Reasonable people of goodwill can disagree on how to pronounce Keynes. For the record, it's another six letter word rhyming with cleanness and meanness.
A trade deficit isn't a problem if there isn't a current account deficit. The obvious solution is to somehow trick China into buying $1.2 trillion magic beans.
Are you kidding? Keynes was totally obsessed with trade deficits.
Magic beans -- you know they're the beanest.
I'm going to do my response Memento-style.
I'm not sure it really warrants tattoos.
Keynes was obsessed with concrete cows. At least, I hope he was because that's what he's got.
I do not think that it's at all clear what policies should be adopted, and I do not think that there is broad agreement about the problems.
Some fraction of underwater mortgage household debt should be pushed back. Which fraction, how, and to whom is not clear to me.
Banks and shadow banks (ie, publicly traded bond-issuing entities) should be forbidden from taking on too much leverage. How?
Even the obvious baby step of separating proprietary trading from FDIC-backed retail banking is contentious (the Volcker rule seems to mean that banks engaged in trading need to submit detailed reports which regulators will interpret. No bright line for compliance or noncopmpliance. The current regulators seem less sharp than Markopolos who isn't a fool but neither is he organizationally or analytically exceptional.
The supreme court's relaxation of lobbying rules means that moneyed interests will have an even easier time getting their versions of draft regulations into play. How to change that?
Trade deficits are a canard, a consequence of a strong dollar. My trade deficit with the corner bodega is very high, but I remain unconcerned.
Oh wait, lure the trade deficit into an abandoned building, having told congress that it's the problem, and let nature take its course.
OK, next.
Trade deficits -- or in the more fashionable parlance, "global imbalances" -- are very important. They are connected to everything, very much including the financial crisis. BE OBSESSED.
Trade deficits are a canard, a consequence of a strong dollar.
Alternatively put: a strong dollar means unemployment in manufacturing areas. Which irks many people, even when the manufacturing went away before Flashdance ended its theatrical run.
Who among us is not down with O.E.E. (Other Eras' Economists)?
I am waiting to see what Europe does this week.
NDGP Targetting pretty soon, since the vampire squid commanded it. I don't know how big a difference a 3-4% target is going to make, and Bernanke has been very firm about 2%
I also wonder about medium to longer term expectations, if the Fed swears it will pull back at 7.0% UI.
But I think they are under great pressure to not get blamed for Obama's election loss.
You sound like me before I give up and use the printer down the hall.
After reading everything, I pick door number four. Because I really trust Jamie Galbraith and because he is closest to Minsky, who knew his Keynes and bastard Keynesians and military Keynesians. Keynes also in a little-read post-WWII article supported Minsky.
Print and fucking build. I think Keynes wanted just enough private enterprise left so that entrepeneurs could have a little sport.
But what we think doesn't really matter.
Keynes, "THE LONG-TERM PROBLEM OF FULL EMPLOYMENT", May 1943, via Econospeak.
If two-thirds or three-quarters of total investment is carried out or can be influenced by public or semi-public bodies, a long-term programme of a stable character should be capable of reducing the potential range of fluctuation to much narrower limits than formerly, when a smaller volume of investment was under public control and when even this part tended to follow, rather than correct, fluctuations of investment in the strictly private sector of the economy. Moreover the proportion of investment represented by the balance of trade, which is not easily brought under short-term control, may be smaller than before. The main task should be to prevent large fluctuations by a stable long-term programme....JMK
10. As the third phase comes into sight; the problem stressed by Sir H. Henderson begins to be pressing. It becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours.
This is, as far as I am concerned, Keynes most clear work of macroeconomic policy and planning over the long term.
7: Some fraction of underwater mortgage household debt should be pushed back. Which fraction, how, and to whom is not clear to me.
Inflate it away.
We may not know how to reward people for investing in real assets, but we know how to punish them for holding cash. Which ought to have the same effect.
we know how to punish them for holding cash.
Also, how to punish them for working on soft money grants, so lets not push this too far.
Increasing the money supply means either allowing existing banks to borrow more, so creating asset price bubbles without doing much good for the tangible economy and incidentally enriching GS further, or federal reserve buying of new kinds of assets.
The FRB's balance sheet already looks fucked up. What sould they buy, Solyndra shares and a few Phoenix suburbs?
Wait, how about cutting everybody a $500 check? Telling congress that the trade deficit kicked a puppy and is in that warehouse is the best way out.
23.3:I really dislike all "pump-priming," for expectation reasons, and because it is the exact opposite of what Keynes had in mind.
1) Workers and suppliers knew they would be working on Hoover Dam and the GG Bridge for a long time. Give me a check, I know for certain everybody's check will soon be gone. There is no doubt I should save as much of it as possible.
2) Keynes wanted the marginal efficiency of capital, profits, rents, interest to become zero and stay there. Ch 24.
3) Open a Fed window to everybody. Promise to keep it open forever at lowest available rates. Limit borrowing to a figure, 50k? so speculators can't try to drive up the rate.
Increasing the money supply means either allowing existing banks to borrow more, so creating asset price bubbles without doing much good for the tangible economy and incidentally enriching GS further, or federal reserve buying of new kinds of assets.
Or they could just mail everybody checks.
21: Hmm, I think that makes you part of the creditor class...
24.1:
A) Even if it literally doesn't work at all, the real (as opposed to nominal) cost of the "mail everyone a check" strategy is trivial. It's inexcusable that we haven't at least tried it on a large scale.
B) We don't just have an aggregate demand problem; we have a balance sheet problem. People are cutting back to pay the mortgage, bills, etc. If all they do is pay down their debts, that's helping too. Because money is fungible.
C) Probably that's what you'd do with one check. But supposing the Gov't committed to sending another, and another, and another, until unemployment dropped below 5.5%. Would you eventually change your mind and start spending?
24.3: Sounds good, though I think "forever" is maybe a bit long. I would suggest, until Nominal GDP is above trend. Would be best to exclude 2007+ from the definition of "trend" to allow for some catch-up growth.
23.3 was sarcasm, the subsequent Memento sentence provided context.
Mailing checks has been done, without net effect. People save the money or send it to whoever holds their underwater mortgage.
Next inflation plan?
Emergency immediate federal spending on the worthwhile goal is Solyndra.
Resetting home prices and breaking the largest investment banks is a prerequisite for pushing money at the economy, but either of these seem as likely as the guy from Mememnto (did he look like Brad Pitt or was that just me?) developing a crush on Elizabeth Warren.
The free money I got a few years ago went into the next month's rent. I think the point is to get it to the many people who are not in a position to save. If some people do save, it's ok. If most of the free money is going to people who save, that's a failed stimulus policy, though it might be effective at other things, like keeping up inequality.
Earlier today I re-linked this on Facebook and some right-wing asshole I went to college with who majored in econ and works in investment banking left a comment saying it's cherry-picked bullshit. I kind of want to respond but worry that he can drown anything I write in jargon that I won't know how to substantively engage with.
Another guy I went to high school with who works for Deutsche Bank has been posting a steady stream of stuff on Facebook about how ignorant the protesters are of the real way finance works. I really want to punch him.
30: I think point 1 is bullshit but the rest of it is pretty much accurate. I don't know how you could reasonably debunk "Myth" 1 empirically right now, you're stuck using the same models and methods used to design the stimulus in the first place. Which amounts to "Experts say stimulus works." Better than nothing, but not exactly a debunking.
I really want to punch him.
Poking is a poor substitute.
28: We've been sending out checks, but not big enough ones. There are ~300M Americans, you could send $3,000 to every human being in the US for under a trillion dollars. If that doesn't work, do it again. And again.
The Fed should be doing this.
I promise to spend it on a bicycle.
Another guy I went to high school with who works for Deutsche Bank has been posting a steady stream of stuff on Facebook about how ignorant the protesters are of the real way finance works. I really want to punch him.
You could point him to Doug Henwood, who presumably is not totally ignorant of the way finance works.
33. If you say so. People who are solvent will save the money, people who are underwater will send the money to their bank and still be unable to move, large fraction of the effort is lost, maybe more than half. Extending unemployment benefits would be humane, but I think not effective at fixing the housing market or shrinking the unreasonable profit and influence of the largest banks.
You could tag your friends in George Grosz's paintings until they defriend you.
I don't agree with the last sentence. The current problems are well-understood by people on this very blog. And people with the same broad politics, say on this very blog, broadly agree about what policies should be adopted.
Ok, "can disagree" would have been more accurate than "will disagree".
3
Are you kidding? Keynes was totally obsessed with trade deficits.
Perhaps I haven't read enough of Keynes (or this aspect didn't register). Is this obsession found in the General Theory ?
30
I'm not impressed with the link either.
Regarding the stimulus, the administration lost the political argument when they let this graph out the door. As someone (Yglesias?) noted a key feature of the graph is that it shows the economy recovering even without any stimulus. Which shows the administration didn't understand that this wasn't a normal recession.
Regarding the Bush tax cuts since Obama and crew renewed them in full instead of letting them expire I think they now own them and they should henceforth be called the Obama tax cuts.
Regarding "free money", this is nuts, cheap is not the same thing as free and arguments to the contrary are generally characteristic of dishonest sales pitches.
I agree that high taxes are not the source of our current problems.
I am not sure what I think about trade policy and the value of the dollar but I don't see why we would want to get the national savings rate up when we already appear to already have more savings than can be usefully invested and this is causing lots of problems.
Getting people free money is like cutting taxes, not thinking big enough and only helps those people who don't need help. If you're broke, jobless and/or saddled with a mortgage bigger than your house is worth, getting a couple of hundred or thousand dollars in government money doesn't get you out of your hole.
The problem is simple: everybody is in hock to everybody else and nobody can pay off their debts. The longer this festers the worse the problem gets when everything collapses, as it's already threatening to do, so we need drastic measures, something biblical: let's have a jubilee. All debts null and void, everybody starts with a clean slate, then send some government checks.
Keynes was very much concerned by international trade in general. The Economic Consequences of the Peace is remembered as being about reparations, but in fact a lot of the book is about the economic (rather than financial) consequences of the Versailles treaty. He thought it was only part of the problem that the Germans were going to be forced to pay a ton of money to the Allied Powers - the other half of the problem was that the Germans wouldn't be able to export enough stuff to the rest of Europe to earn the foreign currency needed to pay it. Obviously, German export industries needed inputs to produce output, and quite a lot of those were imports. No German exports, no German imports, no Allied exports to Germany.
He went into great detail about the specific industrial complexes that would be affected by the swing to mercantilism - the Luxembourg/Saarland/Lorraine steel basin, with German steelworks processing French ore and coal. Except they wouldn't be because the French wouldn't let them import enough of either, and neither did they want to buy German steel. So the French mines would close and both the French and German downstream industries making things out of steel would pay over the odds for their steel.
Keynes was all about the specific, which among current economists is also true of Paul Krugman but not many others.
The problem is simple: everybody is in hock to everybody else and nobody can pay off their debts.
Nah. Or at least only as simple as you want it to be.
There are at least two important things here.
1) Wages were not high enough to maintain a reasonable lifestyle for the middle-class; or the standard of "reasonable" has gotten out of hand
2) Credit has gotten way too easy, or risk is too low, or perceived too low. By this I don't mean lower-middle class buying houses, but the scumbags getting free money from the Fed and buying 50 billion in Greek Bonds betting on a bailout
3) Treasury Bond Rates, short, five, ten, mortgage are too low. Krug etc go wheeeee free money, I go WTF?
I see little point, ok, I do see some point and won't resist, in a Jubilee that is followed by more bubbles, insane carry-trade plays, and commodity and sovereign debt speculation. And since I don't think we have a handle on global finance yet, either theory or control, Jubilee would be nice but not an answer.
QE2 was $600 billion. Instead of using that money to help out bond speculators, maybe they could have used it to send out $2000 checks to everybody.
Why do you specifically want higher interest rates (i.e. higher rents on capital)? I get the rest of the comment but not that bit.
44:I am so tired of these quick-fix jump-start ideas, they reveal an underlying faith in markets and a return to an default optimal equilibrium that is absolutely not justified by the facts or an understanding of Keynes. 30 years of neo-classicism and their friends the new keynesians has just created way too much confidence
45:Is this to me?
Oh, most of of that is analytical, descriptive rather than prescriptive. It isn't that I want high interest rates, it is that in current conditions as I see them why are they so low? What does it mean? Really mean?
I am really a GT ch 24 guy when I am not a Marxist. Low interest rates would be terrific in a world where nobody was getting 20% quarterly profits. But the rentiers have not yet been euthanized, nor the cowboys corralled.
33
We've been sending out checks, but not big enough ones. There are ~300M Americans, you could send $3,000 to every human being in the US for under a trillion dollars. If that doesn't work, do it again. And again.
The Fed should be doing this.
This is the sort of thing it is easier to advocate if you aren't actually chairman of the Federal Reserve (or in some other position of real power). Such people are properly cautious about untried extreme solutions.
46
I am so tired of these quick-fix jump-start ideas, they reveal an underlying faith in markets and a return to an default optimal equilibrium that is absolutely not justified by the facts or an understanding of Keynes. 30 years of neo-classicism and their friends the new keynesians has just created way too much confidence
Hey a mcmanus comment that makes sense. This was the main problem with the graph (and underlying policy) I linked in 40.
47: Perfectly possible to adopt that strategy gradually. On day 1 of the recession, send out checks for $1. On day 2, send out checks for $2...
Could quickly turn off the tap if it looked like inflation was getting out of hand (somewhere in excess of 7%).
Maybe you're right and I'd feel differently if I actually had the power. But we should be asking for it anyway; Fed policy as it stands today should not define the leftmost extreme of the discourse. At the very least the Fed could have declared that it would tolerate a few points of extra inflation for a few years if that's what it took to get out of the recession.
This was the main problem with the graph (and underlying policy) I linked in 40.
Nope. The problem with the graph was that Obama's projections didn't reflect reality - as the neo-Keynesians said at the time.
And not only were Obama's projections known to be wrong, but the depth of the recession was also underestimated by the then-current measurements. The result has more-or-less perfectly vindicated the neo-Keynesians.
But I think the bigger point is that our current problems are complicated and poorly understood meaning even people with broadly the same politics will disagree about what to do.
Benquo for Treasure Secretary and PGD for chairman of the Federal Reserve, or vice versa. I think we can get a broad Unfogged consensus behind that, amirite?
The free market types tamed Keynes by presenting monetary policy has been seen as a technocratic and apolitical mechanism to "manage" the free market as opposed to a deeply political set of choices at the heart of capitalism. This is under attack from both the right and the left now. Worse, it seems transparently false because the political choices central to monetary policy (running any stimulus through financial market dealers and banks at the top of the economy, baked in trickle down) are making it totally ineffective. We'll see whether this actuallly affects policy.
Fannie and Freddie were the version of monetary policy which were political -- using the credit power of the Federal government to channel money to the housing sector, a kind of industrial policy. But they have belly flopped even worse, in part because of the nasty "public/private" hybrid structure that led them to profit-chase the private subprime securitizers off the cliff.
Of course, Bob has been hammering on this theme consistently and well as regards monetary policy.
Whoops, even more typos than normal -- take off "has been seen" in first line.
Mailing checks is a poor route to the deeper structural changes we need. Here is the official PGD economic agenda:
--adjudicate and fairly distribute the losses from the financial crisis and housing bubble, which are still acting as a hobble on the economy. Do it all at once through a grand bargain rather than a slow ad hoc deleveraging process that will lead to a lost decade.
--fix the system to tame finance and limit profit potential from gaming the markets. This would redistribute talent and resources back out to the real economy. A tiny financial transaction tax of five basis points (a nickel per $100) would kill HFT overnight and raise about $25-35 billion a year to boot. Restrict prop trading at TBTF banks and put in tough limits on speculation in commodity markets. You may want to go further and restructure the banking system around limited purpose banks, as we did after the Depression. Lawrence Kotlikoff has advanced a radical but IMO quite workable proposal for this that incorporates the move away from depository banks to money market funds.
--invest in infrastructure, ranging from old economy transport infrastructure to our wireless network and energy grid. Also invest in manufacturing and software innovation at the basic research level.
--Green energy investment too but I think the left relies too much on this alone. A small carbon tax, if you could get it, would let the government rely more on market forces plus basic research in this area and less on ad hoc subsidies of individual companies.
--The taxes above plus a new marginal tax rate of, say, 60 percent on incomes of $1 million+, plus a cut in the Pentagon budget of at least 25-30 percent would fund all this comfortably, until rising health care costs kick in, which leads to additional utopian agenda suggestion...
--long term transition to single payer with a provider health budget that allows us to control health care costs in the way every single other industrialized country has succeeded in doing.
--Finally, to address global imbalances pressure China to raise domestic wages, invest in institutions that support widespread domestic consumption that can suppport imports, and stop gaming their currency. Once we disinvested in Empire we could stop trading off the domestic economy for foreign policy cooperation, which we have been doing for decades.
I think this is actually a quite straightforward and not particularly radical agenda. But in our current political environment it is unattainable. We need to rebuild the union movement to provide the institutional support for any kind of political agenda that really benefits the middle class.
The alternative is a slide to a new position as the cheap labor/low regulation investment destination of choice among the advanced countries with clear rule of law.
restrict prop trading
The Volcker Rule, written by someone brilliant, amounts to requiring that banks dump information to the SEC who will then decide whether or not activity is compliant. There are no bright lines, so relies on political will and sustained organizational competence at the SEC, which is funded and staffed at the behest of congress. How well is that going to work?
Basically, I am saying that the ability of government to have any effect on large financial entities looks pretty limited, empirically. Throwing out ideals in this environment seems pretty pointless, a model UN activity. Pinning responsibility for current failings to particular congresspeople seems more productive.
Throwing out ideals in this environment seems pretty pointless, a model UN activity.
Possibly pointless, but certainly on-topic. From the original post:
But I think the bigger point is that our current problems are complicated and poorly understood meaning even people with broadly the same politics will disagree about what to do.
The current problems are well understood, and there's a broad consensus here about how a well-functioning government would respond.
Mailing checks is a poor route to the deeper structural changes we need.
I'm all for deeper structural change - and I support basically all the ideas you listed. But they are unattainable in the short run, people are hurting now, and the Fed could start printing checks tomorrow.
the Fed could start printing checks tomorrow.
Is that actually true? PGD raises his deep, structural objection (which I'm not entirely on board with), but aren't there also legal constraints? I wonder how creative the Fed would have to get with the law to do something like this.
"Tomorrow" being a metaphor. Presumably they would have to approve it at one of their meetings, which are every six weeks or so.
I don't know what the law is, specifically, but my understanding is that there are loopholes. For example, they might have to launder the money through the treasury, rather than sending the checks out directly. Basically, they would give the treasury a pile of money in exchange for the treasury selling them some magic beans. Then Tim Geitner would cut us some checks.
At any rate, even just announcing that the program is coming would have an immediate short term boost.
I don't think the Fed could legally just send out checks to people, at least not without some very baroque legal/financial manipulations. What they could do is monetize the Federal debt. In other words, Congress could pass a law to mail out checks to people, then just borrow the money from the Fed to do it. (The Fed would buy all the bonds). There may be some legal issues in there too but I don't think they are major. Congress, Treasury, and the Fed would all have to be players in doing that.
For a couple of reasons, I think mailing out checks is somewhat inferior to a program that just writes down the underwater mortgages based on some kind of shared appreciation arrangement. Of course then everyone would bitch because their neighbor got a break and they didn't (technical term: 'moral hazard').
I like your agenda, PGD.
Have you worked in debt relief for college loans?
I've had some tangential involvement but it's not central to what I do. I have been closely observing the related debate on the "gainful employment regulation" for proprietary schools, which is on my short list of 'sick political shit you cannot fucking believe is happening even while you watch it going on'.
62 would be great for the University of Phoenix.
I don't know what that debate is. Is that the part about how places like the University of Phoenix are eating kids alive and turn out to be worthless?
Yes. The rule would have required that to qualify for Federal loans (the kind that can't be discharged in bankruptcy), a school would have had to meet at least ONE of the following standards:
a program would be considered to lead to gainful employment if it meets at least one of the following three metrics:at least 35 percent of former students are repaying their loans (defined as reducing the loan balance by at least $1);
the estimated annual loan payment of a typical graduate does not exceed 30 percent of his or her discretionary income;
or the estimated annual loan payment of a typical graduate does not exceed 12 percent of his or her total earnings.
In other words, if even one third of your students can pay back their loans (down from I think 50 percent originally) you are golden. The proprietary schools exploded and succeeded in completely gutting the rule, and then delaying it past the next Presidential election on top of that. There was much rich irony in seeing both Democrats and Republicans line up to denounce Federal over-regulation of private businesses by demanding minimal (any) standards for use of Federal money.
For a couple of reasons, I think mailing out checks is somewhat inferior to a program that just writes down the underwater mortgages based on some kind of shared appreciation arrangement.
It's inferior in as much as there is a much bigger constituency of people who like to receive checks than of people who have an underwater mortgage. There would be a lot of grumbling about undeserved mortgage write downs, but mailing out checks would be stupid popular.
That said, I think we should do both.
I wish my mortgage was underwater. Then I could walk away from it. Instead I'm stuck with a house that won't sell, forking over mortgage payments every month in the vain hopes that I will get some scrap of my equity back some day.
67: If the house won't sell, maybe you're overestimating its value?
Cheer up! Maybe you really are underwater!
68: God, I hope not. We've already slashed the price so that we are taking a huge loss.
Turns out that paying your mortgage off early is for suckers.
Bank of America Deathwatch ...Yves Smith
Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation...Bank of America's holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
That compares with JPMorgan's deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm's $79 trillion of notional derivatives, the OCC data show.
Ok, so what the fuck, FDIC and the American taxpayer are now on the hook for $75 trillion?
Probably not, but I just go 75T 75T 75T and my brain gets stuck.
The Yves Smith above is a must read.
Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It's well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.But it's even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.
The FDIC is understandably ripshit. Again from Bloomberg:
The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren't authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn't believe regulatory approval is needed, said people with knowledge of its position.
Geithner, Bernbanke, and Obama:unspeakably corrupt and evil
Why would that mean FDIC had to pay out on any derivatives? It doesn't insure them, doesn't have any responsibility for them, doesn't have any obligation to them. It would have to pay out the depositors, but that's not the $75t number you're talking about. (Which to be clear is this supposed derivatives holding, presumably gross rather than net)
72:"Why" is like bolded in 71;did you miss it?
American law says derivatives contracts get first call on assets in bankruptcy before depositors;as I recall this created quite a mess during the General Motors restructuring, and as far as I know is not yet settled with the Lehman bankruptcy
Or you could follow the links, and read the comments.
David Dayen has picked it up at Firedoglake; there are other blogs studying it; it was asked about yesterday at a press conference; and there is the original Bloomberg story
Geithner is in Europe, I think and this could be a "sweetener" for the Greek restructuring deal. It could be a "poison pill" to guarantee a congressional bailout as BofA goes down, or a bailout to keep BofA alive;or a way to cook the books to get a last set of bonuses before BofA goes down.
Here is the FDL Dayen, article mostly cut-and-paste from the Bloomberg. But some comments are helpful. There is a commenter who says no biggie don't get knickers twisted, you'll like him, since your only point or purpose is to humiliate me rather than learn anything.
There are informed commenters at Yves Smith place. Story is only about 12 hours old, I expect more today.
As far as what exactly is going on, it is unclear.
One commenter notes that the FDIC by law can get unlimited funds from Treasury to resolve bank failures and does not have to go to Congress, well, limited only by the debt ceiling authorization.
Geithner and Bernanke I think see themselves as saviors of Western Civilization from we ignorant peasants who refuse to put on dog collars to rescue G & B's golfing buddies the World Financial System...which is still fucking insolvent and still gambling insanely in an attempt to extend and pretend or recapitalize themselves or jyst fucking loot it all before it collapses.
Notional? No $75T? I don't want to bother with this bullshit.
Basically a swap is one of the rare exceptions to the rule that the FDIC and/or bankruptcy courts can tear up executory contracts. So if the swap is collateralised, and most are these days, especially as counterparties decline in credit quality, they get to take the collateral and it is unavailable for the FDIC to use to pay depositors. Even if it isn't collateralised, the swap termination amount would be a senior unsecured claim, same as the depositors' claims (which are ultimately guaranteed by the FDIC, which has to make up any shortfall).
And, to clarify, no the US taxpayer is not (legally) on the hook for $75tn. Even if that gross notional amount (which to a large degree will net out) somehow ended up as a crystallised liability of the bank, the FDIC's exposure as deposit insurer would be limited to the insured deposit total.
The bolded bit doesn't assert that there is a claim on FDIC for derivatives. It just doesn't say that. It says that the derivative holders (like various other people) have a prior claim on the bank's assets in bankruptcy.
It might increase how much the FDIC would have to pay out to settle the deposits, or rather, reduce how much it could recover from that later in the bankruptcy court. Looking up, that's actually what Yves says - that's the "direct transfer" referred to - as does the Bloomberg story. Neither of them claim that FDIC would have to pay out any more than the volume of deposits it insures.
Okay, it took a while, but I think I get what you are saying.
FDIC insurance has nothing to do with the banks asset's, so the swaps getting first call on assets will not affect what FDIC has with which to cover the depositors.
I am still not sure you are right, because it doesn't explain why 1) FDIC is "ripshit" as Smith (my preference, incidentally) says, or b) why the counterparties demanded the move, and what about it is reassuring to counterparties.
And I never thought that the 75T was a taxpayer liability, I just don't like the bullshit implied in that number. It's actually 53T, mostly in Europe. What, zero out or cleared to some multiple billions? 50B?
Does the clearing require consent of counterparties?
And remember the scenario in which this will become interesting or important. If BofA starts going down, we will hear about these swaps, or Congress or somebody will, and will be told that if these counterparties are not made whole, the European Financial System will go down. Or, conversely, if the European Banks are forced to take big haircuts on Greek Debt, they will go down and take BofA with them.
Okay, it could be as a Greek deal is being done, that this move of swaps to "collateralized" helps some Euro banks out with their reserves or capitalization to make them look better on paper.
I hope Salmon or Simon Johnson writes on this today.
And I fucking do not trust Geithner or Bernanke.
This from Smith's thread:
SteveA says:
October 18, 2011 at 11:31 pm
The question is whether these derivatives are "qualifying financial contracts" under the law -- if so, yes, this is rape, because FDIC is obligated to honor qfc's in the event of a bank's insolvency.
SteveA says:
October 19, 2011 at 5:30 am
To clarify about qfc's: this means that counterparties on qualifying contracts will be made whole (ultimately at taxpayer expense), without the Fed or Treasury intervening directly, as they did with Bear and AIG. So they're preparing for another back-door bailout for Wall St, without that messy issue of getting Congress to vote the funds.
Btw, I take this transfer of liabilities from Merrill to the depository as a sign that BoA is, in fact, quite likely to fail.
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I'll read lots of sources, but I am still not happy.
I think FDIC's problem is that, if the counterparties pull their collateral out, there'll be less cash left in the retail bank and therefore it'll be harder to recover FDIC's costs from the bankruptcy. Also, if there's less cash in there at the point FDIC is called in, more of the cash needed to cover withdrawals has to come out of the insurance fund.
The bank apparently likes the idea (according to Bloomberg) because the retail operation has good credit and therefore doesn't need to post so much collateral with other banks. The counterparties, presumably, like it because they don't trust BoA not to play silly-buggers with the collateral.
It seems plenty dodgy to me, tbh, as it seems to risk the wholesale side of the bank pulling down the retail side.
It's not that they'll be made whole, it's that the contracts can't be repudiated, unlike say a supply contract. Like I say, if there's collateral, the counterparties will get that. If not, they'll get an unsecured claim on the bank's assets.
FDIC insurance has nothing to do with the banks asset's, so the swaps getting first call on assets will not affect what FDIC has with which to cover the depositors.
Yes it does. The first port of call for the FDIC when it is paying out depositors of a failed bank is the bank's own unencumbered assets. This is why the FDIC hates covered bonds, because the assets used to collateralise the covered bonds can't be used to pay depositors in the event of insolvency.
The point about "qualifying financial contracts" is that payments made under a QFC pre-bankruptcy cannot be clawed back post-bankruptcy to pay other creditors. If Ginger and I have a derivative deal that counts as a QFC and I make a margin payment to Ginger today, and go bankrupt next week, Ginger doesn't have to worry that my bankruptcy trustees will try to get that margin back off her. Similarly, collateral, as Ginger says above.
SteveA is simply wrong when he says that QFCs mean that, if one counterparty to a QFC fails, the government has to make the other counterparty whole. The government DOES NOT INSURE EVERY QFC, that's a ludicrous idea. Even if the failed counterparty has a lot of FDIC deposits as well, that still doesn't mean that FDIC will make all its QFC counterparties whole. FDIC does not insure institutions; it insures deposits. Hence the name.
This is getting rather deep in the weeds, but for the sake of completeness I should point out there have been some interesting legal rulings recently, mostly surrounding the Lehman bankruptcy, which have called into question the scope of the so-called bankruptcy safe harbour for derivatives (ie the QFC exemption). The details are not particularly relevant to this particular discussion, but it does potentially mean that there's more scope for clawback and/or collateral retention than was thought to be the case a few years ago. It's very case (and judge) specific, though.
The Wikipedia FDIC page is clear about what counts as a deposit. Anything conditional seems to be excluded.