Rebel Traders – Analysis Without The Hype

From the “absurd and nutty file”

Of all the statistics pouring into the White House every day, top economic adviser Larry Summers highlighted one Friday to make his case that the economic free-fall has ended.

The number of people searching for the term “economic depression” on Google is down to normal levels, Summers said.

Searches for the term were up four-fold when the recession deepened in the earlier part of the year, and the recent shift goes to show consumer confidence is higher, Summers told the Peterson Institute for International Economics.

Summers continued the administration’s push-back against critics of President Barack Obama’s handling of the recession, defending the economic stimulus package against Republicans who have tried to paint the program as a failure because it hasn’t stemmed the unemployment rate. [...]

I argue the situation that searches for the terms ‘economic depression’ is a fallacy for a gauge of the real health of the American citizen and of the economy.

It is human nature to desire knowledge when one is scared or confused by any situation, be it swine flu, nuclear war, or economic disasters. Pick any topic and at the on set of pain the desire to understand it is peaked. Then comes a period of complacency and acceptance of what caused that pain.

The number of individuals in the United States facing economic hardship of their own is still increasing, and by some measures is actually increasing rapidly as in the rapid rise in foreclosures and credit card default rates which stand at record levels.

We also know that the unemployment situation measurement (U-6) which measures people working at distressed levels and/or hardships (those working part time for economic reasons) is now nearly 17% and probably much closer to 25% based on my own ‘open eyes’. This means that more and more people are being cut from full time to part time and the number of individuals having to take on additional jobs to make enough money to pay the bills is increasing significantly.

For Larry Summers to claim that the number of Google searches gives him insight into how well his economic team is doing is actually an insult to those in the ‘real world’ struggling who may not even have time anymore to sit on Google and do searches, or to those who have had to cut their cable/Internet service to cut expenses, or to those who are holding yard sales all over America selling everything that is not nailed down to raise more money.

Their are a slew of metrics one can use to measure and/or gauge just about any condition in life. Sometimes, however it requires one to apply logic and the human mind in order to process the data to arrive at a rational interpretation, something we call ‘independent thought‘ which appears to be deteriorating in this world of ours.

The Internet age has brought to the human species a whole new set of metrics in order to measure many snapshots of life at any given moment. As a person who works extensively in public safety I can attest to the public sentiment right now that the H1N1 (swine flu) has become pushed back in the human mind to the place where worrying about next weeks soccer match for little Johnny or the spot in the mind where one keeps thoughts about what they will have for lunch the next day. Even while the H1N1 is still being projected by those in the medical community as being a full blown pandemic and the possibility that the vaccine may not be effective (or even ready in time) for the wave 2 to arrive in the fall and winter.

We have become a people of ‘5 minute’ attention spans. Tell me everything I need to know in 5 minutes while I’m getting the kids ready for school because no one wants to spend (or can’t spend) any more time than that to understand what is happening in the world. People are concerned about what the 5 minute headlines are for that day only.

Complacency is another human characteristic that can’t be accurately gauged for a meaningful conclusion of a situation or event. As everybody is busy trying to make ends meet and raise a family there is simply no time for allocating too many brain neurons to worry about something for too long. We watch our 5 minute podcast of the news, we may be scared about something for a little while and then take it upon ourselves to learn more about it… but it quickly turns to being complacent about it and then it falls back to the  corners of the mind where next weeks food shopping list lays.

Just because someone may have a short attention span and has become quickly complacent of a situation does not mean it has improved. Actually, history has shown us that complacency has been one of the worst human traits we have. It is what puts people into dangerous situations thinking that something won’t affect them.

What I’m attempting to discuss here goes well beyond stock market analysis. But, if we are to apply metrics of Internet searches to economic recovery then we should also understand a little about human behavior before making the claim that Larry Summers is attempting to make that the economy is improving simply based on a computer generated metric of Google searches. It requires human thought to analyze it and put it into context.

Most human beings have an infinite capacity for taking things for granted

– Aldous Huxley 1894-1963, English novelist

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Treasury Secretary Tim Geithner and economic adviser penned an op ed piece for the Washington Post today. This is something that should be released by Government press statements (public domain), not to one specific news agency in my view.

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A New Financial Foundation
By Timothy Geithner and Lawrence Summers
Monday, June 15, 2009

Over the past two years, we have faced the most severe financial crisis since the Great Depression. The financial system failed to perform its function as a reducer and distributor of risk. Instead, it magnified risks, precipitating an economic contraction that has hurt families and businesses around the world.

We have taken extraordinary measures to help put America on a path to recovery. But it is not enough to simply repair the damage. The economic pain felt by ordinary Americans is a daily reminder that, even as we labor toward recovery, we must begin today to build the foundation for a stronger and safer system.

This current financial crisis had many causes. It had its roots in the global imbalance in saving and consumption, in the widespread use of poorly understood financial instruments, in shortsightedness and excessive leverage at financial institutions. But it was also the product of basic failures in financial supervision and regulation.

Our framework for financial regulation is riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk. In recent years, the pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated.

That is why, this week — at the president’s direction, and after months of consultation with Congress, regulators, business and consumer groups, academics and experts — the administration will put forward a plan to modernize financial regulation and supervision. The goal is to create a more stable regulatory regime that is flexible and effective; that is able to secure the benefits of financial innovation while guarding the system against its own excess.

In developing its proposals, the administration has focused on five key problems in our existing regulatory regime — problems that, we believe, played a direct role in producing or magnifying the current crisis.

First, existing regulation focuses on the safety and soundness of individual institutions but not the stability of the system as a whole. As a result, institutions were not required to maintain sufficient capital or liquidity to keep them safe in times of system-wide stress. In a world in which the troubles of a few large firms can put the entire system at risk, that approach is insufficient.

The administration’s proposal will address that problem by raising capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms. In addition, all large, interconnected firms whose failure could threaten the stability of the system will be subject to consolidated supervision by the Federal Reserve, and we will establish a council of regulators with broader coordinating responsibility across the financial system.

Second, the structure of the financial system has shifted, with dramatic growth in financial activity outside the traditional banking system, such as in the market for asset-backed securities. In theory, securitization should serve to reduce credit risk by spreading it more widely. But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust.

The administration’s plan will impose robust reporting requirements on the issuers of asset-backed securities; reduce investors’ and regulators’ reliance on credit-rating agencies; and, perhaps most significant, require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.

The plan also calls for harmonizing the regulation of futures and securities, and for more robust safeguards of payment and settlement systems and strong oversight of “over the counter” derivatives. All derivatives contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse.

Third, our current regulatory regime does not offer adequate protections to consumers and investors. Weak consumer protections against subprime mortgage lending bear significant responsibility for the financial crisis. The crisis, in turn, revealed the inadequacy of consumer protections across a wide range of financial products — from credit cards to annuities.

Building on the recent measures taken to fight predatory lending and unfair practices in the credit card industry, the administration will offer a stronger framework for consumer and investor protection across the board.

Fourth, the federal government does not have the tools it needs to contain and manage financial crises. Relying on the Federal Reserve’s lending authority to avert the disorderly failure of nonbank financial firms, while essential in this crisis, is not an appropriate or effective solution in the long term.

To address this problem, we will establish a resolution mechanism that allows for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system. This authority will be available only in extraordinary circumstances, but it will help ensure that the government is no longer forced to choose between bailouts and financial collapse.

Fifth, and finally, we live in a globalized world, and the actions we take here at home — no matter how smart and sound — will have little effect if we fail to raise international standards along with our own. We will lead the effort to improve regulation and supervision around the world.

The discussion here presents only a brief preview of the administration’s forthcoming proposals. Some people will say that this is not the time to debate the future of financial regulation, that this debate should wait until the crisis is fully behind us. Such critics misunderstand the nature of the challenges we face. Like all financial crises, the current crisis is a crisis of confidence and trust. Reassuring the American people that our financial system will be better controlled is critical to our economic recovery.

By restoring the public’s trust in our financial system, the administration’s reforms will allow the financial system to play its most important function: transforming the earnings and savings of workers into the loans that help families buy homes and cars, help parents send kids to college, and help entrepreneurs build their businesses. Now is the time to act.

Timothy Geithner is secretary of the Treasury. Lawrence Summers is director of the National Economic Council.

If one had to pin point a particular point in time when the financial crisis our country faces now began one only has to look to November 5, 1999.

What happened on that day?

Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another’s businesses.

The measure, considered by many the most important banking legislation in 66 years, was approved in the Senate by a vote of 90 to 8 and in the House tonight by 362 to 57. The bill will now be sent to the president, who is expected to sign it, aides said. It would become one of the most significant achievements this year by the White House and the Republicans leading the 106th Congress.

”Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. ”This historic legislation will better enable American companies to compete in the new economy.”

Yes, the very same Larry Summers who now advises the President on economic policy is the very person who spoke highly of deregulating the financial industry. What was done on that day in November 1999 was to essentially throw out the Glass-Steagall Act of 1932 which essentially was to prevent the very problems that has happened to us over the past several years.

In 1999 the decision was made to let banks dabble in other financial endeavors and that was a pivotal moment in the destruction of our financial system.

The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation’s financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression.

Today’s action followed a rich Congressional debate about the history of finance in America in this century, the causes of the banking crisis of the 1930’s, the globalization of banking and the future of the nation’s economy.[...]

[...]The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.

”I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930’s is true in 2010,” said Senator Byron L. Dorgan, Democrat of North Dakota. ”I wasn’t around during the 1930’s or the debate over Glass-Steagall. But I was here in the early 1980’s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”

This Wednesday President Obama is scheduled to announce new sweeping rules to address the financial institutions.

WASHINGTON — President Barack Obama is ready to roll out an overhaul of the intricate rules and systems that govern America’s troubled financial institutions, proposing the most ambitious revision since the Great Depression.

The goal is to prevent a recurrence of the economic crisis that erupted in the United States and exploded last fall with devastating consequences still reverberating around the world.

Unless President Obama is prepared to re-introduce the Glass-Steagall Act then then I don’t have much faith in any new regulation.

Naomi Klein, author of “The Shock Doctrine” had an interview with “Woman of the Web” magazine. This was a most enjoyable read.

Naomi Klein is the award-winning author of the international bestsellers The Shock Doctrine: The Rise of Disaster Capitalism

[...] bank bailout[s], I think it’s a disaster, crony capitalism at the absolute worst. I think the timing of the release of Larry Summers’s financial records from last year is really interesting. He worked at a hedge fund one day a week and was paid $5.2 million. He was paid $135,000 for one speech to one of the bailed-out banks. And when he got the post he was presented as an egghead academic, as if he wasn’t coming from Wall Street.  In fact he wasn’t just working for one bank; he was working for all of them. He collected $8 million in these fees in one year.[...]

[...]Larry Summers and Tim Geithner came up with a plan to bail out the banks that is actually a disguised bailout for the hedge funds — where the government is not bailing out the hedge funds directly because they can’t sell that, but hedging the hedge funds to buy the toxic assets of the banks — instead of nationalizing the banks and  breaking them up, which is what needs to happen. This is very different from what FDR had the guts to do. He used that progressive movement, he used the rage at the banks, to pass Glass-Steagall. And there’s no excuse for the fact that there’s been no serious re-regulation of the financial sector. The idea that you would somehow hand out trillions of dollars to the banks and then regulate them months later is crazy. You have the leverage when you’re handing out the money. “You say you want a bailout? Well here are the new rules.” And somehow we’re supposed to believe that the plan is to hand out trillions of dollars to the banks, and then later, once they’ve taken and spent the money, impose new rules. That’s the stupidest plan I’ve ever heard in my life. And I don’t believe these guys are dumb. I think they’re corrupt.[...]

[...]I really believe that this bailout is not a bailout for the economy. The best writing about this has been done by Joseph Stiglitz, Paul Krugman, Jeffrey Sachs. These are very, very respected economists. Two of them with Nobel prizes. What’s really shocking to me is that they’re in the position of criticizing from the sidelines, as opposed to being in the administration. This administration is trapped in the kind of thinking that created the crisis and I think it should be just gloves-off criticism on this, because it’s very, very serious. It’s very serious that Joseph Stiglitz has not been invited to play a pivotal role in the administration, that Paul Krugman is seen as too extreme. That’s why Summers matters, because Summers is the gatekeeper. Summers appears to be keeping people away from Obama. He’s defining the terms of the debate, and they are outrageously narrow. I think we should take Stiglitz and Krugman and Sachs at their word on the bailout: It’s worse than we thought. The debts that these banks hold are enough to swallow the country’s entire GDP and then some, if we keep throwing money into that black hole. It happened in Iceland. We just saw a national economy be wiped out by the debts accumulated by private banks.[...]

[...]What enrages me more than anything is impunity. I am in a state of rage about the impunity of the elites at the moment. I’m very disturbed by this idea that we just have to keep looking forward, we can’t look backward. That is a declaration in favor of legal impunity for the elites, whether we’re talking about torture, whether we’re talking about the financial crimes that created this crisis, whether we’re talking about what happened under TARP and the first $700 billion. Elizabeth Warren has done such a fantastic job and has raised some very, very deep legal issues about what happened with that money, and there seems to be no desire to prosecute.[...]

[...]I do believe that the Wall Street bailout is the greatest heist in monetary history.[...]

Source: Women of the Web

For some background on Larry Summers be sure to go back and read this post I did on April 3