Tuesday, June 30, 2009
Today, if my father had lived, he would have been 98 years old. Few of us will live to see our 98th birthday.
Last night I was working as a gallery attendant at the Contemporary Arts Center. The CAC is open until 9 pm on Monday nights, and is free to the public from 5 to 9. If you ever get to Cincinnati, you should visit the CAC, if for no other reason than to see the building. The building is a treasure, and my favorite gallery is the second floor. My job is to keep an eye on the guests, as the art work does not touch them.
I can not help but notice the number of people that come through that are seriously over weight. We have a health crisis in the United States, and I am not talking about health care insurance. Because there is so much fast food and because food is cheap, people are killing themselves by literally over eating. I do not believe we should stop fast food companies from advertising, but something needs to be done to counter the affect that fast food advertising is having on the health of our nation. I see young people carrying too much weight, and just about everyone knows that with obesity comes a number of health problems. Something needs to be done, as we are literally killing ourselves with food.
Yesterday, I wrote about an article in ROLLING STONE magazine's July 9 - 23, 2009 issue. There are three boys on the cover known as BOYS TO MEN, and on the left of the cover are these words, "THE BAILOUT - HOW GOLDMAN SACHS RUNS WASHINGTON." If you don't feel like spending $5.95 to read one very good article by Matt Taibbi, then go to your public library and read this article.
Change will not occur just because one person says we need change. Change in the way the investment business is run in the United States will only come when enough people become knowledgeable about how the investment business conducts itself. While I think there should be greater leadership from the 50 state pension funds when it comes to putting pressure on Wall Street and Washington about how the investment business is conducted, the individual citizen needs to get into this fight too. The trillions of dollars held in pension funds, mutual funds, endowments and foundations in the United States is what we are talking about. And, a small number of investment professionals have been taking extreme advantage of a whole country and their investable funds for far too long. The way business is done on Wall Street and Washington with regards to the investment industry must be changed. This country's very security as a nation depends on it. People have been made "marks" of a greedy few for far too long.
Monday, June 29, 2009
Today, I would like to direct everyone to the ROLLING STONE magazine, issue of July 9-23, 2009. Beginning on page 52, Matt Taibbi has written an article titled The Great American Bubble Machine. This is an important article to read if you are a MONEYTHOUGHTS follower or not. Directly under the title are these words: From tech stocks to high gas prices, Goldman Sachs has engineered major market manipulation since the Great Depression - and they're about to do it again.
First let me say, I am surprised to find this article in a magazine I thought wrote about music. But, last week, I got a post card telling me that Conde' Nast would no longer publish Portfolio, the magazine. I find it interesting that a magazine like Portfolio can not make it in this market. If ever there was a time when the public needs to know more about what is going on between Wall Street and Washington, it is now.
Matt Taibbi has researched and written an excellent article, and if only 100 million people would read it, we might have a chance to change some things in Washington. Wall Street has made "marks" of the American people as individuals and as part of larger groups such as pension funds run by the several states. Take a few minutes and go to your local library and read this article if you do not wish to buy the magazine for one article as I did.
But, then we should all make copies of the article and send it to President Obama in THE WHITE HOUSE. If a few million people cut out or sent copies of this article, perhaps our president might get the picture. The article talks about how many former Goldman Sachs people work in government in important positions that regulates the way business is done on Wall Street. Again I urge everyone to read this article, it will open your eyes to what went on, as well as what is going on now in the investment business.
After some of you read this article, I hope you will share your opinions in comments.
Sunday, June 28, 2009
Saturday, June 27, 2009
I am working with a new computer, and still feeling my way. Here are two pics I took yesterday from my front yard. I am not a photographer, I simply point my camera and click. That is me on the cone flower in the first picture, I decided to try the life of a bee for a few hours. It wasn't bad actually, I have had worse times over the years, being a human.
Hopefully, by next weekend, I will be able to show my paintings again. They are on here somewhere.
You all have a nice weekend, and be ready for MONEYTHOUGHTS on Monday.
Friday, June 26, 2009
This week, I got back on track and started beating my drum about the credit rating agencies, as I have done for many many months. The big three credit rating agencies had a huge impact on our recent financial crisis, the bond market meltdown and yet, these three companies must have a lot of political friends because they remain untouched by this whole affair. Who is protecting these fuckers? That is the trillion dollar question!!!
Others have written about the problems with the CRAs, the conflict of interest they have in the way they are paid by the investment bankers seeking the triple-A ratings, and yet these three companies keep dodging every bullet. Why?
In review, the Fed requires that banks hold triple-A credits in their portfolios. This is a requirement set down by the Fed. I have argued that, if the Fed thinks that owning triple-A credits is so important to the stability and safety of a commercial bank's portfolio, then why not have the Fed take over the issuance of the triple-A rating process? If this rating must mean something, then does it not follow that the Fed would be the best source for establishing what constitutes a triple-A rating? How many times can we afford to have the three major credit rating agencies be at the apex of a financial crisis?
I have suggested, in an earlier post, that there has to be some limit, a number in dollars, as to how many triple-A mortgage-backed bonds can be securitized over a given amount of time in the United States before the value, or meaning, of the triple-A rating comes to mean nothing. I will let the economists and mathematicians figure out what that number should be, but this I know, it can not be infinite.
Yes, there are other problems that need to be worked on to prevent another financial crisis, but the problem of the credit rating agencies is really at the molecular level of our financial problem. And, in my opinion, until this piece of the puzzle is dealt with in a forth right and honest manner, we are headed back to the same kind of financial crisis we just came from.
Thursday, June 25, 2009
Yesterday I brought attention to the fact that Congress knew of the problems with the credit rating agencies as far back as January 2003. Most likely, Congress knew about the conflict of interest issue with the credit rating agencies much before 2003. But, even with the financial crisis and the bond market meltdown, and now a few books are coming out about the economic and financial events over the last few years, the issue of the credit rating agencies remains like the fine print at the bottom of a credit card contract, ignored by nearly everyone. A few have talked about this on some TV news programs, but we have heard nothing from this administration about changing the present system.
I, in prior posts, have gone into the problem in detail and even given my solution, which is to make the Federal Reserve Bank the issuer of the triple-A rating. When you dig into the importance of the triple-A rating as it relates to banking regulations, you see that the Fed itself places significant importance on institutions holding securities with the triple-A rating. If, holding triple-A credits in an institution's portfolio is important to how the Fed views the stability of banks, and their ability to function and carry out their responsibilities to their customers and their community, then should not the Fed have control over the issuing of that triple-A rating? It is my opinion that the Fed must have control of the triple-A credit rating if our system of banking is going to be able to withstand a future financial crisis.
Far too few understand, or, possibly even care, about what this credit rating issue is all about, but I can assure all of you that without a credit rating system with integrity, the economic recovery that the Obama administration is working for, will not take place in the near term. Far too many investors and professional portfolio managers have been burned by the structured financial products that came out of Wall Street. The market for these bonds was the entire world and the world will be much more careful where they invest their money in the future.
Wednesday, June 24, 2009
The above link is to a report about the credit ratings agencies. I am reprinting the title and date of the report. Notice the date of this report, it is January 2003. Here it is:
Report on the Role and Function of Credit Rating Agencies in the Operation of the Securities Markets
As Required by Section 702(b) of the Sarbanes-Oxley Act of 2002
U.S. Securities and Exchange Commission
If you go to the link and read just the Introduction of this report, you will see that everything and more that I have been trying to bring to the readers of MONEYTHOUGHTS has appeared in print as far back as January 2003. The Congress knows the score as it relates to the role the credit rating agencies play in the operation of the securities markets, and Congress had a responsibility to act to protect investors from the conflicts of interest that the report spelled out. Why did not Congress act in behave of the people? Hundreds of millions of people have money invested in the securities markets for a multitude of reasons. Saving money in a traditional savings account can not keep up with inflation. That is why people invest, to hedge against inflation and hopefully hold onto the purchasing power of their dollars. But, the Congress of the United States let the people on Wall Street fuck over everyone invested in our securities markets, and especially the bond market where many people thought their money was safe. To think that the alliance between Wall Street and Washington is going to suddenly disappear is nonsense. Business as usual will be with us again. Congress knows on what side their bread is buttered. MONEY TALKS AND BULL SHIT WALKS, and don't you forget it.
Tuesday, June 23, 2009
First a disclaimer: I know nothing about Health Care.
I find it interesting that now that the Obama administration is ready to take on the health care issue that Democrats are getting cold feet. Or, is it not so much a matter of cold feet as it is a matter that they know where the big campaign contributions come from. With the percentages for change in the Health Care system being reported on TV by the news programs, you would think that the Democrats in Congress would get the message. This is just another example of my old standby, "money talks and bull shit walks." We have 40 plus million people without health insurance, and even the middle class, whoever they are now after this latest financial crisis, want changes in the present health care system.
I do not have any answers, but I do encourage everyone to let their members of Congress know where they stand on the issue. The poll numbers are strongly on the side of change. Members of Congress need to know where you stand and who you will vote for in the next election. Those with representatives from the "Party of No", I doubt whether much can be done, but these guys want to hang on to their jobs in Congress too. The smart ones find a way to stay in office. Write to them, email them, call them on the phone!!! The health care insurance industry is not going to lay down and die so you and your family will have health care. Take a chapter from those greedy bastards on Wall Street, no one gives up their meal ticket without a fight, and the health care insurance executives have a big meal ticket to protect.
Monday, June 22, 2009
I have not read or heard of any changes in the credit rating agencies (CRAs), and this is a big disappointment. Without understanding the role the CRAs played in the financial crisis, and more specifically in the bond market meltdown, the Obama administration is not dealing with the economy, credit and investing in a forth right manner.
Whether President Obama himself understands the role that the CRAs play in the movement of credit from borrower to investor is hard to say. But, the men and women around him should know the role the CRAs played in creating the financial crisis and the eventual bond market meltdown of mortgage-backed bonds. Doing nothing will almost certainly mean a slower economic recovery because investors and the large pools of cash (pension funds, etc.) will be more careful where they invest their fixed income money now.
The idea that banks should hold onto a percentage of the bonds or mortgages they make is a so so idea. There are ways around it, and if not, I am sure the banks will finds ways to circumvent the intent of the rules. But, we should not be surprised that the banks and the CRAs will go back to their old ways in a short time. They, Wall Street, did not spend all those millions of dollars on lobbyists to talk to our Congress and not get something in return for their money.
Sunday, June 21, 2009
Today is Father's Day and as I often do during the year, I think of the times I spent with my father as I was growing up. My father owned a hardware store for almost 20 years, and during that time I had the opportunity to hang out, and then later, as I got older, work in his hardware store. I got to see how my father treated people that came to his hardware store seeking help with a hardware problem or just to hang out and talk with the other men that would gather in his store on a Saturday morning. The men and women that came to my father's hardware store seeking help in solving their problems came because my father treated their problem as if it was his problem too. After listening to them, he would pick out what they needed to fix their problem. People were not regarded as "marks" in my father's hardware store. He recognized that none of his customers had money to waste, and he did his best to save them money wherever he could. That is why people came back to his hardware store because they knew Si would give them the help they needed. I learned a lot more than hardware working in my father's hardware store.
Happy Father's Day.
Saturday, June 20, 2009
These cone flowers are in my front yard and they are apolitical. They know nothing about the right or the left. They are just there to make people that walk by them feel good. This Saturday I am not going to post any of my political art. Flowers standing tall seems like the way to go today.
Everyone have a nice weekend.
Friday, June 19, 2009
This morning I read what Paul Krugman wrote in The New York Times about the new financial regulations being proposed by the Obama administration. The thing that caught my eye was the fact that there is nothing, according to Krugman, about the credit rating agencies. If the Obama administration and Congress do not deal with the conflict of interest that the credit rating agencies have with the underwriters, that pay for the credit ratings, then we can all look forward to another meltdown in the near future. Greed on Wall Street is buried in the DNA of the investment business. Not willing to meet this challenge head-on will only encourage those greedy bastards to go right back to the well.
Man at work simply means that there is another writing project getting my attention. When I retired in 2005, I started to make notes about events that took place while I was working for the State of Ohio. There is a story there and I am trying to put that story on paper, so to speak. Some people have encouraged me to write my story as way of putting the past behind me. Others have said that it is a good writing project regardless of whether the story gets published. While both of these reasons are good reasons in and of themselves, I, nevertheless, would like to write this story with the hope that someone will want to publish it. This is not going to be a big book. I am hoping to keep it to about 200 pages or less, with a few photographs that I have saved from the events covered in the story. My father, many years ago,(he died in 1969), said to me that everyone has a story to tell. And, with that in mind, I am trying to get my story on paper. Some times when we take a job, we have no idea what we are getting in to. This story is about a very average guy and the events that happened to him when he went to work for the State of Ohio.
As I feel the need to write something about the economy, I will write something from time to time.
Wednesday, June 17, 2009
Well, it appears that the story about the credit rating agencies is getting through, and that is the good news. The bad news is that even the people on the cable news shows, I only watch MSNBC and some CNN, realize, though they do not use my words (“money talks and bull shit walks”) that the Wall Street lobbyists are pouring lots of money and effort into Congress to kill the kind of regulation and enforcement that is needed to protect the investor going forward. W & W Inc. (Wall Street & Washington Incorporated) is a very powerful alliance that will take a tremendous grass roots effort to defeat.
Last night, I caught Michael Lewis on the Rachel Maddow Show talking about the credit rating agencies and the conflict of interest they have with the underwriters of the mortgage-backed bond deals that pay the CRAs for their triple-A ratings. Lewis went on to say the same thing that I have been writing about the CRAs for the last several months. The fact that Lewis’ comments made it onto the TV before 10 pm is good. This morning on MSNBC’s Morning Joe, they were talking about the credit rating agencies again. This is all very good, but we need to keep up the pressure on the Obama administration.
It does not appear that the Obama administration is going to get the fair minded help they need to correct the serious problems in the present system. With everything on this administration’s plate, namely defense and foreign relations on the one side, and the economy and health care on the other, substantial changes in the banking and investment industry may not receive the kind of attention, and reform, that is going to make a difference.
But, I am happy to see that the word about the credit rating agencies is finally getting into prime time. This is the first step. When enough people understand the game, the rules of the game get changed. Many of the members of Congress do not know what those of us that read and write on MONEYTHOUGHTS knows about the banking and investment industry.
Change will eventually occur when there is a grass roots movement demanding better regulation, oversight, auditing, transparency and enforcement. Not before!
Tuesday, June 16, 2009
We should all see something tomorrow about the new banking and investment regulations that the Obama administration will make public. This, while not yet law, will be very interesting to read. It will give us some idea as to how much real change we might expect from this administration and Congress. If they have done nothing about the credit rating agencies and how they do business, then it will be just a matter of time before the next bubble becomes a reality and the American people are once more exploited by those greedy bastards on Wall Street. Believe me, you do not have to be an Einstein to figure out that as long as Wall Street is paying the credit rating agencies for the ratings they receive for the structured finance deals that they underwrite, mortgage-backed bonds, then it will be just a matter of time before another housing bubble appears. Besides the conflict of interest of the credit rating agencies, there is another point, and that other point is the lack of control of monetary policy by our central bank, the Federal Reserve Bank, of their monetary policy. Securitization has changed the ball game for The Fed, and, it has made their former tools of monetary policy inadequate in the 21st century.
Monday, June 15, 2009
Yesterday morning I rode 26 miles on my bike for RIDE CINCINNATI (that's me in the above photo). RIDE CINCINNATI is a bike ride to raise money for breast cancer research at the Barrett Cancer Center at the University of Cincinnati. I spoken briefly with the founder of the ride, Dr. Harvey Harris, and he said that they had 1,600 riders participate in the ride this year. This was the 3rd year for RIDE CINCINNATI. I want to thank everyone that donated money to my team, a team of one, this year.
This week, I may not get around to writing a lot about the economy as I usually do on MONEYTHOUGHTS. While I was riding Sunday morning, a close friend of many years, lost his brother to cancer early Sunday morning. I also knew his brother for at least 60 years.
The Obama administration is supposed to be coming out soon with new regulations for the banking and investment industry. It will be interesting to see what steps are being taken to see to it that we do not make the same mistakes again. Regulation, oversight, auditing, transparency and enforcement are all aspects of a good system, and we need and deserve a good system to protect borrowers and investors in the 21st century.
Saturday, June 13, 2009
Tomorrow, June 14, is Flag Day in the United States. I am going to take a bike ride, RIDE CINCINNATI, for breast cancer research tomorrow morning as I raised $495 for the Barrett Cancer Center of the University of Cincinnati. I have been working out on my bike since early April and feel pretty good about the shape I am in now. This should be a lot of fun, it is not a race, it is just for me a 26 mile bike ride on route 8 in Kentucky after I pedal across the purple bridge that crosses the Ohio River from downtown Cincinnati.
A lot has happened this week, and I wish I knew how to extract the hate that resides in our country. Hate is a serious issue, and it deserves all of our attention. In tough economic times, hate comes to the surface and even boils over into violence. I know none of us what to live in a country where there is hate and violence.
Friday, June 12, 2009
We have a cool wet morning here in the Queen City.
Health care reform is the big economic story in the news this week. This nation needs a more healthy population as we are not at the top when compared to other nations, and health care costs are hurting us economically as well. But, in my mind, education is an important piece of the health care puzzle. Without better nutrition and health education people will continue to make poor choices in life style behavior. Personally, I think everyone should have health care, and especially children should have the benefit of a complete health care system. But, with that said, I believe the Federal Government can do a lot more to inform and educate people to make better choices in nutrition, exercise and a wide assortment of life style choices that do not promote a healthier population. Insuring that everyone has access to health care is just a part of the problem, a healthier nation needs to live a healthier life style too. There is, in my opinion, much that can be done to educate children (and adults) about what is good for the human body, as well as what each individual can do to promote and live their own healthier life style.
I believe that there is a contract between government and its people. I believe that government should “cover” the health care option, but I also believe that the people have a responsibility to do what they can to make and maintain themselves as healthy citizens. Let me put it this way, the government provides us with the boat, but we all need to grab an oar and paddle too. Government money alone can not make for a healthier population without a serious effort on the part of government to inform and educate the population about what each of us can do to live a healthier life style.
Thursday, June 11, 2009
Some people in the fixed income business consider Bill Gross the most knowledgeable person in the world about fixed income. This link was sent to me by someone that I knew when I worked in the investment business. While it is a little long perhaps, I nevertheless, think this is someone who has years of experience and knowledge dealing with bonds and our domestic economy and the world economy. I think those of you who read what the head of one of the largest fixed income money management firms has to say, will find it very interesting.
Wednesday, June 10, 2009
There has been a great deal of talk about the Federal Government’s spending, stimulus, to get our domestic economy moving again, but there has also been a great deal of criticism about the amounts of spending too.
My problem is not so much with the spending by the Federal Government as the lack of new rules for the banking and investment "game". Going forward with the mistakes of the past will not produce different results the next time around. As long as the attitudes on Wall Street and the regulations coming out of Washington remain the same, disaster is waiting for us just around the corner.
I am not very hopeful about the odds for change in the system. As I have said many times before, “money talks and bull shit walks.” Money and access make things happen in Washington, we all know that. The real question is: with all President Obama has on his plate, can he ferret out what is necessary with regards to securities regulations, the credit rating system and control people like Larry Summers and Tim Geithner to do what needs to be done? Wall Street & Washington, Inc. will not just rollover and give President Obama the level playing field that would ensure a speedy and complete economic recovery. The alliance between Wall Street and Washington is no secret. You do not have to be an Einstein to figure out that there is a direct pipeline of money moving north to south, Wall Street to Washington. The traffic pattern of money goes back to the founding of this nation in the 18th century.
There are large pools of capital to be invested here in the United States and around the world. What the managers of these large pools of capital are waiting to see is if the rules of the game will receive the corrective balance that the investor side of the equation is entitled. Once the investment “playing field” is made more “level”, we can expect the movement of capital from investor to borrower to restart our domestic economy and the rest of the world’s economy as well. We are still the economic locomotive that the rest of the world looks to. What is needed now is a better regulated, more transparent and enforcement of the rules. When Washington figures that out, perhaps the argument about what is too much spending can be solved. But, as things stand now, we are headed back to the place we just came from, another financial crisis and bond market meltdown.
Tuesday, June 9, 2009
What does it mean to say the triple-A credit rating is not bottomless? Could there be an Olympic Games where everyone wins a gold medal? What would a gold medal mean if everyone got one?
It is my opinion that the credit rating agencies (CRAs) would have continued to slap their triple-A credit rating on every bundle of mortgages that reached their desks for securitization until the game finally fell apart, and it did. At what point does the weight of all those triple-A rated mortgage-backed bonds bring down the real estate market and create a financial crisis?
Even a crane used to build tall buildings around the world has a weight limitation before it too will collapse. Nothing can withstand unlimited stress, not even passing out triple-A credit ratings for every mortgage-backed bond issue that is underwritten by Wall Street can withstand that kind of stress.
For the Federal Reserve Bank not to see the relationship between the issuance of the triple-A credit rating by the credit rating agencies, and the mortgage-backed bond market meltdown, is to ensure that we, the United States, will have a repeat of the financial crisis that we have already been through. Doing the same thing and expecting a different result, without taking steps to correct our mistakes, is a formula for more disaster.
The credit rating agencies have a built in conflict of interest with the mortgage-backed bond underwriters because it is the underwriters that pay the CRAs for the rating. As long as this remains the situation, the underwriters on Wall Street will “shop” the credit rating until they get the triple-A rating they need to pedal their bonds.
The CRAs played a key role in the financial crisis along with the guys that paid their bills, the underwriters on Wall Street. For the Fed to ignore the facts of our recent financial history, means that we as a nation are doomed to repeat the same financial history again.
The Federal Reserve Bank must take control of the credit rating process. It is important that the size of the securitized mortgage market be a calculation into the monetary policy decisions of the Fed. This in the world of securitization of mortgages is essential if the Fed is to have the kind of influence they need to have to manage monetary policy in the 21st century.
If politics trumps doing the right thing for the American people, as far as a future financial crisis and bond market meltdown are concerned, then, we all better be putting more than a few gold coins under the mattress.
Monday, June 8, 2009
Did you watch 60 Minutes’ interview with Chairman Ben Bernanke last night? There was some good stuff in the interview and the footage of the inside of the Fed was something to see. I bet we all could use a pallet of one hundred dollar bills
I agree with the comment that next to the President of the United States, the Chairman of the Federal Reserve Bank is the most powerful person as it relates to our economy. The central bank of any country has an enormous responsibility for not just the monetary policies of the country, but with the United States, our domestic economy and the economies of the rest of the world. For many years, the United States’ economy has been viewed as the locomotive that pulls the other economies of the world with it much like the locomotive pulls the other cars of the train.
Ben Bernanke is highly qualified to be the Chairman of the Fed, but like all of us, experience has a lot to do with the knowledge we bring to the job. Before becoming Chairman of the Fed, Ben Bernanke was a professor of economics at Princeton University. His area of expertise was central banking and the Great Depression. Unfortunately, technology has permitted the world of banking to change, and those changes have, in my opinion, rendered the old tools of monetary policy incapable of influencing the growth of the money supply as well as creating what I would call “leaks” in the system.
Over the last several months, the Fed has had to take ex-ordinary measures to deal with the financial crisis. But, unless the Fed and the Federal Government (Congress) are prepared to make some permanent changes in the way banking is done, we are going to travel the road of a financial panic and crisis again.
The Fed must, in my opinion, have complete control of the credit rating process. The issuance of the triple-A credit rating must no longer be in the hands of the private sector, to be “shopped” by the underwriters as was done in the recent past. The credit ratings are the weights and measures of finance, and must be controlled by the Federal Reserve Bank. There is in my mind a mathematical relationship between the growth of the money supply and the issuance of the triple-A credit rating. The triple-A credit rating can not be inflated and stand for nothing. The integrity of the triple-A rating is essential to our economy not going down the same road to a financial crisis again.
Wall Street will abuse the credit rating system again as it has done several times in the past. The fixed income sector of the market that creates the billions of dollars of structured financial obligations and their triple-A credit ratings is not bottomless.
Saturday, June 6, 2009
Friday, June 5, 2009
When I was a little boy, I loved those books where you took a pencil and connected the dots by following the numbers until a picture took form before your eyes. Understanding economics and monetary theory is very much like connecting the dots with a pencil in those books I loved as a child.
Understanding what money is and the forms it can take, as well as understanding that like a commodity money can go up in down in value, also known as purchasing power, and, to rent money, the interest rate that is paid by the borrower can change over time.
The concept of a central bank with power over the commercial banks orbiting around it, is the stuff that makes our economy so dynamic and gives it its strength. However, we know the world is not static, as there are always new innovations that can short circuit the best systems. Our central bank, The Fed, had its sights on growing the economy and did not realize that computers and a few bright guys could create a whole new sector of finance known as structured debt obligations. Once securitization came about, it was time for The Fed to reexamine the situation and ask itself if it had the necessary tools to continue to influence the growth rate of the money supply.
Securitization of mortgages did not exist when the first tools of monetary policy were put together. The world of finance changed, but The Fed did not anticipate how that change would affect their ability to run monetary policy. Securitization, the triple-A bond rating, and a world wide market for collaterized mortgage obligations (CMOs) changed the framework under which monetary policy could be effective.
The Federal Reserve Bank needs to control the issuance of the triple-A rating as a tool to influence monetary policy. The triple-A rating, in a world of the securitization of mortgages, can not remain in the hands of the private sector. The weights and measures of finance, the credit ratings by which billion$ of dollars are underwritten, must be in the hands of the Federal Reserve Bank.
There are a lot of people that will disagree with my opinion, but no one can disagree with the fact that with the securitization of mortgages, the Fed has lost influence over the monetary policy for which it is charged. Congress needs to step up to the plate and recognize that the financial playing field of the 21st century is far different than it was when Congress created the Fed. A Federal Reserve Bank without control over the triple-A rating and thus the issuance of CMOs, is a Fed lacking control of its own monetary policies.
Thursday, June 4, 2009
Today, I want to talk about something that has been going around in my head for a while, but for some reason I have not written it down, so, here goes.
The Federal Reserve Bank can influence the growth of the money supply by using three basic tools of monetary policy. The first tool is OPEN MARKET OPERATIONS. Open Market Operations is the buying and selling of U.S. Treasury securities on the open market. If the Fed buys securities they put more reserves into the banking system, and, if they sell securities they take reserves out of the banking system. The second tool is the FED FUNDS RATE. The Fed can raise and lower the Fed Funds Rate to encourage more or less lending and thus influence the growth of the money supply. The third tool is the RESERVE REQUIREMENT for commercial banks. By raising or lowering the Reserve Requirement that banks must maintain, the Fed can again influence the growth rate of the money supply. The Fed can not control the growth rate of the money supply because if people do not want to borrow money the Fed can not force them to borrow. This is sometimes known as “pushing on a string.” You can push a frozen rope, but you can not push on a string. Try putting a piece of string on a table and pushing it with your finger. It does not work, and neither does the Fed. Let me explain.
The process of securitization of structured finance obligations, mortgage-backed bonds, etc., short circuits the Fed’s influence over monetary policy. When mortgages or any other structured financial obligations are bundled and made into fixed income securities, given the triple-A rating by the Credit Rating Agencies and sold around the world, the Fed has lost influence over the growth rate of the money supply. I do not believe that Chairman Greenspan fully understood this at the time it was happening. The more I read about Alan Greenspan the more I think he was an idiot savant. Greenspan’s interest in economics and his thing for numbers was no substitute for an understanding of the subtleties of monetary theory.
The financial bubble that was created was a direct result of the process of securitization of the mortgage market and the sale of mortgage-backed obligations to investors around the world. In essence, the Fed, our central bank, lost control and the resulting financial crisis that hit the United States and then the rest of the world began with the expansion of mortgage credit writ large by the world wide appetite for mortgage-backed bonds.
I guess if I am right, that would make me the Antichrist of monetary policy, but if it does so be it. There is a flaw in our Central Banking System, and until this flaw is recognized and dealt with, this flaw will come back to bite us all in the ass again.
Wednesday, June 3, 2009
Last night I watched the NBC Special on the Obama White House. I have seen the White House from the street, but I have never been in the White House. It is always interesting to see what the White House looks like inside. The program was entertaining as it should be, but news programs should be more than entertaining and they are not much more than entertainment.
While Brian Williams and President Obama were in the car making a burger run down to the city, Williams asked Obama if he ever stops as he is switching channels and watches some of the cable news shows. Obama’s answer was “no”, he does not watch because there is nothing for him to learn from the same worn characters saying the same worn things. I agree, but it is all I have, so I watch it.
I have written about the fraud of the Credit Rating Agencies many times, and yet, not one of these TV news shows has discussed the role this fraud played in the financial crisis and the bond market meltdown. Why has there been no discussion of this vital piece of the puzzle? Is it that it is too difficult for people to understand a bond rating system that starts with triple-A? Or, is it more likely that a discussion of the role that the Credit Rating Agencies played in the mortgage-backed bond fraud is not sexy enough for the people that repeatedly appear on these news shows?
I hope the big shots at NBC watched the Obama White House Special last night and heard what the President said about their political news shows on MSNBC. How about putting on some new faces that know some new things to talk about? Have not we all heard enough from Pat Buchanan for the rest of our lives?
Discussing politics requires an understanding of the economic factors that drives the political debate. NBC, how about bringing on some people that know something about the Credit Rating Agencies, the mortgage-backed bond market? Is not it worth a gamble to shoot a little higher and try for a more knowable show that might even get the President’s ear?
Tuesday, June 2, 2009
The President’s Council of Economic Advisers says that it is for the economic good of the nation that we have health care reform. Because it will save jobs and help large and small businesses that this health care reform might happen. We are not going to get health care reform where everyone will be covered because it is the right thing to do, or, that as humans, everyone has a right to health care. Those reasons really do not carry any weight. It is because in Dollar$ that it makes sense that there is hope that reform will take place. This is just one more example of my philosophy about life in America, and perhaps all over the world in varying degrees, that money talks and bull shit walks. Show the economic imperative, yes the word imperative is used in the article about health care that I read this morning, and you might just be able to get enough votes to get reform passed by the Congress of the United States.
I love the part of the article where they discuss the Dollar$ that will be saved by the typical family of four as a result of health care reform. The Council of Economic Advisers can tell us how much we will save 20 and 30 years out in 2009 Dollar$. This kind of economic analysis is just so much crap that it is beyond laughable. They can not tell you the purchasing power of the Dollar in five years much less 20 or even 30 years. But, for the vast majority, these people on the President’s Council of Economic Advisers sound like they know what they are talking about. May the FORCE be with them.
I hope we get health care reform passed soon. I think we will be a better nation if everyone knows that they will not be destroyed by health care costs or that they can not take a better job for the security of their family because they fear losing coverage because of a preexisting condition. I know there must be another million reason why health care reform will be good for this country, but we do not need to list each one.
Monday, June 1, 2009
Today starts a new month and for me a new project. For the next three months I will be working on writing a story. This is my story, a true story, something that I lived.
Over the last year and three and one half months I have written my opinions about the economy, the markets and the way government policy has affected our domestic economy.
Now it is time for me to try a new strategy and write a book. I do not know if anyone will publish my story, but at this point in time, I feel like I have to make the effort now. So, for the next three months, I am going to be writing this story with the goal of having a book written by September 1, 2009.
I will still write my blog MONEYTHOUGHTS; however, I will be writing a lot less. I have given my blog my best shot, and while I realize what I write about is not the sexiest stuff in the world, I nevertheless think it is important that someone makes the effort to get the story out there.
The basic argument for me is that the federal government has an obligation to protect the investor, private individuals and public pension funds. Fiscal policy and monetary policy in the United States makes saving money over the long term a losing proposition, thus forcing people and institutions to invest in the stock and bond markets. With investing a necessity to reach actuarial assumptions set by actuaries, the investment game needs to be on the level. Making marks out of people by Wall Street’s greedy is not sport, and should not be tolerated the way it has been by the Federal government and is still today. Regulations, oversight, transparency and enforcement of the security laws needs to be brought to the investment industry. Congress has an obligation to the people of the United States to run a clean investment game. It is my opinion that this has not been the case, better regulations are needed as well as need to be enforced. A whole nation of hard working people have been financially crippled because of the greed of a few. This should not stand, but it will take effort to change the way business is done in Washington and Wall Street. W & W incorporated is not a not for profit enterprise.
I will still write a few times a week, but my main thrust will be going into my book. I may recycle some of my old posts if I need to.