Posts Tagged ‘banks’

crisis-what-crisis

We’re more than seven years out from the most severe economic crash since the First Great Depression and nothing much on Wall Street has changed.

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As everyone knows, the Too Big To Fail banks that got us into the current mess are now Too Bigger to Fail. The top five U.S. banks had approximately 30 percent of U.S. banking assets in 1998; this rose to 45 percent by 2008 and to more than 47 percent in 2013 (the last year for which data are available).

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Meanwhile, the U.S. banking industry topped off 2015 with record profits of $163.63 billion, the highest net income of any year in the SNL bank regulatory database, which dates back to 1991. The largest four banks—JPMorgan Chase, Bank of America, Wells Fargo, and Citibank—together captured 42.7 percent of the industry’s income in 2015.

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And, as it turns out, the three big ratings firms that played such a central role in the financial crisis—Standard & Poor’s Ratings Services, Moody’s Investors Service, and Fitch Ratings—have themselves never been downgraded.

The three issue more than 95% of global bond ratings, a total virtually unchanged from the pre-2008 period.

Profits also are nearing all-time highs as they ride a recent wave of debt sales and push into new lines of business. . .

The fallout from the financial crisis was supposed to crimp the credit-ratings model. Firms awarded rosy ratings to residential mortgage bonds that later soured, triggering widespread losses.

Lawmakers and regulators called for a major shake-up of the way the firms made their money. But seven years later, the industry’s business blueprint—in which banks and debt issuers still pay ratings firms to have their deals graded—remains in place despite concerns about its potential conflicts.

No wonder folks are still angry at Wall Street.

*Yes, for those who follow such things, that’s the image from the cover of the 1975 Supertramp album, “Crisis? What Crisis?”

Update

And just as I posted this, I learned, according to a new Institute for Policy Studies report, the $25 billion in bonuses Wall Street banks handed out to their 172,400 New York City-based employees last year amounted to double the combined earnings of all 895,000 Americans who work full-time at the current federal minimum wage of $7.25 per hour.

The Wall Street bonus pool has become so large that in 2015 it would’ve been enough to have lifted all of America’s 2.6 million fast food prep and serving workers up to $15 per hour — and still have had $4 billion left over. Or that bonus pool could have raised to $15 the hourly wage of all our nation’s 1.6 million home care aides or all of our 2.6 million restaurant servers and bartenders.

Sanders-growth

Economists and economic commentators have started to push back against the attacks of liberal mainstream economists on Bernie Sanders’s economic proposals and the analysis of the consequences of those proposals by Gerald Friedman.

Here’s a quick rundown:

Matthew Klein notes that the “supposedly ‘extreme’ and ‘unsupportable’ forecast” that was part of Friedman’s analysis merely “implies American output will return to its previous trend just as Sanders would be finishing up his second term, in the third quarter of 2024.”

we have no insight into the macroeconomic effects of Sanders’s entire programme, which has lots of moving parts and would not just affect things like the quantity of infrastructure investment and the distribution of income, but also the incentives to work and take risks. Our point is a simple one: a prolonged period of rapid growth in the US is plausible, with the right policy mix. The burden of proof should be on those who say otherwise.

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David Dayen makes much the same point (that Friedman’s “economic growth numbers would simply eliminate the GDP gap that was created by the Great Recession and was never filled in the subsequent years of slow growth”) and then notes that the growth projections of some of the liberal critics (such as Laura Tyson, Christina Romer, Austan Goolsbee, and Alan Krueger) were themselves far off the mark.

Economist Jamie Galbraith (pdf), who was Executive Director of the Joint Economic Committee in 1981-82, agrees that “skepticism about standard forecasting methods is perfectly reasonable” but then observes that Friedman’s methods are actually pretty mainstream.

It is not fair or honest to claim that Professor Friedman’s methods are extreme. On the contrary, with respect to forecasting method, they are largely mainstream. Nor is it fair or honest to imply that you have given Professor Friedman’s paper a rigorous review. You have not.

What you have done, is to light a fire under Paul Krugman, who is now using his high perch to airily dismiss the Friedman paper as “nonsense.” Paul is an immensely powerful figure, and many people rely on him for careful assessments. It seems clear that he has made no such assessment in this case. . .

Let’s turn, finally, to the serious question. What does the Friedman paper really show? The answer is quite simple, and the exercise is – while not perfect – almost entirely ordinary.

What the Friedman paper shows, is that under conventional assumptions, the projected impact of Senator Sanders’ proposals stems from their scale and ambition. When you dare to do big things, big results should be expected. The Sanders program is big, and when you run it through a standard model, you get a big result.

Finally, economist Joshua Mason makes five main points about Friedman’s analysis of of the results one might expect from Sanders’s programs.

First, conventional wisdom in economics is that an exceptionally deep recession should be followed by a period of exceptionally strong growth. Second, the growth in output and employment implied by the paper are more or less what is required to return to the pre-recession trend. Third, discussions of macroeconomic policy in other contexts imply the possibility of growth qualitatively similar to what Jerry describes. Fourth, it is not necessarily the case that the employment Jerry projects would exceed full employment in any meaningful sense. Fifth, if you don’t believe a growth performance at this level is possible, that implies a sharp slowdown in potential output, for which you need a credible story.

In Mason’s view, the fifth point is the most important. And the bottom line is this:

Ten years ago, the CBO expected GDP to be $20.5 trillion (correcting for inflation) as of the end of 2015. Today, it is $18.1, trillion, or about 12 percent lower. Similarly, the employment-population ratio fell by 5 points during the recession (from 63.4 to 58.4 percent) and has risen by only one point during the past six years of recovery. Either these facts — unprecedented in the postwar period — reflect a shortfall of effective demand, or they don’t. If they do reflect a lack of demand, then there is no reason the expanded pubic spending and downward redistribution that Sanders proposes cannot close the gap, with a period of high growth while output and employment return to trend. (The fact that such high growth hasn’t been seen in the postwar period is neither here nor there, since there also has been no comparable deviation from trend.) Alternatively, you may think that the shortfall relative to previous growth rates reflects a decline in potential output. But then you need to offer some explanation of why the growth of the economy’s productive capacity slowed so abruptly, and you need to apply this belief consistently. I think it’s more reasonable to believe that the gaps in output and employment reflect a demand shortfall. In which case, the Sanders plan could in principle have the kind of results Friedman describes.

As for myself, I believe there is a debate worth having—which, alas, the liberal mainstream critics are attempting to shut down.

If however we let that debate unfold, it will show that contemporary capitalism produces a grotesquely unequal distribution of income, a crumbling physical and social infrastructure, inadequate healthcare, heavily indebted college students, a Too Big to Fail financial sector that threatens another collapse, and slow rates of growth that simply cannot employ the U.S. working-age population.

All that Sanders’s proposals and Friedman’s analysis demonstrate is how far we’ve fallen and what it would take for the United States to reverse those disturbing trends.

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“Goldman Sachs Republican” Neel Kashkari, the new president of the Federal Reserve Bank of Minneapolis, has warned that the biggest banks in the United States “are still too big to fail and continue to pose a significant, ongoing risk to our economy.”

Although TBTF [Too Big to Fail] banks were not the sole cause of the recent financial crisis and Great Recession, there is no question that their presence at the center of our financial system contributed significantly to the magnitude of the crisis and to the extensive damage it inflicted across the economy. . .

Going forward

I believe we need to complete the important work that my colleagues are doing so that, at a minimum, we are as prepared as we can be to deal with an individual large bank failure. But given the enormous costs that would be associated with another financial crisis and the lack of certainty about whether these new tools would be effective in dealing with one, I believe we must seriously consider bolder, transformational options. Some other Federal Reserve policymakers have noted the potential benefits to considering more transformational measures. I believe we must begin this work now and give serious consideration to a range of options, including the following:

  • Breaking up large banks into smaller, less connected, less important entities.
  • Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant).
  • Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.

I’m curious to see what liberal critics of Bernie Sanders have to say about Kashkari’s analysis.

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Special mention

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According to USA Today [ht: sm],

Even as Wall Street braces for more cuts to jobs and bonuses, JPMorgan Chase CEO Jamie Dimon was paid $27 million in 2015, up from $20 million the year before, the company said Thursday.

The pay raise comes after JPMorgan announced record annual profits last week, thanks to cost-cutting that helped to offset stagnating revenue growth.

JPMorgan’s board paid Dimon a $1.5 million salary, a $5 million cash bonus and $20.5 million in performance-based stock grants, the company said in a regulatory filing.

Last year, Dimon was paid a $7.4 million cash bonus and $11.1 million in stock awards. His $1.5 million salary has remained unchanged.

Whenever a commentator declares that “politics is the art of the possible”—and proceeds to make whatever arguments they deem necessary to delegitimize ideas that challenge the current common sense—I’m on my guard. What we’re being told is to accept present conditions as immutable facts of life, and to trim our goals accordingly. We’re being told not to entertain ideas that point in the direction of the not-yet possible.

So it is with Paul Krugman these days. Now that Bernie Sanders has to be taken seriously, Krugman has taken to invoking the art of the possible and, in the process, both rewriting history and declaring that Sanders’s plans represent deceitful fantasies.

In order to make a thinly veiled case for Hillary Clinton against Sanders, Krugman has decided that Too Big to Fail Banks—Bank of America, JPMorgan, Citigroup, Wells Fargo, and Goldman Sachs—which now long after the crash are all Too Bigger to Fail—played no significant role in 2008. Instead, the problem, as Krugman (citing Mike Konczal) sees it, was shadow banking. While breaking up the big banks might not solve all the problems of the financial sector, it’s simply disingenuous to try to whitewash the history of the crash of 2007-08 by arguing that the nation’s largest banks played only a marginal role in creating the conditions of the bubble that eventually burst and, when it did, in bringing the world economy to its knees.

If the art of the possible with respect to financial reform is one or another version of Dodd-Frank, it’s extending private health insurance to cover more people—and decidedly not proposing a single-payer (let along a single-provider) plan. Here, Krugman relies on Ezra Klein to assert that Sanders’s plan is a fantasy, since it relies on cost-savings associated with government setting health reimbursement fees (like the current Medicare system) and it would mean disrupting the existing, private insurance system. And, of course, we can’t have that.

The fact is, Krugman (along with Konczal, Klein, and many others in recent days) is determined to make the American electorate stick to existing policies and policy options, which don’t disrupt business as usual. That’s the art of the possible, as proposed and practiced by Clinton.

What Sanders and his growing number of supporters are relying on is our disenchantment with the existing possibilities, which put us in the Second Great Depression and left too many Americans without decent healthcare, and a desire to make strides that challenge the current common sense and help us imagine the next steps.

That’s politics as the art of the not-yet possible.

Or, alternatively, we can just let Juan Perón take over.

iceland-prison-sentences

In Iceland [ht: ra], by the end of 2015, 26 high-level bankers had been sentenced to a total of 74 years in prison.

It’s a move that “would make many capitalists’ head explode if it ever happened here.”

In the United States, all the major Wall Street financial firms nicknamed Too Big To Fail banks—Bank of America, JPMorganChase, Citigroup, Wells Fargo, and Goldman Sachs—have paid out settlements for illegal conduct in the mortgage-security markets that caused the 2007-08 crash. However, no individual executives have gone to jail or even faced prosecution for that conduct.

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In fact, according to report from researchers at Syracuse University, during 2015, federal prosecution for white-collar crime fell to a 20-year low.

The available records show an overall decline that began during the Clinton Administration, with a steady downward trend — except for a three-year jump early in the Obama years — continuing into the current fiscal year.

During the first nine months of FY 2015, the government brought 5,173 white collar crime prosecutions. If the monthly number of these kinds of cases continues at the same pace until the end of the current fiscal year on September 30, the total will be only 6,897 such matters — down by more than one third (36.8%) from levels seen two decades ago — despite the rise in population and economic activity in the nation during this period.

The projected FY 2015 total is 12.3 percent less than the previous year, and 29.1 percent down from five years ago.

Addendum

The argument in the United States has been that prosecuting and jailing banking executives would have disrupted the financial sector and the economy as a whole.

iceland-unemployment-rate

While the recovery in Iceland from the financial crash has been anything but smooth, it’s still the case that unemployment has fallen to 4 percent and wages have been rising at an annual rate of 6.2 percent.