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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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