Monday, April 25, 2011

Is It 1994 Again?

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market"(, 2009)

There are several similarities between current trends and those in 1994, a year when many institutions were left destitute. Historical analogies can help us imagine what might happen, but identification of differences should be noted too.

The greatest dissimilarity is probably the structure of markets. There was some official (government-sponsored) interference in 1994, the most obvious being the Federal Reserve's authorized pegging of interest rates. There was, however, no comparison to the government's merrymaking in 2011.

Official policy to boost the stock market is well known. See, for instance
The Fed Underwrites Asset Explosion. Rumblings that the Federal Reserve is writing put options on U.S. Treasury securities circulate, the particulars of which can be read on various websites and in the Financial Times (see: "More on the Literal Bernanke Put," April 18, 2011.) The result of such interference is, or, would be, (depending on your inclination), to relieve fears of bondholders. The risk of falling prices is transferred to the party that has written the put. The Fed is (would be) absorbing losses if Treasury bond yields continue to rise and prices fall. (The latter is often forgotten but is important since balance sheets suffer losses and collateral falls: leading to calls for additional collateral.)

All government interference in security markets fails. The Fed's monopolized control and underpricing of short-term interest rates failed when the Internet and mortgage bubbles burst. Today, whether or not the Fed is writing put options to attract buyers of Treasuries is not as important as the knowledge that there are few interested buyers of an unhedged, 2-year Treasury note (0.70% yield) or a 10-year Treasury bond (3.5%). The Fed-sponsored put option is the logical next step to dampen the yield curve.

The analogy to 1994 is to an earlier time when the government could no longer control interest rates. Yields were too low and bond prices too high. Once rates did rise, there were several consequences. Many were related to untested and overmarketed derivative products. Institutions failed, some of high reputation, because they did not understand the derivatives that were making their clients rich (and suddenly poor). As we've seen time and again, "stress tests" of derivatives (and of banks) are paper exercises that cannot account for unforeseen divergences or convergences of markets that have been mangled. Many institutional and retail investors were caught in the grinder. An autopsy of 1994 may help today's investors avoid similar mistakes.

Then and now, the Fed had reduced interest rates to a microscopic level (from 9-3/4% to 3%), which had chased investors out of money markets and into the stock market. Net cash flows into stock mutual funds rose from $13 billion in 1990 to $79 billion in 1992 and to $127 billion in 1993. In 1992 and 1993, money market funds suffered net outflows.

Then and now, the banking system needed a bailout. Then and now, the Federal Reserve assisted financial gimmickry to boost a floundering economy. Commercial real estate was the greatest offender in the early 1990s. Citicorp and others had stopped lending. Banks borrowed Treasury bills at 3% and bought Treasury bonds that paid 6% yields.

This was the carry trade. Federal Reserve Chairman Alan Greenspan launched the carry trade in the early 1990s, for which he claimed a patent at the September 2004 FOMC meeting (See "
The 2004 Fed Transcripts: A Methodical, Diabolical Destruction of America's "Wealth." Several iterations later (of raising and cutting rates), have shown not only that superficial finance suffocates the real economy, not only that deeper and deeper cuts are less stimulative, but also that each new fix in finance must be more intrusive and crippling to markets.

In 1994, unhealthy securities were fashionable. More importantly, novice securities produced wholly unanticipated results when markets collided. Seemingly sophisticated investors learned they had not appreciated the risks they were bearing. Unanticipated correlations were imbedded in highly marketable derivative products. Today, derivatives are far more complex and the magnitude is incomprehensible. J.P. Morgan, a single bank, holds $78 trillion of derivative contracts. About 84% of all U.S. commercial banking derivative contracts ($231 trillion in total - all told, over a quadrillion dollars of contracts exist in the world) are interest-rate related at a point when interest rates can only go in one direction. A failed Treasury auction could boost interest rates by 4% in seconds. The banks say "We're hedged." Well, maybe this will turn out swell, but it is hard to grasp how the twists and turns of a commercial-bank, derivative book almost 15 times the size of the United States' GDP (around $15 trillion) can be anticipated when markets devour unmodeled deviations.

Then and now, derivative protection against rising rates is selling. From The Credit Bubble Bulletin, April 8, 2011: "The biggest year since 2003 for the packaging of U.S. government-backed mortgage bonds into new securities has extended into 2011, bolstered by banks seeking investments protecting against rising interest rates. Issuance of so-called agency collateralized mortgage obligations, or CMOs, reached $99 billion last quarter, following $451 billion in 2010..."

Then and now, the Federal Reserve - specifically, the FOMC - was too slow to raise rates. Discussions at current FOMC meetings will not be released to the public until 2016, but debate in late 1993 may have generated a similar edge. Larry Lindsey was the Federal Reserve governor who upset the applecart, or at least, the chairman, Alan Greenspan.

In September 1993, FOMC members David Mullins and Lawrence Lindsey expressed concern of a 'speculative bubble' in the stock and bond markets. Mutual fund flows from the U.S. had recently driven stock markets to all-time highs in Hong Kong, Bombay, and Botswana.

In November, Boston Chicken's shares appreciated 243% on the first day of trading. The stock sold at over 100 times sales - not earnings. This was the beginning of the public's consciousness of an acronym - IPO - that previously had been a Wall Street insiders' term. Federal Reserve Governor Lindsey stated at the December 1993 meeting: "[W]e all agree that the 3 percent [funds] rate is unsustainable. We all know it is too late." That is, the FOMC should have raised rates earlier to forestall a certain degree of speculation.

Lindsey noted a rush into $1 million home mortgages since, at current interest rates and forthcoming tax rates (which were going up for the well-to-do); this was "like borrowing money free for 30 years." Lindsey expected "asset rediversification, a flow of funds into real estate and... out of dividend-paying stocks into OTC stocks." "OTC stocks" would soon be rechristened "the Nasdaq" which rose from 760 to over 5,000 in about six years.

After Lindsay warned about "asset rediversification" in 1993, he raised the Boston Chicken IPO as a sign of speculation, then suggested the Fed cook up its own fast-food IPO, asking: "What do you think, Al?" Nobody at the FOMC ever call Greenspan "Al" and very rarely "Alan." First names were generally not used when FOMC members addressed each other. Transcripts are only words, but if a playwright's annotations were called for, "scowl" is the impression when Larry spoke to Al.

On January 31, 1994, Greenspan warned that "[m]onetary policy must not overstay accommodation." The Fed chairman went on to say the FOMC would decide "when is the appropriate time to move to a somewhat less accommodative level of short-term interest rates... Short-term interest rates are abnormally low in real terms..." By early 1994, banks were liquid and lending. This, too, should have warned the carry-trade was coming to an end. This is in contrast to 2011, when large banks' are not lending and owe their parasitic solvency to the Financial Accounting Standards Board.

The Fed raised the funds rate to 3.25% on February 4. This one-quarter of one percentage point increase caused more financial destruction than any event since the 1987 crash. Margin calls drove prices lower and yields higher. This prompted more margin calls and more selling. Long-term Treasury yields rose from 6.3% in January to 8.0% in December 1994.

February was just the beginning. The Fed continued to raise the funds rate to a peak of 6.00% in 1995. Greenspan probably did not anticipate the carnage. Nor, may he have anticipated how derivatives destabilized the financial system. The leverage in these contracts had contributed mightily to the recovery of the U.S. economy. The deleveraging could not have been a complete surprise.

A comparison between Greenspan in 1994 to Ben Bernanke in 2011 is probably an empty exercise. It is unlikely that Simple Ben will ever raise rates. He is, after all, simple. Either the market or a successor will do so. That is my opinion though, so Greenspan's reaction to rising rates in 1994 is presented as a case study that might shed some light on what the 2011 FOMC could think and do.

It does not appear the flowering of imaginative finance was appreciated even after the Fed raised rates on February 4. Frank Partnoy's book, Infectious Greed: How Deceit and Risk Corrupted the Financial Markets is an invaluable guide to the unraveling. Quoting Partnoy: "The New York Times took note of the panic among financial specialists on February 5...saying the Fed's action sent an arctic blast through Wall Street."

On February 28, Chairman Greenspan told the FOMC: "I think we broke the back of an emerging speculation in equities. We pricked that bubble [in the bond market] as well....We have also created a degree of uncertainty; if we were looking at the emergence of speculative forces, which clearly were evident in very early stages, then I think we had a desirable effect." The Fed would raise the funds rate to 3.50% on March 22 and to 3.75% on April 18, 1994.

Askin Capital lost all of its money by April 7 - two months after the first rate hike. David Askin "was one of the largest and most sophisticated investors in mortgage securities. Askin was a respected trader...and was among the most active traders of complex mortgage securities. Often, Askin was the market." (Partnoy)

David Askin had marketed his fund as containing the "highest quality" securities. These would be hedged "so as to maintain a relatively constant portfolio value, even through large interest rate swings." He may have believed this, yet two 0.25% increases in a short-term rate sank the $600 million fund. The fund advertised its "proprietary analytic models" which discovered mispricings among complex mortgage derivatives, such as Collateralized-Mortgage Obligations (CMOs). Askin and his models misunderstood the complexities and compounded the error with a high dose of leverage. He also made the common mistake of ignoring the markets (after the February 4 rate hike) and believing his models - which told him they were right and the markets were wrong.

In hindsight it is easy to find fault with investors who lose money in a slingshot fund. Yet, it is also easy to understand why investors would trust Askin, given his experience, his reputation, and his domination of the market in which he invested. This is a warning to investors, in 2011: that it is worth the effort to understand the types of securities being managed in an account. Bond ratings are often camouflage for devious accounting tricks. ETFs are being launched so fast today, they cannot possibly be thoroughly vetted beforehand. More flash crashes should be expected. Standard asset allocation (as seen in the glossies and newspapers) is not the way to think about one's assets when imbalances are bound to topple. Collateral behind derivative arrangements (such as ETFs) is obscure.

At the April 18 FOMC meeting, Greenspan ventured: "[T]he sharp declines in stock and bond prices since our last meeting, I think, have defused a significant part of the bubble which had previously built up. We let a lot of air out of the tire, so to speak..." Possibly, but cascading losses had a long way to go. This was the date of the third rate hike, to 3.75%.

Askin's failure prompted an earthquake through the CMO market. Piper, Jaffrey, an old-line Minneapolis investment firm advertised the Piper Jaffrey Government Income Portfolio Fund as safe and secure. CMOs include mortgages that are backed by the U.S. government, so the fund remained within its mandates when the derivative securities rose to 93% of his holdings. As government-backed securities, they carried AAA-ratings. (There was no memory of unwarranted, AAA, U.S. government-sanctioned ratings in 2007. Why none of the regulators, rating-agency analysts, portfolio managers, CEOs were not arraigned...) The fund yielded over 13% - double the average of other government short-term bond funds. Something is mispriced here, but not the CMOs: more sophisticated traders called the securities "nuclear waste."

With the fig leaf of a AAA-rating, Piper, Jaffrey bought "inverse IO" CMOs, the payments from which correspond to the inverse of interest-rate payments of homeowners. Piper relied on Askin's models to price its own securities. When Askin's apparatus failed; Piper, Jaffrey could no longer value the portfolio. The fund manager resorted to calling brokers around the country and then released a weekly price. (Piper, Jaffrey was legally required to publish a daily Net Asset Value.) This garbage-in, garbage out methodology calculated the 1994 principal loss at 28%.

The lesson for investors in 2011 is to look beyond a brand name. Piper, Jaffrey had a good reputation. The Piper Jaffrey Government Income Portfolio had some flaws. It was managed by a celebrity: Worth Bruntjen. The "Wizard of Mortgages" appeared on the December 6, 1993 front cover of Business Week. He dressed as General Patton at sales meetings. Unbeknownst to the human resources department, he had not graduated from college. The most prominent red flags were the Piper, Jaffrey ads: "THIRTEEN PERCENT RETURNS! Legislation was passed permitting municipalities to buy shares in the fund. About 60 did so.

On May 17, 1994, the Fed raised the funds rate by 0.50% to 4.25%. On May 24, Greenspan told the FOMC members that "ever since the 1987 peaks after the stock market crash" uncertainty was diminishing and there was an element of euphoria that gripped the markets...we have taken a very significant amount of air out of the bubble...I think there's still a lot of bubble around.... [W]e have the capability, I would say at this stage, to move more strongly than we usually do without the risk of cracking the system." It is interesting that he estimated the damage done by raising rates had not and would not "crack the system," probably meaning the credit system along with the stock and bond markets. This is in contrast to 1999 when Greenspan claimed the Fed could not identify a bubble and even if it could the Fed would do nothing other than sweep up the debris. Looking at 1994 now, Greenspan had (in his words) identified a bubble, was letting air out of it [sic], and The System was in fine shape. Yet, it was cracking. The deified investment bank at 85 Broad Street was bailed out.

The largest publicly acknowledged casualty of all was Orange County, California, which lost $1.7 billion in derivative trades and was forced into bankruptcy. It had fallen prey to the pathetic County Treasurer, Robert Citron. (When asked how he knew interest rates would not rise: "I am one of the largest investors in America. I know these things"). To make a long story short, he bought AAA-rated issues of the Federal Home Loan Bank. The credit was sound but the bonds had been diced into inverse-floating rate structured notes. These were well beyond Citron's comprehension. As such, his decision to leverage $7.4 billion worth of inverse-floaters with $13 billion lent by Merrill Lynch threw kerosene on the fire.

It might be asked why a respected Wall Street firm did not observe more prudence when the borrower was so obviously untutored. Merrill was making too much money to care. Between 1990 and 1993, Merrill Lynch earned more than $3.1 billion, topping the total profits of its previous 18 years as a public company. Over $100 million of the profits were wired from the Orange County treasurer. Corporations were easy prey for investment banks. Merrill Lynch sold Preferred Redeemable Increased Dividend Equity Securities (PRIDES), Goldman Sachs marketed Automatically Convertible Enhanced Securities (ACES), Lehman unleashed Yield Enhanced Equity Linked Securities (YEELDS) and Bear Stearns created Common Higher Income Participation Securities (CHIPS).

Other big losers include Air Products and Chemicals (which lost $113 million), Dell Computer ($35 million), Caterpillar Financial Services, Eastman Kodak, Gibson Greetings, Mead, Procter & Gamble, Cuyahoga County (Ohio), National Fisheries (South Korea), Postipankki Bank (Finland), Federal Paper Board, Wimpey Group, Silverado Banking Savings and Loan, City Colleges of Chicago ($96 million - almost its entire portfolio), the Eastern Shoshon Tribe, the Sarasota-Manatee Airport Authority, Lewis & Clark County (Montana), eighteen Ohio municipalities (the reader may note an implied, potential vaporization of municipal balance sheets - they are easy prey), and Sears. Firms in the money business also paid a heavy price. Investment managers NationsBank, Fidelity Investments, the Vanguard Group, First Boston, Cargill Investor Services, Metallgesellschaft, Yamaichi Securities, Shanghai International Securities, and Soros Fund Management suffered unexpected losses.

Bankers Trust was hired by Gibson Greetings to hedge its interest-rate risk. At first the derivatives were simple. The strategies evolved into bizarre interest-rate swaps. For instance, Gibson Greetings received a fixed-rate, 5.5% interest coupon from its counterparty (Bankers) which received a floating-rate coupon equal to the London Interbank Offered Rate (LIBOR) squared by itself and then divided by six. This was more fun than scriptwriting The Daily Show. A Bankers Trust managing director recalled: "Guys started making jokes on the trading floor about how they were hammering customers." Gibson Greetings paid over $13 million in fees to Bankers over a 3-year period. The chairman of Bankers, Charlie Sanford, awarded the salesman a substantial bonus and sent an enthusiastic memorandum to the company when he announced the elevation.

Bankers Trust honed its skills to a remarkable degree. Bankers earned $7.6 million from one interest-rate swap it sold to Procter & Gamble. The security was so complex that the company misunderstood its exposure to a change of interest rates by a factor of 17. What appeared to be an exposure of $200 million was actually a $3.4 billion bet that rates would remain low. More interesting than the trade (on which P&G lost $200 million) were the taped phone calls that cut to the heart of the derivative sales boom. Following is a conversation between Kevin Hudson, who sold the deal, and Alison Bernhard, a colleague:

BERNHARD: "Oh, my ever-loving God. Do they understand... what they did?"

HUDSON: "No. They understand what they did, but they don't understand the leverage."

BERNHARD: "They would never know...."

HUDSON: "Never. No way, No way. That's the beauty of working at Bankers Trust."

These gimmicks were gathering headlines by the fall of 1994. It may have been fate, then, that entwined Bernhard and Hudson on November 5, 1994. The New York Times devoted a story to the managing director and the vice president of Bankers Trust. We read, under a lovely photograph of the pair: "Alison Ann Bernhard, a daughter of Dr. and Mrs. Robert Bernhard Jr. of New Orleans, was married yesterday to Kevin Walter Hudson, a son of Dr. Barbara W. Hudson and Walter Hudson of Baltimore. The Reverend Jeffrey H. Walker performed the ceremony at Christ Episcopal Church in Greenwich, Connecticut." The happy pair were headed to London where they would ply their trade for Bankers Trust.

It was misguided economists who sold the world on their efficient market hypothesis. It was the EMH on which the premises of the derivative models are constructed. Simple Ben worships at the altar. The models still do not address such pricing abnormalities as greed, pride, criminality and the most basic of motivations that led Bernhard & Hudson to the altar of Christ Episcopal Church.

Tuesday, April 12, 2011

Economics 101: Long Material, Short Certified Idiots

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market"(, 2009)

Some relationships:

The last time the U.S. dollar exceeded 120 on the dollar index (ticker symbol DXY: a measurement of the dollar against other currencies) was in January 2002. The close on April 8, 2011, was 75.08, a 37 % decline.

Since January, 2002, gold has risen from $282 to $1,475 an ounce, also quoted at the April 8, 2011, close

Silver has risen from $4.30 to $40.93 an ounce.

A barrel of crude oil (WTI) has risen from $20 to $113. A barrel of WTI crude rose $20 (from $93) within the past two months.

Oil is ubiquitous. A rising price increases the costs and prices of wheat, corn, gold, silver, shipping, and Internet searches.

Christina Romer is the poster child for the Home-Schooling Movement.

On April 7, 2011, Aaron Task, host of Yahoo's "Daily Ticker" show, interviewed President Obama's former Counsel of Economics' Adviser Chair Christina Romer. Before quoting Romer, context follows.

Federal Reserve Chairman Ben S. Bernanke, the poster-child for the No-Schooling Movement, knows that his stock-market support operations are coming to an end, or a pause - time will tell. Propping up the stock market was an explicit objective of QE2. Quantitative Easing 2 (QE2), a process by which the New York Federal Reserve is buying $600 billion of U.S. Treasury securities, is due to end in June.

For instance, on Monday, April 11, the New York Fed is dispatching $6.5 to $8.5 billion of currency (U.S. dollars) into the banking system as payment for 5- to 7-year Treasury notes. Classified as Permanent Open Market Operations (POMOs), auctions of similar size are held almost every work day. Fed-heads claim the banking system will pump this $6.5 to $8.5 billion of high-octane currency (they call it money) into the job-creating economy. Nothing of the sort is happening, nor will it.

After three years of negative interest rates and a Fed balance sheet that is $1.8 trillion larger than in the fall of 2008, jobs; wages, working hours, and production industries still wane.

Chairman Bernanke wants the POMOs to continue, forever. A few Federal Reserve Bank presidents have recently stated their reservations, in public. They warn that it is time to stop POMO-ing, QE-ing, or otherwise bankrupting America. ("Bankrupting" was not their description.) These speeches may have been genuine or may have been orchestrated to observe sentiment in the stock market.

Christina Romer is Ben Bernanke's Siamese twin (below). She spoke for the Bernanke plank: quantitative easing has been a success - let's keep doing it! Quoting Romer on Yahoo!: "I think the evidence is that QE2 was very effective and certainly QE1 was very effective. I don't understand why we'd be dialing back that tool." The average American knows Romer should either be working in a soup kitchen or eating in one. (See bottom.)

Central to her argument is that a lower dollar helps Americans. Since she worked so hard to emphasize this view on the "Daily Ticker," we can be sure that: (1) Ben Bernanke is doing all that he can to lower the value of the dollar against other currencies, (2) jobs, wages, working hours, and production industries will continue to shrivel, and (3) tried-and-true asset relationships of the past decade will accelerate (see top, "Some relationships").

In this regard, it is good to bear in mind, that:

(Again.) The dollar index has fallen 37% since January 2002.

The Bureau of Labor Statistics (BLS) calculated the civilian population available to work was 216 million in January 2002. It was 239 million in December 2010, an increase of 23 million.

Within this group, the BLS calculated 132 million were working in January 2002. In December 2010: 138 million, an increase of 6 million.

Thus, the percentage of those with jobs among those who can work has dropped significantly. Those who do have jobs are worse off, in general, than they were in 2002.

The BLS calculated the weekly earnings of the average worker at $341 in January 2002. In December 2010, it was $342. This calculation is adjusted for inflation - but: the government's calculation of inflation - from a base set in 1982-1984. Given the corruption of government inflation numbers, the latter figure ($342) should be reduced by at least 20% (remember the influence of compounding over a nine-year period).

Now, onto the Romer-Bernanke relationship. This is not only a useful study regarding our current dollar policy, but is also an example of the inbreeding among celebrated economists. They will not change their minds because they cannot change their minds, for reasons of silted brain arteries, respectability, and civil wedding receptions.

We have, first, Christiana Romer, Class of 1957 Garff B. Wilson Professor of Economics at the University of California, Berkeley, former Chair of the President's Council of Economic Advisers, former economics professor at Princeton University, current co-director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER),former member of the NBER's Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received her Ph.D in economics from the Massachusetts Institute of Technology in 1985.

We have, second, Ben S. Bernanke, current chairman of the Federal Reserve Board, former Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs at Princeton University, former chair of the President's Council of Economics Advisers, former Director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER), former member of the NBER's Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received his Ph.D in economics from the Massachusetts Institute of Technology in 1979.

In Ben S. Bernanke's Essays of the Great Depression, the book which conferred upon him the title of "The Greatest Scholar of the Greatest Depression," he states, on the very first page: "We may agree with Romer" that is: Christina Romer, not her husband David Romer, the current Herman Royer Professor of Political Economy at the University of California, Berkeley, etc., etc., who received his Ph.D in economics from the Massachusetts Institute of Technology in 1985. N. Gregory Mankiw,

(See "The Best and the Brightest Protect Greenspan and Betray the American People", "Government Authorities are Looking Out for Themselves - as Should Everyone", "The Flations - Part II") currently, Professor of Economics at Harvard University, past staff economist on the Counsel of Economics Advisers, A.B. in economics from Princeton University, Ph.D in economics from the Massachusetts Institute of Technology in 1984, etc., etc., etc., served as best man at David and Christina Romer's wedding. David Romer served as best man at the wedding of N. Gregory Mankiw. In a notorious decision, but one that would appeal to well-bred economists, The Honorable Oliver Wendell Holmes wrote: "Three generations of imbeciles are enough." The American people may want to consider applying Holmes' legal remedy to the field of economics.

Christina Romer's "The Nation in Depression," (Journal of Economics Perspectives, 1993), enlists Bernanke's scholarship to encase her theme. Bernanke's Greatest Scholarship of the Greatest Depression was stated in his Massachusetts Institute of Technology Ph.D. thesis, a pompous name for a paper that was more-or-less footnotes he scribbled from Friedman and Schwartz.

Paul S. Samuelson (1915-2009), the economist who propelled M.I.T. to the forefront of economic studies after World War II, was interviewed by the Atlantic in 2008: "The 1980s trained Macroeconomists - like... Ben Bernanke and so forth -- became a very complacent group, very ill adapted to meet with a completely unpredictable and new situation, such as we've had.... I looked up Bernanke's PhD thesis, which was on the Great Depression, and I realized that when you're writing in the 1980s, and there's a mindset that's almost universal, you miss a lot of the nuances of what actually happened during the depression."

Samuelson's nephew is Larry Summers, currently the

Charles W. Eliot University Professor at Harvard University, past Director of the National Economic Council, past Secretary of the Treasury of the United States, B.S. from the Massachusetts Institute of Technology in 1975, who received his Ph.D in economics from Harvard University in 1983. Larry Summers is the son of Robert Summers (born: Robert Samuelson), professor emeritus at the University of Pennsylvania, received his Ph.D in economics from Stanford University. Larry Summers' mother, Anita Arrow Summers, is professor emeritus at the University of Pennsylvania, etc. Anita Arrow Summers' brother, Kenneth Arrow, is currently the Joan Kenney Professor of Economics and Professor of Operations Research, Emeritus at Stanford University, and past recipient of the Nobel Prize in Economics [Sic].

From Aaron Task's interview on Yahoo's "Daily Ticker":

TASK: A lot of people say the Fed's been very successful helping financial markets and helping people at the upper end of the income scale. There hasn't been a translation into wage growth for the average worker or substantial hiring, so [how] would the Fed be doing more to help [if it continued to QE]?

ROMER: Noooooooo! [Phonetic approximation - FJS.] If you look in fact at what quantitative easing does, it tends to lower the price of the dollar, both of those things that are good for ordinary families and lower long-term interest rates means firms can do investment. It means it's easier for consumers to afford borrowing, so that tends to encourage spending and when people spend that puts the people back to work. A lower price of the dollar helps to make goods more competitive in foreign markets. If we're exporting more, we need more workers to produce it.

TASK: Isn't it true that long-term rates have risen since the Fed announced QE2 in August? And also, a lot of people think a 'weaker dollar' means the dollar doesn't go as far, when I go to the grocery store and when I put gas in my tank, or things of that nature. So, I think a lot of people think the weaker dollar is hurting them, not helping them

ROMER: So, you need to be very careful. It's hard to evaluate what QE has done to long-term interest rates, because there were a lot of announcement effects. What I can tell you is that the academic studies that have looked at this absolutely say that QE does what we thought it was going to do.

And, of course, on the price of the dollar we're not talking about what's happening to your purchasing power here; we're talking about what the price of the dollar is in the foreign exchange markets. I think that everyone agrees that a lower price of the dollar tends to make us export more, which ultimately causes unemployment to come down."

[Interruption: How could studies conclude anything since they can't even separate announcement effects? And: absolutely? This falls into the Ben Bernanke 60 Minutes "100% sure" of himself claim. Before concluding that Romer and Bernanke are talking 100% claptrap (my view), her statement is technically correct if she is addressing "risk-on" in the stock market, commodities, the New Wave of collateralized sub-prime mortgages, etc. And, just why are "we" not talking about purchasing power here? Falling purchasing power (per Task) has only "encouraged spending" because Americans need to spend more just to buy the same - or fewer - items than three months ago. This is going to put people back to work!! How is it that purchasing power is independent of the foreign exchange markets!!! Americans should borrow more so they can spend more, even though they are buying less with depreciating dollars, and this is good for Americans!!!! "Everyone" agrees about the lower price of the dollar!!!!! Oh, this is too stupid to continue. - FJS]

There is the possibility that Romer is making it up as she goes along (the most charitable proposal), but, it was not Task, but Romer, who started talking about the dollar and its influence. She either thought her argument was so convincing she wanted to take advantage of this public forum or she is not operating with a full sea bag. The latter seems more probable when listening to other Romer claims in the interview.

ROMER: There's no evidence that what's holding back business spending or consumer economy is government activism.

In 2010, David Farr, President, Chairman and CEO of Emerson Electric Corporation, in Chicago, told investors: "Why would any CEO invest one penny in the US? There is not one reason based on the new rules of the game."

For more of what Romer claims there is "no evidence," see Corporate CEOs Won't Invest in America, Why Should You?

Fellow brand-name professors and Fed economists stand behind Romer. The New York Fed published a paper on April 6, 2011: "

Large-Scale Asset Purchases by the Federal Reserve: Did They Work?" (Take a wild guess.) The Fed still has $200 billion of QE2 purchases but the history has already been written.

Dispensing with accredited economists, how did the average American respond to Romer? Whether average or not, the "Comments" by Yahoo! viewers showed a far better grasp of economics.

Comment #1 was from

"Ross," who asked "Is this chick retarded or what?" Of viewers who expressed an opinion about Ross' analysis, 227 liked his comment; 16 disliked it.

Comment #2 was from "Brian," who queried: "Who knew it was so easy? Someone should go tell those poor nations in Africa that we've learned the secret: just produce more of your currency." (Score: 182 to 11.)

Comment #3 was from "Kimmie Taylor" who observed: "QE1 has failed on jobs. QE2 has failed on jobs. The only success with these QEs are increased bank profits." (253-18)

Comment #4 was from "Jack," who stated one obvious problem and a fair conclusion: "The woman has never held a real job and knows nothing about the real world. She is a complete failure."

There was not a single Romer defender as far as the eye could see. (The eye saw the first 20 reviews.)

We will finish with "PhilippeB" (#6), a fast learner: "No idea who she is but it is now official: Christina Romer is a certified idiot." (62-3)

What to do about it? Please refer to the very top: "Some relationships."

Tuesday, April 5, 2011

Greenspan Panders for More Money

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market"(, 2009)

Former Federal Reserve Chairman Alan Greenspan has once again received space on the editorial pages of the Financial Times. He does not deserve, so shall not receive, a rebuttal. But, it is probably still worth a moment to remind readers of the interests he continues to serve.

His intention, in "How Dodd-Frank Fails to Meet the Test of Our Times" (March 30, 2001), is to kill the Dodd-Frank Act's application to the banking industry. Greenspan, of course, was more circumspect, but he is not receiving the courtesy of careful interpretation here.

Greenspan still receives large fees to speak. These fees are paid by Too-Big-To-Fail banks and other tributaries of the financial juggernaut. His fees are reported to be lower these days. He used to receive $150,000 to $250,000. That is more than at least 90% of Americans will be paid during a single year of their entire lives. He is on John Paulson's payroll, the most highly compensated hedge fund manager of our times. Bill Gross at Pimco pays him a bundle, too. He was also hired by Deutsche Bank, a relationship that has not received much attention, so he may or may not be still serving DB's interests.

In the Financial Times, Greenspan warned that regulations in the Dodd-Frank Act would inhibit derivative markets, foreign-exchange trading (a market that exceeds $4 trillion a day), and "complex modern-day finance" that needs to be allowed to grow more complex - without interference from regulators "if we wish to maintain today's levels of productivity and standards of living."

For money, some people will say anything. The latest reminder of how finance contributed to America's welfare comes via Welling@Weeden, which published a 40-year study of American wages by Ron Griess ( "Real" (meaning - adjusted for inflation) average hourly earnings in the U.S. were $20.86 in 1973. In February 2011: $19.33. Finance has grown from David to Goliath and sucked in money that has made billionaires of Alan Greenspan's current employers.

Greenspan warns that U.S. banks may leave for more favorable climates. This is the best recommendation yet for the Dodd-Frank Act. Go! Last week, some European bankers threatened their regulators with the same warning. It is doubtful any country other than North Korea would take the well-connected. That might be a fine place to send them all. Gibberish will not save a central banker or Too-Big-To-Fail banker in Kim Jong-il's paradise. Pak Nam Gi, North Korea's Head of Finance, was executed in March 2010 for inflating the currency. He was charged with "intentionally harming the country's economy." Two-Percent-Ben wears the charge like a bespoke suit.