FRANK-DODD CONTROVERSY - Greenspan Speaks Out!

Excerpted from May 2011 - Global Macro Tipping Points

Former Fed Chairman Alan Greenspan wrote an Op-Ed piece for the UK based Financial Times on March 30th, 2011. The article caused quite a ruckus since it could best be described as a full frontal assault on the Frank Dodd Act.

Congressman (D) MA Barney Frank must not have got any sleep drafting his scathing Financial Times rebuttal. The gloves were off and it was time to pick sides.

Well, this mild mannered economist came down squarely on the fence. Not that I couldn't decide who was right, but rather because both are so blatantly wrong and so mired in 'obligations' that they no longer can discuss reality.

Greenspan's message was that, "the Frank-Dodd Act may create the largest regulatory-induced market distortion  since America's ill-fated imposition of wage and price controls of 1971". He argued that the financial systems today are too complex to be effectively regulated. There are just too many inconsistencies.

The former Fed Chairman felt that today, Adam Smith's 'Invisible Hand'  was unredeemable opaque.

Greenspan's view is that Frank Dodd was a broad set of principles that are now to be drafted into a couple hundred regulations by government regulators and as such is doomed. The Frank Dodd premise being that excesses could be addressed by statute.

 As proof of his argument he delivers theGreenspan:  "TIP'S OF THE ICEBERG" which point out the already realized problems with a Frank-Dodd Act implementation.

• Making Credit Rating Organizations 's legally libel for ratings
• Reduce Banks' share of debit card fees
• Regulating Foreign Exchange Derivatives Market (without exemption would leave US)
• Rules on Proprietary Trade
• Bankers' Pay Packages

The question Greenspan poses to his readers is:

• What is the relationship between financial complexity & standard of living
• Was rising share of finance a condition of growth.

His point here being that our high standard of living is a direct result of financial innovation and by regulating it you will only hinder it, potentially impact standards of living and will no doubt have serious and detrimental unintended consequences.

Greenspan demonstrates the essence of the problem.

First he is right that Frank Dodd is a farce. Second he is right that Frank-Dodd cannot be written in a manner to prevent 'too big to fail' financial disasters from happening.

He is however equally wrong that financial innovation has elevated the US standard of living. I am unsure which planet he is living on because we have:

• Collapsing US standards of living for the entire middle class,
• Limited real US economic growth,
• Mal-investment that is now overwhelming QE II money printing to offset $5T in Shadow Banking Toxic assets and $3T in as yet, unadjusted commercial Real Estate values.

The more important point is that the banks should have been forced to go through the capitalist system way to resolve such situations, which is proven and tested.  It is called Bankruptcy Court. Minimally the debt holders in the banks should have been forced to take equity positions or a combination of both.

None of these options occurred because it was more profitable to have the public foot the bill than have the influential senior secured debt holders take those kinds of losses.

The public has the misconception that bankruptcy necessarily means the banks are shut down, ATM's don't work and loans are no longer given out. This is exactly what the senior secured debt holders want you to believe. it is only through this mistaken belief that they can protect their enormous holdings.

The bankruptcy option was discounted because the bank backed liberal media argued that public option would not support "Nationalization" of the banks. This was how DIP was camouflaged.

Effectively, we nationalize the banking debt not the banks themselves.

What bankruptcy would have meant in the US is that the US government would have acted as DIP (Debtor-in-Possession), similar to General Motors, and the banks would have been kept open. The banks would have been broken up, speculative risk elements sold-off, a possible public retail 'utility created and the tax payer would have been whole.

The debt holders would have lost everything to keep tax payers whole or forced to take serious haircuts. Possibly the debt holders would have been forced to accept equity for debt. It would have been about how bad the debt holders were hurt - not the US tax payer.

Wall Street, Banks Press to Shape Dodd-Frank Rules

• 1st Quarter numbers are the second largest ever (largest was Q2 2011 at $300K)
• More lobby spending now ($27M in Q1) than during the height of legislative period a year ago ($26.3M) +2.7%
• Estimates are for Dodd-Frank to generate 5,000 pages of regulations.
• "Implementation, Implementation, Implementation" - top lobbyist for Financial Services Roundtable (Spent $2.5M for 100 largest US Financial firms)
• Lobbying
  • 1-Regulators who are writing rules;
  • 2- Congress to roll-back certain provisions (especially new limits on debt-card fees)
• 5 Main focuses;
  • New limits on Debt-Card fees
  • $583T derivatives market
  • Restrictions & size activities of largest banks
  • Mortgage-finance issues
  • How to revamp mortgage lending giants Fannie & Freddie
• Wells Fargo largest ($1.9M in Q1 from $1M last year), eclipsing JP Morgan from last year

• Example 1
  • Community Financial Services Association (Payday-lending inustry)
  • Spent $590K in Q1
  • Focused on Dodd-Frank and fledgling Consumer Financial Protection Bureau
  • The law set up the CFPB and gave it broad powers to regulate large payday lenders.
  • RESULT: Republicans have introduced several bills to weaken the bureau's powers.
• Example 2
  • Credit Union National Association (delay the debit-card rule)
  • Spent $756K in Q1 (+12%)
  • Plus grassroots lobbying which was extremely busy.
  • RESULT: 144,000 contacts to lawmakers in Q1 (To put $756K in perspective)

REPUBLICAN CONGRESSMAN PAUL RYAN'S BUDGET - $6.5 Trillion in Savings

As part of an April Fool's surprise, Republican Congressman delivered a budget proposal claiming in headline numbers that it would cut the budget by $6.5 Trillion.

The shocking headline grabbing number was supported by the following chart in the April 1st edition of the Wall Street Journal. Now this was an April Fool's joke that no one could possibly get away with! But they did. The public and media ate it up.

Presto, we have a solution to the US debt mess.

My, unfortunate problem is that I both learned to read and mastered public school arithmetic. Therefore when I actually reading the details, I discovered some amazing things about political budgeting.

First, you must decide what the political number is that you want.
Second, you use simply arithmetic based on either magical or obscured assumptions.
Thirdly, you don't touch any sacred cows that may prompt people to read any further than the headlines.

So what did the master of deception Ryan do?

First, he needed a number so big the newspapers and nightly news would salivate over it. That required a number of over $4 Trillion (it was rumored Obama had this number in his mind for an announcement in the first two weeks of April). So a little over 50% more than Obama's required $6.5 Trillion to be the magic political number.

Secondly, if he told us to assume we can get the US expenses down to 20% of GDP over 10 years. Presto, we have $4.4 Trillion alone. Sprinkle some out year cuts that no one will worry about today and we have our number.

Thirdly, so we don't cause any backlash and ensure we don't have anything do to until after the next election we make sure all the cuts are more than two years away and will require 60% congressional approval. That effectively 'kicks the can down the road' but is seen to solve the problem.

After a 15 second sound bite on the evening news the public suddenly feels things are being attended to by the newly elected Republican House and quickly returns to DWS.

I read the details. There are none! You read then at the Committee on the Budget and in the Wall Street Journal and see if you agree.  APRIL FOOLS!!!!

The only thing close to being difficult is cutting the deficit to $1 Trillion in 2012 from $1.67 Trillion. But that is next year's problem and next year who will remember this budget anyway?

To create extra fairy dust Congressman Ryan sprinkled the following into the budget:

If you really believe any of this is realistic, then you my friend deserve what is going to happen when reality arrives and the tooth fairy is exposed.

DEMOCRATIC PRESIDENT BARRACK OBAMA'S BUDGET PROPOSAL - $4.0 Trillion in Savings

President Obama had his work cut out for him to out 'sound bite' the republicans after the Paul Ryan budget. The republican lambasting of the President's fiscal plan went like this:

"Under the president's current plan, spending will top $4 trillion this year alone, and consume 28.5% of our nation's economy. His plan would mean a $1 trillion increase to the already unsustainable spending growth of our nation's entitlement programs -- including a "down payment" toward government-controlled health care and education; a $1.5 trillion tax increase to further shackle the small businesses and investors we rely on to create jobs; a massive increase in energy costs for families via cap and trade. This would result in an exploding deficit, a doubling of the nation's debt in five years, and an increase of that debt to more than 82% of our nation's GDP by the last year of the budget. This approach will double the debt in five years, and triple it in 10 years, ultimately debasing our currency and reducing the living standards of the American people."   WSJ

Mr. Obama charged out the gate April 13th with his proposal that would cut federal budget deficits by a cumulative $4 trillion over 12 years, compared with a deficit reduction of $4.4 trillion over 10 years in the Republican plan.

The president offered he would use starkly different means, rejecting the fundamental changes to Medicare and Medicaid proposed by Republicans and relying in part on tax increases on affluent Americans. The president framed his proposal as a balanced alternative to the Republican plan.

“There’s nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires,” the president suggested.

Mr. Obama said he would meet his $4 trillion deficit-reduction target by cutting spending across a range of government programs, from farm subsidies to federal pension insurance. He called for cutting $400 billion more in military spending — twice what his defense secretary, Robert M. Gates, told Congress was the largest cut he could recommend.

Mr. Obama said his plan would contain a trigger to require across-the-board spending cuts if, by 2014, the federal debt was still projected to be rising as a percentage of the total economy. The trigger would apply not only to spending but also to what the administration calls “tax expenditures” — essentially payments to taxpayers for deductions for charitable donations or home mortgages. The use of the phrase “tax expenditures” allows the administration to lump tax-related issues into the spending category.

More details of the rhetoric can be found here: New York Times and the White Office Fact Sheet

CONCLUSIONS:

Neither party knows how to solve the problem without massive reductions to national security (Military, Home Land, CIA, NSA, Black Ops) or social entitlements programs.

Both parties have avoided any possibilities of addressing either subject:

• as long as possible ,
• after the next election or
•  the next crisis excuse

.... whichever occurs first.

SOURCE: GordonTLong.com

Why The Fed Must End QE2 On April 27th

SOURCE: Why The Fed Must End QE2 On April 27th

• NO CREDIBILITY: The Federal Reserve has lost all credibility on Wall Street, and most of the American public with the absolute refusal to recognize the dire effects on asset prices that QE2 has created. But the refusal is part of the problem. It reinforces the wide spread belief of investors that the Fed is out of touch with reality, and that they sit in their Ivory Tower implementing an exceedingly loose monetary policy, with the stated goal of inflating asset prices. The Fed has refused to even acknowledge the possibility (rather than the indisputable facts) that not only have they inflated selected asset prices like S&P 500, the Dow indexes, but they also have inflated asset prices like food, energy, and clothing which would actually hurt the economy and consumers.
• REDUCED STANDARD OF LIVING: Remember, overall inflation is actually being artificially under-reported by the numbers because housing and wages are not inflating. These are the two actual groups of assets that Americans in reality need the Fed to inflate. But Fed’s policies have been unable to help and seem to essentially be hurting the housing sector, as higher everyday living costs with stagnant wages tend to reduce disposable income and resources that could be otherwise allocated to saving towards a down payment to purchase a house, improving the real estate sector of the economy.
• EMERGING MARKET INFLATION: The fed has exported dire and extreme inflationary pressures on an already precariously balanced inflationary picture in the emerging market economies from China to India. These countries had inflationary problems before based upon their undervaluing currencies. Nevertheless, this is how their economies have been set up in the global trade role that has been 30 years in the making. These countries just couldn`t revalue their currencies near enough to still keep their role as exporting, cheap labor manufacturers, without sending the entire region into a 10-year depression which would bring the entire world into a depression not seen since the Great Depression. This results in making what would be a manageable level of inflation in China of around 3.5 to 4% an unmanageable level of inflation at 5.5 to 6%, and maybe even higher as the full effects of the inflation of commodity asset prices have not yet fully been incorporated and manifested in the Chinese manufacturing economy.
• INFLATION TRADE:
  • 1.Loose monetary policy is dollar negative (printing money, currency devaluation, etc).
  • 2.Commodities like Oil, Gold, Silver, Wheat, Corn, Cotton, Copper are Dollar negative Hedges
  • 3.Therefore, put on the following trade: Short the dollar, and go long commodities.

• TRANSITORY INFLATION CLAIM: Bernanke also adds that these inflationary effects are transitory in nature--he has been saying “transitory” for over 6 months now. How long does it take for ‘transitory” to become “stuck in the economy, and cannot get rid of without a massive rate hike sledgehammer”?
• FED NOT LISTENING: The Fed might ask themselves the following question:
  • How come at every Speech where there is a question and answer session that you are asked about inflation?
  • How come every reporter when interviewing a fed member asks them about their role in causing inflation around the world and how this is contributing to political and social instability in emerging economies? Is this just by coincidence, all these reporters and questions revolving around inflation effects? The answer is that these questions are being asked for a reason, and that alone is a problem for the fed.
  • How come every other country is worried about inflation, including developed economy neighbor Europe, while the US doesn`t have an inflation problem? It seems the US is the only country in the entire world where inflation isn`t a problem? Does this seem logical? And if it is in fact the case, how long do you think it will stay this way, where the entire globe is experiencing inflation pressures but the US has a “transitory” inflation problem?
• UNLEASHING THE INFLATION MONSTER: The problem for the Fed is that this goes beyond current inflationary effects in the economy, but future expectations of inflation in the economy. And none of these are transitory in nature once they get embedded in the psyche of investors and consumers. The only way they were doused in 2008 when they were at these exact levels was a near historic crash in the financial and housing markets. Absent of some similarly extreme deflationary event, inflation and expectations of inflation are only going to feed on themselves and become even more firmly entrenched in the economy, negatively reinforcing investors and consumer’s asset allocation and spending habits. This all becomes self fulfilling in nature, and the real nasty part about inflation is if you don`t head it off early, once it gets even a little momentum, it becomes much more difficult to control and manage. This is where the fed is right now; they are at the cusp of losing control of their handle on inflation with their incredibly dovish stance towards inflation

Q1 GDP - SLOWDOWN

• The U.S. economy grew at a slower pace than forecast in the first quarter as government spending declined by the most since 1983.
• Gross domestic product rose at a 1.8 percent annual rate from January through March after a 3.1 percent pace in the last three months of 2010
• The first-quarter pace was the slowest since April through June of last year.
• For all of 2010, the world’s largest economy expanded 2.9 percent, the most in five years,
• after shrinking 2.6 percent in 2009.

  2009     2010     2011
  -2.6      2.9        1.8 (Q1)
                          0.8 x Inventory Build

                          3.4-3.9  Fed January Forecast
                          3.1-3.3 Wednesday

FED SLASHES FORECAST

• Slower first-quarter growth explains why the Fed trimmed its 2011 forecast to 3.1 percent to 3.3 percent, according to its latest so-called central tendency, released yesterday.
•  In January, the central bankers projected 3.4 percent to 3.9 percent expansion.
• BERNANKE: “I would say roughly most of the slowdown in the first quarter is viewed by most on the committee as transitory,”

CONSUMER PURCHASES

• Household purchases, which account for about 70 percent of the economy, rose at a 2.7 percent pace last quarter after a 4 percent gain in the final three months of 2010.

CONSUMER CONFIDENCE

• Consumer confidence in the U.S. fell last week for the first time in a month as rising gasoline prices hurt household finances, another report showed. The Bloomberg Consumer Comfort Index decreased to minus 45.1 in the period ended April 24, the lowest level since the end of March, from minus 42.6 the prior week. Measures of personal finances and buying climate dropped, indicating households may limit purchases as fuel costs rise.

INVENTORY

• Inventories last quarter were stocked at a $43.8 billion pace, compared with a $16.2 billion rate in the fourth quarter.
• Excluding inventories, the economy climbed at a 0.8 percent annual rate from January through March, the slowest since the third quarter 2009.

INFLATION

• “Increases in the prices of energy and other commodities have pushed up inflation in recent months, longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.”

INVESTORY SENTIMENT

• The S&P 500 closed at a new bull market high yesterday, but based on the most recent bullish sentiment reading from the American Association of Individual Investors (AAII) you would not know it.  In the last week, bullish sentiment did increase, but at a current level of 37.90% sentiment is hardly ebullient.