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Update on the Meltdown: BOHICA

Comment: There is a military slang acronym “BOHICA,” which stands for “Bend Over, Here It Comes Again.”

“Economists: Another Financial Crisis on the Way” by Matthew Jaffe; ABC News; 3/2/2010.

Even as many Americans still struggle to recover from the country’s worst economic downturn since the Great Depression, another crisis – one that will be even worse than the current one – is looming, according to a new report from a group of leading economists, financiers, and former federal regulators.

In the report, the panel, which includes Rob Johnson of the United Nations Commission of Experts on Finance and bailout watchdog Elizabeth Warren, warns that financial regulatory reform measures proposed by the Obama administration and Congress must be beefed up to prevent banks from continuing to engage in high-risk investing that precipitated the near-collapse of the U.S. economy in 2008.

The report warns that the country is now immersed in a “doomsday cycle” wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management – and when the risks go wrong, the banks receive taxpayer bailouts from the government.

“Risk-taking at banks,” the report cautions, “will soon be larger than ever.”

Without more stringent reforms, “another crisis – a bigger crisis that weakens both our financial sector and our larger economy – is more than predictable, it is inevitable,” Johnson says in the report, commissioned by the nonpartisan Roosevelt Institute.

The institute’s chief economist, Nobel Prize-winner Joseph Stiglitz, calls the report “an important point of departure for a debate on where we are on the road to regulatory reform.” . . .


3 comments for “Update on the Meltdown: BOHICA”

  1. The list of excuses for appointing Larry Summers as Bernanke’s replacement at the Fed just keeps getting shorter and shorter:

    The New York Times
    As Summers’s Odds Rise, Stimulus Easing Is Seen
    Published: September 2, 2013

    WASHINGTON — The spreading expectation that President Obama will name Lawrence H. Summers to lead the Federal Reserve Board appears to be working against the central bank’s efforts to stimulate the economy.

    The jitters even have some analysts betting that a Summers nomination could lead to slower economic growth, less job creation and higher interest rates than if the president named Janet L. Yellen, the Fed’s vice chairwoman.

    Businesses raising money and people buying homes and cars all have faced higher interest rates in recent months as the Fed’s campaign to suppress borrowing costs has faltered. The rise in rates reflects optimism that the economy is gaining strength, and an expectation that the Fed will begin to pull back later this year. But a wide range of financial analysts also see evidence of a Summers effect.

    Many investors expected that Ms. Yellen would be nominated to replace Ben S. Bernanke as head of the central bank, a choice that would have sent a clear message of continuity. Instead, investors are now trying to anticipate how Mr. Summers might change the Fed.

    The unease is the product of a little information and a lot of speculation. Mr. Summers, a Harvard University economist who served for two years as Mr. Obama’s primary economic adviser, has said little about monetary policy in recent years. Investors are left parsing a handful of comments in which he has expressed some doubts on the benefits and concern about the consequences of the Fed’s policies.

    “People don’t know what Larry might do,” said Mohamed El-Erian, chief executive of Pimco, the giant bond fund manager. “There’s a lack of a lot of information on Larry’s views. We don’t have enough information to make an assessment, just some second- and thirdhand accounts.”

    Some doubts always attend the arrival of a new Fed chairman, but the consequences are particularly freighted at the moment because the Fed’s effectiveness increasingly depends on its ability to reduce uncertainty among investors. The central bank floored its traditional gas pedal five years ago when it pushed short-term interest rates to zero. It has since focused on further reducing long-term interest rates — which determine the cost of most kinds of borrowing — largely by convincing investors that short-term rates will remain near zero.

    The sense of uncertainty is heightened by the fact that as many as five of the Fed’s seven governors may be replaced in the next year.

    One governor, Elizabeth A. Duke, stepped down at the end of August. A second governor, Sarah Bloom Raskin, has been nominated to serve as deputy Treasury secretary. Mr. Bernanke’s term ends in January, as does the term of a fourth governor, Jerome H. Powell — although Mr. Obama could choose to reappoint Mr. Powell, a Republican who joined the Fed only in May last year and is said to be open to a longer stay. If Ms. Yellen is passed over by Mr. Obama, she, too, could choose to leave even before her term as vice chairwoman ends in October 2014.

    Mr. Obama said last month that he would not announce his choice for the Fed’s top spot until the fall, and that he was considering at least three candidates: Mr. Summers, Ms. Yellen and the former Fed vice chairman Donald L. Kohn. But the president’s top economic advisers uniformly support the selection of Mr. Summers. They regard him as a creative thinker and an experienced crisis manager, qualities they value in particular because they expect the Fed may confront difficult choices as it begins to retreat from its six-year-old stimulus campaign.

    They also insist that Mr. Summers supports the Fed’s efforts to revive the economy and would continue those efforts.

    But Mr. Summers has criticized the Fed’s purchases of Treasury securities and mortgage-backed securities, warning that bond-buying on such a scale could distort financial markets. He said it was “less efficacious for the real economy than most people suppose.” As a result, many investors suspect he would seek to end those purchases more quickly than Ms. Yellen.

    Julia Coronado, chief North America economist at BNP Paribas, said last week that the yield on the benchmark 10-year Treasury note already had started to rise as investors price in a Summers nomination. She added that the yield could eventually rise half a percentage point more than if the president nominated Ms. Yellen instead. Ms. Coronado estimated that this Summers effect would reduce domestic economic growth by 0.5 to 0.75 percentage point over the next two years, which could reduce job creation by 350,000 to 500,000 jobs.

    A Summers nomination, she wrote, “would come at a cost of higher market volatility and interest rates, and a less buoyant economic recovery.”

    Posted by Pterrafractyl | September 2, 2013, 7:32 pm
  2. @Pterrafractyl–


    “Now is the Summers of our discontent!”

    As distressing as the prospect is, it brings to mind my cautionary remarks to the lintheads who claim there is no difference between Republicans and Democrats.

    There is a profound difference. The contrast could be represented as, “Which would you like for dinner, a chicken-fried steak dinner at Denny’s or a plate full of broken glass?”

    The Democrats are the chicken-fried steak dinner at Denny’s, the Republicans the plate full of broken glass.

    Another way of expressing this is an old country aphorism: “There is nothing like stepping in a cow flop to make you realize how nice tripping over a stone can be.”

    Hearty appetite!

    Posted by Dave Emory | September 2, 2013, 8:11 pm
  3. @Dave: Krugman has a post today that characterizes the differences we can expect between a Larry Summers vs Janet Yellen Fed era:

    September 3, 2013, 12:03 pm
    The Conscience of a Liberal
    Summers the Shiftless
    Paul Krugman

    A few months ago Christy Romer gave an excellent talk on the prospects for monetary policy in a liquidity trap, titled It Takes A Regime Shift (pdf). As many of us have noted, the central bank has very little direct traction when safe short-term rates are at the zero lower bound; maybe it can achieve something by buying lots of unconventional assets (“quantitative easing”), but its main hope of achieving anything is through “expectations management” — convincing both financial markets and players in the real economy that it will hold off much longer on tightening once the economy improves than they currently expect, which will lead to higher expected inflation and demand, and hence higher spending now.

    However, engineering such a change in expectations — what I long ago dubbed a credible promise to be irresponsible — is hard. How do you convince people that the central bank won’t just revert to type, always eager to snatch away the punchbowl, at the first signs of economic improvement?

    Romer’s answer is that it takes a “regime shift” — a set of actions that reflect a clear break with the past. FDR achieved such a regime shift in the 1930s by going off the gold standard, and in general by bringing in a, well, New Deal. Shinzo Abe may (the returns aren’t in yet) be achieving something similar simply by talking and acting in such a seemingly un-Japanese way; I suspect that Abenomics is working better than one might have expected precisely because Abe seemed to be such an ordinary Japanese machine politician, until he started moving on economic policy.

    This, I think, is the way to read today’s report by Binyamin Applebaum on how the rising odds of a Summers appointment to the Fed is already having a chilling effect on the economy. A Yellen appointment would clearly have represented something new at the Fed — not just because she is, as Garrison Keillor used to say, a person of gender, but also because she has been a strong and consistent monetary dove, and took that position before it was fashionable.

    Summers, on the other hand, while he often expresses unconventional views when not in office, has a strong tendency to revert to conventionality when in office. And leaving Summers the person on one side, just think of the historical connections: can you imagine a stronger signal that the same old regime is staying in place than choosing a Robert Rubin protege at this late date?

    So the apparent decision to appoint Summers is a strong anti-regime-shift signal on Obama’s part.

    Now, we can hope that if Summers actually does get the job, he’ll realize the problem — and realize that he needs to pull his own version of what Abe has pulled off in Japan, saying and doing things that shock people into realizing that he isn’t going to be the conventional-wisdom guy they expected. And this is, in fact, my advice to Summers if he is the guy: don’t spend your first few months being mild-mannered and winning friends. What this economy needs is a monetary shock — and if you don’t do it right away, you probably won’t get a second chance.

    So if Yellen gets nominated it sounds like there might be a breakup, at least temporarily, between Wall Street and its Federal regulators. If Summers is nominated it’s a signal that the longstanding romance would still be intact. And, of course, if it was a GOP Fed nominee the government would still be in bed with Wall Street but there would be broken glass involved and eventually a body.

    Posted by Pterrafractyl | September 3, 2013, 1:28 pm

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