no special press screenings for this reporter, but if you care about the things that this blog cares about, and if you’re reading I’ll assume you do, it ought to hold your interest.

(Interestingly, these aren’t the only business-related movies coming out; seems Hollywood is rediscovering Wall Street. Imaging how long it takes to get a movie from script-form to its premiere at Cannes, those producers must’ve jumped into action about Sept. 15, 2008.)

Yves Smith over at naked capitalism has a review. “‘Inside Job’ (is) an ambitious picture, clearly aiming to stir public anger and action by showing how criminally corrupt the financial services has become and how it has subverted government and the economics discipline,” she says. The film may not star Michael Douglas (although it is narrated by Matt Damon,) but then again old Gordo never wrecked the entire financial system. Just Bluestar.

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US stocks fluctuating between small gains and losses Wednesday as investors digest Japan’s move to halt the yen’s rise. But the indecisiveness continues a broader trend this week as investors haven’t shown much conviction for stocks in either direction.

Yesterday’s trading featured some puzzling relationships, Art Cashin at UBS noted in his morning note. Treasurys rallied, gold rose sharply — typically signs of moves to safety, but the dollar weakened. Meanwhile, stocks waffled between plus and minus territory throughout the day.

“By early afternoon, traders were looking at the tape like it was a Picasso painting,” Cashin said. “For equities, the net result was yet another low volume stall at the top of the trading range.”

Now, Cashin sees the market approaching a “very critical inflection point,” especially as S&P 500 stalled Tuesday right below the top of its three-month trading range for a second-straight day.

S&P 500 recently up 1.5 at 1123. Cashin said resistance could come in the range of 1129 to 1132, while support exists at the 1111 to 1113 level.

The indecisiveness over the last few days comes as stocks have steadily churned higher this month, gaining more than 5% in September, historically the market’s worst-performing month. But amid the run-up, market sentiment has been a bit schizophrenic, Yves Smith wrote on her “naked capitalism” blog.

From recovery optimism, to fears of the economy double-dipping back into recession, and back to a more positive outlook, investor mindset has widely shifted back and forth recently, she noted. The consensus now seems to believe August bearishness was overdone.

“The other shoe may be yet to drop,” Smith said. “But until then, institutional investors can’t afford to stay too far from the herd, and the herd hates to bet against growth for very long.”

So now it appears the nation will get a new set of laws for the banking industry. Actually, “set” is putting it lightly; at 2,000-plus pages, the financial reform bill passed this afternoon by the Senate is as monstrous a leviathan as the healthcare bill that proceeded it.

Glass-Steagall and the other Depression-era laws that were a response to another financial crisis, created a stable environment for the banking industry for half a century. If this bill manages that feat, it will be rousing success, and investors will reap the benefits, even if they don’t realize it.

Here’s the rub, though: Glass-Steagall was 37 pages. Thirty-seven pages. It laid out concrete, simple rules. This bill we have today, this 2,000-page behemoth, doesn’t lay out simple, concrete rules. It creates councils. Agencies. “Authorities” to break up banks that “pose a threat” to the system.

“Citbank, JP Morgan, Bank of America, Wells, Goldman, and Morgan Stanley NOW constitute ‘a grave risk to financial stability.’ ” Yves Smith writes at naked capitalism. “You could extend the list further into the stress test banks (19 in the US), but let’s stick with these. If we believed this bill was meaningful, action be taken against these banks immediately upon signing. Odds of that happening? Zero.”

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Lots of chatter in the blogosphere about the Fed’s stance now that the crisis has passed, but the economic recovery remains tepid at best.

Naked capitalism blogger Yves Smith wonders if the Fed is actually pleased with the “crappy economy” that consists of high unemployment and weak job growth. She notes recent commentary from some Fed officials suggests a certain level of comfort with the pace of recovery.

That’s not a good sign, especially as the unemployment rate remains stubbornly high at 9.5% and the U-6, the broader unemployment rate, stands near 17%. “There will be no recovery without jobs, and there will be no net job creation if small businesses, especially startups, do not lead the way,” Michael Shedlock writes over at his blog.

But back to Smith’s point, a complacent Fed at the stage of the game isn’t a good sign. She’s no advocate of quantitative easing, and thinks monetary measures won’t have much impact if banks are reluctant to lend. “But the Fed’s body language has a big influence on policy discussions, so its lack of a sense of urgency undermines initiatives on other fronts,” Smith says.

Once again, any action depends on this economic recovery. As John pointed out earlier, this week’s earnings reports and economic data could offer further details regarding whether all the worries about the economy double-dipping back into recession are warranted or not. The economic calendar is chock full of data, including June retail sales, PPI, CPI, as well as several measures on manufacturing and July consumer sentiment.

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Raymond, one of our regular readers, had a comment to a post about Friday’s jobs report that’s stuck in my head. “Welcome to the ‘New Normal’ – it’s repulsive,” he wrote. “The middle class of America is getting destroyed. If we do not see real policies that work from government and the private sector, America will be a very different place in a couple of decades.”

If only anybody had been thinking that way a couple of decades ago, we might not be where we are now. There are developments in the global economy that are frankly beyond our control, to be sure, but we could’ve done more to provide for the working classes, rather than just telling them to become “knowledge workers,” shipping their jobs to Asia and papering over the whole thing with borrowed money.

We have been hollowing out the working class for going on 30 years, and that is the great, unappreciated story of our times. Cities like Cleveland, Newark, Detroit have become shells of themselves, and it’s hard to see them coming back. How many Rock-n-Roll halls of fame can you have? The United States today does not create enough of the kinds of jobs that will provide a safe, secure living for the working class. We’ve carefully hidden this fact by replacing living wages with credit, and it worked for a while, but that game has exploded rather messily all over the globe.

Which brings me to Andy Grove’s piece in Bloomberg, as highlighted by Yves Smith over at naked capitalism. Grove, former CEO at Intel, explains why we don’t make jobs here in America anymore, the ramifications of that, and suggests some solutions that will make the Kudlows of the world recoil in horror.

The start-up companies that get all the venture capital, he notes quite plainly, and which the business and political classes lavish praise upon as the great creators of jobs, aren’t creating jobs. A mythology has risen around companies like Intel and Apple; but Apple employs ten times as many people in Asia as it does here. Well, that’s a problem:

You could say, as many do, that shipping jobs overseas is no big deal because the high-value work — and much of the profits — remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work — and masses of unemployed?

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Just when I thought I could not possibly get more outraged by anything I hear about government bailouts, I read this from the Times:

When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Societe Generale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.

Um, excuse me? Am I to understand that the U.S. government, which was about to hand over nearly $200 billion to AIG, forced it to agree not to sue any of the banks it owed money to, even if it should it later find out that any of them committed, oh, you know, fraud? Is that what my government brokered?

This is the kind of agreement that, say, a corporation might make one sign when they’re letting you go, but giving you a little severance package, know what I mean? Why in the world would the U.S. government, which was about to fork over an almost unheard of amount of taxpayer money, want to force to AIG to give up any legal chance to recoup any of that money? It would make sense if it was the banks forcing that issue, but for the government to…

A-ha! A-ha!

“Another way to read this requirement is that the Fed and Treasury were opposed to having fraud at the banks exposed, period,” Yves Smith writes at naked capitalism. “That is a very troubling stance for bank regulators to take.”

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Yves Smith over at naked capitalism gets to the heart of what I was trying to say earlier about the dearth of leaders today. Her post is mainly an expansion on Brad deLong’s post about Washington’s apparent apathy toward unemployment. But then she gets to this:

The fact that Washington is wildly out of touch with America becomes more apparent with every passing day. Pat Caddell (pollster to Carter, who has since left the Democrats) has told me that he has never seen anything like the gap in responses on various issues between the population and the governing apparatus in the capital.

Why is that? Mainly because their ideas have failed, but they’re too wedded to them to seek out new ones.

The real problem may be that all these approaches are past their sell-by dates, helpful around the margin but insufficient to provide lasting relief to our current malaise. We may be at the end of a paradigm. The US and its trade partners have engaged in a 30 year experiment of deregulation, financial liberalization, more open trade, and deep integration of markets. But most other countries had clear objectives: they wanted to protect their labor markets, which usually entailed running a trade surplus (or at least not a deficit). Many of them also had clear industrial policies. By contrast, the US pretended it was adhering to a “free markets” dogma so that whatever resulted from this experiment was virtuous. But in fact, we have had stagnant real worker wages, with a rising standard of living coming from rising household borrowings and to a much lesser degree, falling technology prices. We have also had industrial policy by default. Certain favored groups, such as Big Pharma and the sugar lobby, get special breaks.

The real story of the credit crisis, the heart of the matter, is that 30 some-odd years of policy in the developed world has been buried under an avalanche of debt. The politician who realizes that, and figures out how to get us beyond that, will be the next great one.

Today it takes most families two paychecks to maintain what one paycheck covered a generation ago. There is no job security, and — thanks to the beauty of 401(k) accounts and retirement and pension funds investing in the stock market — precious little retirement security. We’ve hollowed out everything that was built up after World War II and the Great Depression, and the great challenge now is to rebuild it.

Somebody better get on the stick, because the clock’s ticking.

All right, places people, we got to make this good.

The funniest thing you’ll hear today is this bit about the U.S. pushing Europe to publicize the results of its “stress tests.” I mean, isn’t that hi-larious? The U.S. government’s 2009 stress tests were a carefully orchestrated stage show intended to restore confidence in the banking system, not to necessarily uncover any meaningful information.

Now, at a G20 meeting of finance ministers, the U.S. is pushing Europe to stage their own show. From the Journal:

Worries about Greece’s ability to repay its debt, and concerns about the stability of Spain and Portugal, provide a sobering backdrop at the gathering this week in Busan, South Korea, of finance ministers and central bankers from the Group of 20 industrial and developing nations. U.S. officials said they are convinced that by publicly demonstrating the strength of its banks and promising to solidify those that prove weak, Europe might help stem the crisis of confidence.

“This crisis is multifaceted, but I believe bank stress tests can be helpful as a critical component of any comprehensive plan to restore confidence in the European financial system,” said Lee Sachs, who was, until a month ago, a top adviser to Treasury Secretary Timothy Geithner.

Listen, on the one hand, you have the stress tests. On the other, you have the Fed cutting interest rates to zero, the federal government pushing the $700 billion TARP program at the banks, the Fed buying a trillion and a half worth of bonds from the banks (and other institutional-type holders) and Congress pressuring FASB to drop mark-to-market accounting. Which do you think had the greater effect?

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