Spanish Banks and Unemployment

It is sad to see viable small businesses in Spain laying off employees because their banks have called in the loans necessary for operating capital as reported in the New York Times Sunday.  This makes unemployment worse and recovery impossible.  No amount of austerity will solve this problem.  The banks do not require bailouts, they need a change in the rules so that failed loans (mortgages for real estate) are not a charge against their capital.  There is so way that a bank can stay viable with a historic 20 to 30 percent change in real estate values.  These loans have to be removed from the books as was done in Iceland.  Government austerity will only make the problem worse.

Financial Whales

While JP Morgan Chase recently lost two or three billion dollars, Boaz Weinstein of the $5.5 billion Saba hedge fund made an astronomical sum.  What useful service did Weinstein perform to earn this kind of money?  None!  He observed a price difference between a credit derivative index and the market it was supposed to track.  The aberration was caused by a trader for Morgan called the London Whale.  The Whale kept selling and Weinstein began buying. Like in poker, someone who makes a mistake often doubles down to scare off competitors, but the Whale did not scare Weinstein.  (NYT  May 27, 2012) You need a lot of capital to play this game such as Morgan has as one of the nation's largest banks.  The Whale lost.  Should we care?  Morgan points out that their loss is a tiny fraction of their assets.  This is one meaning of “too big to fail.”  Still, it was just this kind of trading that made the recent financial crisis a crisis. 

Mr. Weinstein has been banned from the Bellagio Casino in Vegas.  In this case, the Casino should be banned and banks should not be allowed to make such bets (Volker Rule).  These brilliant minds should find something else to do with their smarts like making useful products and investing in plant and equipment that provide jobs.

The French Get It

Francois Hollande, the socialist candidate for the French presidency, is advocating that the European Central Bank make loans to nations (not just banks). The ECB is prohibited from doing so, but it is time to change the rules and abandon austerity that is only making things worse. I have long advocated that central banks loan money interest free to nations that have excess capacity (see earlier blogs).

What a waste!

"An American soldier dies every day and a half, on average, in Iraq or Afghanistan. Veterans kill themselves at a rate of one every 80 minutes. More than 6,500 veteran suicides are logged every year — more than the total number of soldiers killed in Afghanistan and Iraq combined since those wars began." These wars must stop. They are not worth the cost of destroying the cream of our youth.
Source: New York Times, 15 April 2012

Crocodile Tears

Let's all shed some crocodile tears for the unfortunate execs of GM, AIG, and Ally Financial Inc. for whom the government has ordered a 10 percent salary reduction. General Motors CEO Akerson will only receive $9 million. GM still owes the government $25 billion.
I suppose these underpaid execs will leave for other bankrupt firms such as Kodak.

What is our biggest problem?

The two chairs of the Commission appointed to develop a plan for reducing the Federal deficit agreed that the debt was the nation's biggest problem and unsustainable. We have to cut defense, social security and medical care they say. But, they know it won't happen.

This has become conventional wisdom. Why does not anyone raise the question of what the real economy of people and factories is capable of producing. Have we lost the knowledge needed to produce? Have the factories rusted?

No. This is an institutional failure, not a physical problem. There is an alternative to borrowing more money in the market. The Treasury could borrow from the nation's own bank,the Federal Reserve. Tell me why it is OK to create money every time a private corporation borrows money from a bank, but not OK if the government does the same thing??

Stock market and the economy

Fed chief Bernanke said that deep problems remain in the labor market. So the S&P hit its highest close in 4 years. Go figure! Of course behavior in a gambling casino doesn't have to make sense.

Good news? Layoffs in January were 154,000 fewer then than in December, 2007. Bad news: firms hired 778,000 fewer workers then they did in December, 2007.

"the fact that labor demand appears weak in most industries appears weak in most industries and locations is suggestion of a general shortfall of aggregate demand, rather than a worsening mismatch of skills and jobs." WSJ March 27, 2012.
This problem will not be fixed by tax cuts and austerity.