EconoMonitor

Nouriel Roubini's Global EconoMonitor

Concorde’s fate offers a lesson for finance

Published in the Financial Times on April 15 2009

The supersonic Concorde aircraft was considered in the 20th century to be the most sophisticated airliner, flying at twice the speed of sound. Its crash in Paris on July 25 2000 destroyed this confidence. Some blamed the crash on metal fragments from another aircraft; others argued that Concorde was overweight and unbalanced. The accident led to some design modifications but in 2003 Concorde was in effect jettisoned in favour of subsonic aircraft, much slower but easier to maintain.

It is not too much of a stretch to compare the global financial system of the pre-subprime era to Concorde. It was fiercely innovative and grew at a record pace for close to two decades, only to suffer a new type of hard landing without clarity as to whether it was the fault of the system’s pilots or also of those regulating its maintenance.

While possible faults in piloting and maintenance of the financial system are many, the biggest contributor appears to be that capital allocation at large, complex financial institutions (universal banks, investment banks, insurance companies and, in some cases, even hedge funds) was broken, focusing myopically on circumventing capital requirements at the expense of long-term economic value creation.

For the current global market crisis, the primary fault lies with the pilots. These bankers and insurers paid themselves large cash bonuses by deceptively booking the income from triple A rated mortgage-backed securities as profits and ignoring their long-run risk/return trade-off.

But the regulatory maintenance cannot escape blame altogether. In fact, its cracks made the system vulnerable to pilot errors in the first place. In a world without regulation, creditors of financial institutions would curb risk and leverage by charging a higher cost of funding and designing tight contracts and covenants. But, in the world we have lived in, government guarantees (such as deposit insurance and “too-big-to-fail” policies) have been offered virtually for free and the financial risks have been socialised even as profits remain private.

For years regulation has targeted individual bank risk, when it should instead be managing systemic risk. Financial institutions will attempt to exploit government guarantees if that is in the interest of shareholders. That is what they are paid to do. So it is imperative to price the guarantees right.

Where should the regulators start to fix the system? Four changes seem paramount:

●  Change the compensation and incentive structure of traders and profit centres at large, complex financial institutions to provide reserve accounts that grow (“pay a bonus”) on good performance and shrink (a “malus”) on bad performance, essentially bringing clawbacks into compensation schemes.

● Prevent obvious regulatory arbitrage and charge for socialised risks – deposit insurance, too big to fail, temporary loan guarantees and the like – with pricing schemes that reflect ­balance-sheet leverage and risk in a continual manner. This will discourage size and risk distortions in a market-orientated way – rather than by fiat – and impose higher charges in good times if they lead to bigger banks and more leverage.

● Quantify the systemic risk of large, complex financial institutions and “tax” their contributions to systemic risk through capital requirements, or deposit insurance fees, or mandatory insurance purchases from private and public sectors. The need for a systemic risk regulator who performs this role and manages the failure of these institutions is only underscored by the growing size of the few remaining operators in the financial arena.

● Enforce greater transparency of over-the-counter derivatives and off-balance-sheet transactions, using centralised clearing for standardised products such as credit default swaps and indices and keeping central registries with trade transparency for all others.

The recent meeting of the Group of 20 went some way to set the system to rights. First, there seems to be general agreement that regulators should work together on a core set of principles. Without such an agreement financial institutions will be able to cherry-pick their jurisdictions. Second, at least from our point of view, the G20 has homed in on most of the important threshold issues, especially the focus on systemic risk, opacity and compensation within the financial system.

We think the issues of implicit and explicit government guarantees (the second point above) warrant far more air-time at future G20 meetings. A solution as simple as pricing these guarantees at the appropriate market rate will help solve the problem, as higher fees for higher systemic risk and leverage will organically lead these institutions to lower their risk profiles.

Some say that the reforms being proposed are against the spirit of capitalism. We think the presence of government guarantees for systemically important institutions is a given. So ignoring them is unlikely to lead to pure capitalistic outcomes. Others say the reforms will inhibit financial innovation. We think this view also gets the issue wrong. The goal is not to have the most advanced financial system, but one that is reasonably advanced and robust. That is also what we seek in other areas of human activity. We do not use the most advanced aircraft to move millions of people around the world. We use reasonably advanced aircraft whose designs have proved to be reliable.

The global financial system may never return to its golden age. Like Concorde, it will be replaced by a somewhat slower but more stable engine that is less prone to very costly hard landings.

The authors are professors who have contributed to the recently published “Restoring Financial Stability: How to Repair a Failed System”.

Also, see “A Bird’s-Eye View” from the same authors.

100 Responses to “Concorde’s fate offers a lesson for finance”

GuestApril 19th, 2009 at 7:49 am

While “reliability” is nice, the market is designed to gravitate toward the solution that provides the highest degree of “exploitability” as is evidenced by our most recent crisis “solutions” offered by TPTB.

Soylent GreenApril 19th, 2009 at 8:51 am

Excellent comment by Guest! This crisis situation may have come to being as an accident in the way the pilots became recklessly greedy due to the moral hazard of bailouts, and the maintenance crewdid not realize that their complicity would crashthe global economy. Now that they have done it, they are going to Profit from the Chaos. The pilots don’t want to let go of the controls and the maintenance crew is letting them pours gasoline on the fuselage. Profit from the Crisis is the motto of the day. We are sitting on our butts, while the elite are setting fire to the fuselage. The financial oligarchy sees everything as a market opportunity to make more money. They know that they will come out of the chaos paying for assets at garage sale prices. The economic chaos for the ordinary human being is just the price of doing business. We are now in a formalKleptocracy. Market Fundamentalism will take us to its logical result. Economic Chaos presents many buying opportunities. The logic of the day is that human beings are expendable. Only the parasitic financial types who control government are the fittest. We either become active participants in our democracy or we are not going to fare well.

devils advocateApril 19th, 2009 at 8:39 am

“history repeats itself”so what did we learn from the 1929 Great Depression?re-apply those lessons to the present

GuestApril 19th, 2009 at 6:38 pm

Let me add that the montra of this administration and the fed is that what was NOT done during the great depression was the cause of prolonging the depression era. Thus, they conclude that by doing what was NOT done (in addition to what was done that they feel was appropriate for the situation), they are providing a cure for what ails the economy…and that is FLAWED thinking.

GuestApril 30th, 2009 at 8:38 am

The Japanese showed what happens when you “don’t do what they did in 1929”. You keep the insolvent banks alive so you don’t have runs, but the result is an inevitable collapse of the real estate market as consumer bank credit remains tight for years.

MM CAApril 19th, 2009 at 8:41 am

I believe that Dr. Doom has toned down his rhetoric and dire anaylsis at the request of Obama and his people. He also accomplished a lot in the past year and was proved right on many occasions… Would not make sense for him to continue so dire so that IF things turn positive he can ride that wave also. He is protecting his future and credibilty so as to remain well respected by many. That is why it is very important to read between the lines on what he says.Bottom line, I see it for what it is today and it is a disaster for most Americans and will stay this way for many years. You cannot accumulate the debt and liabilities we have currently and at the pace we continue to, without SEVERE consequences on everyday life and things. 35 million people on food stamps, approx 15-20Million people out of work or in Shit jobs that gets them now where. Unemployment expected to climb much higher… Forclosure and upside down mortgages are in the tens of millions… Someone tell me where all the positive news is for Americans…. And someone tell me where the approx 10 Trillion spent on fixing things has worked. Banks and Credit card companies are gouging ALL Americans in the eyes with thier new Fees and taking back of credit. State and local govt’s are gouging people with all their new taxes and levy’s and fees. Health care is broke, Education is broke, Manufacturing is broke, Green technology is a pipe dream in this country as long as Big Oil and Banks are in charge… Medicare and SS have unfunded liabilites of 60 Trillion and rising…And they (Obama and all the others) expect me and All other Americans to beleive that an extra 12.00-15.00 in our paycheck is helping…I could list 100 other gloomy pieces of what’s wrong and quite honestly not many postive things about Economics and the finacials of this country and it’s people. Plenty of positives on people and societal issues, but what we have here is a TOTAL collapse of our Economic and Financial system caused by a bunch of greedy and corrupt Govt’t officals, politicans and Corporate types.Chryslar is toast within days, GM in bankruptcy by June and to be just a shell of itslef.. How the hell did that happen?Optimism will return when there are positive things happneing…. I for one probably won’t be around as I only have about 25 years left here if all goes well…

oy veyApril 19th, 2009 at 3:16 pm

IMO chrysler and fiat will be a done deal…and the UD gvt will make it happen any way possible.

GuestApril 19th, 2009 at 8:54 am

PeterJB, guys whaddaya think of this article….http://www.hizb.org.uk/hizb/pdfs/HT_Towards_a_Safe_Economy.pdfexcerpt:-The foundations upon which the capitalist system is built(1) Ideological creed: separation of religion from lifeThe limitation in human beings and their dependency on the Creator is natural and inherent in them.Man is in need of the Creator to organise the affairs of his life, as he is dependent on sanctification andworship. This is because man’s own organisation of his affairs is subject to change, contradiction, biasand difference. However, the capitalist system is negative with regards to the solution to man’s greatestproblem (belief in Allah and organising life by his legislation). The capitalist ideology separates religionfrom life, making belief in religion an individual matter, leaving every individual to adopt whatever beliefthey want. This conclusion was reached on the basis of the idea of compromise, and it means that thehuman thinkers and leaders legislate the system whereby life’s affairs will be organised.As a result, the West has fallen into spiritual decay and the purpose of life has become maximising one’sshare of sensual pleasures; this being understood also as the path to happiness. In turn the people spendtheir lives in a frenzied pursuit of satisfying their instincts and organic needs. Most of the capitalists havereached thereby the extreme in seeking satisfaction, having tried every evil, whilst it is painted to them asa good. To the extent that one of the major capitalist economists, speaking of the future of Capitalism inthe last century, said, “For at least another hundred years we must pretend to ourselves and to everyonethat fair is foul and foul is fair; for foul is useful and fair is not.”By this ideology the capitalist finds himself in facing two dangerous situations:1. If he does not have enough money he naturally cannot completely satisfy all his needs. This pusheshim in most cases to frustration and despair, and in turn to psychiatric illnesses. Thus we find that thepsychiatrists in America for example have higher salaries than other medical practitioners. Some peoplealso react to this grim situation by trying to escape reality and society through crime, drugs and the like.2. In the case that he does have enough money to completely satisfy his needs and wants, then hebecomes exposed to live in a fatal vacuum which can lead to suicide or abnormal behaviour, or at thevery least to a worthless life of boring monotony. This is why we find that the proportion of suicide inthe West is much higher than anywhere else. Studies have shown that in France alone 160,000 peopleattempt suicide each year of which 32 are successful each day; most of them are youth.(2) Focus on the growth of wealth, instead of its distributionThe capitalist system focuses on the creation and growth of wealth instead of the distribution of wealthto the extent that growth is taken as something sacred and as a magical solution to economic problems,poverty in particular. Bernard Shaw, the European philosopher and critic, who was bald and had a thickbeard, said, “Capitalism is like this head of mine and this beard of mine: high in production and unjustin distribution.”The focus on growth in Capitalism is the result of wrongly defining the economic problem; a fallaciousconception with which it has deluded humanity, including those who are overwhelmed by it. Thecapitalists consider the scarcity of goods and services relative to human needs as the economic problem.That is that the limited goods and services are not sufficient to satisfy the unlimited needs of man. Bythis they make and assume a problem which has no solution! This incorrect diagnosis leads to an evenworse prescription: increasing the goods and services (production) so that everyone who has the wealthcan access them. As for those who do not have wealth, they do not satisfy their needs. Hence thecapitalists do not seek to completely satisfy the needs of each and every individual as they consider thisto be impossible, so they resort to increasing the total wealth; this is what they call ‘growth’. They forgetthat the economic requirement is to serve the society as a whole, not to subject the society to economicgrowth such that the wealth from this growth goes only to a few. And when the growth is achievedthrough loans, like the building of dams and roads, then the first to pay the bill is the majority of people,those who are poor and deprived from the benefit of that growth!Reply to this comment By Anonymous on 2009-04-19 06:28:35

blind de miloApril 19th, 2009 at 9:16 am

a,. for the record my computer hung up downloadingthat pdf. ? spooked me, so i only saw the firstfew pages.. .but.from your selection….i think it is a well written article and agreewith most of it.the deficiency in the mind of man is responsible for theinjustice of distribution in that we have lived ina system that is designed to be imbalanced. we acceptit, tolerate it and even perpetuate it when we know itis failing and is unjust. the bernard shaw analogy seemsappropriate..the question then is how to fix it? which parts of theexisting order are sustainable, useful and justand which parts need to be corrected, eliminated or reversed. ( spiraled ) ;)…..as for the allah part. i don’t know to what extentinfusing religion into economics would be any improvement or make any difference.to some capitalism is already a religion as well asan economic system.this question could be argued for eternity? but i’ll leave it at that.as far as the principles of fairness, honesty, truthfulness, liberty are concerned i think they must beinfused in the functional real economy, as well assustainability..we cannot continue to allow the important decisionsconcerning the functioning of the “system” to bemade in back rooms, via back room deals, and in the shadows by shadow authorities in shadow institutions andcomplexity as a means of obfuscation also doesn’t solvethe problem of unjust distribution..so we have a lot to learn and a lot to change but do wehave the minds in the world able to grasp the reality of the problem and to do the work of articulating and coordinating corrections?beats me. but i see light!

redlegApril 20th, 2009 at 12:06 am

Part 1: Give me a break.part 2: sounds good, but distribution is the root of the problem. The have-nots have watched their real incomes decline over the last 30 years while the haves portion has gotten much larger. Perhaps if the distribution had been a bit more even, then the debt problem we are facing/resolving now would not be a crisis. Look at it this way: if everyone gets a 5% raise per year over the next 10 years, the rich get much richer than the poor even though the increase is the same in terms of %, so the pressure increases on the bottom end. When the system is skewed towards the top, at what point do the folks at the bottom revolt?

MarkApril 20th, 2009 at 1:36 am

Yes, distribution. But it’s an issue that’s far more complicated. Well, not complicated, just not something that people want to discuss: growth. Even if we were totally equitable and NOT increasing our “economic” footprint we’d still be on a headlong dash to the edge of the sustainability cliff.What’s equitable should be food, shelter and water. These should be unalienable rights, not mansions, SUVs and the like.Remember: 2/3rds of the world’s population lives on $3/day or less.Mark

PeteCAApril 19th, 2009 at 9:07 am

$BKX Banking Conundrum ???Based on a quick look at the banking index ($BKX) on stockcharts.com, a reader could get the impression that the problems in the US banking industry have bottomed. At least – so it appears from the chart for $BKX, which has turned and is surging upwards lately.But is this a correct view of US banking? There’s no doubt that the Government has poured trillions into the top Wall St. banks and financial sector in an effort to stabilize toxic assets and major losses on their books. Surely these huge bailouts must be enough to turn the tide sooner or later? You would think so, and evidently that’s what The Street wants us to believe.But here’s the conundrum.In fact, I call it the $BKX conundrum.Right now commercial real estate prices in the USA are getting hammered. There’s no secret there – people like Mike Morgan and Mike Shedlock have been forecasting this downturn for years. And needless to say, many commercial banks across the USA are now getting hit very hard by soaring defaults on commercial RE loans.In fact, banks are going bust in the USA at a pretty fast clip. By last count, there were over two dozen banks that have failed since the start of this 2009. The media are not really highlighting this, so the public is not watching too carefully. And the rate of bank failures is likely to accelerate as the commercial RE problem really hits home. The folks at Money and Markets (esp. Martin Weiss and Mike Larson) put together some excellent white papers outlining the real risk in the US banking sector. See their Web site at http://www.moneyandmarkets.com . The risk to the commercial banking sector is much larger than most average Americans realize.Therefore, if the commercial banking sector is at risk than the alternative banking index RKH (stockcharts.com) should show a new downturn. This is the regional banks index.Which leads to the “banking conundrum”.How can $BKX be rising again, if RKH turns downwards in the future ???I guess we’ll have to watch and see what happens. The folks in Washington DC were always clear that their plans to “rescue” the US banking system did not include most average banks – just the big ones on Wall Street. The fate of America’s commercial banks is tied very much to the overall health of the US economy itself, and very little of Obama’s bailouts are helping Main Street. Actually, not more than 5-7% of the bailouts will reach the man in the street .. or the banks in the street.So we’ve got a $BKX conundrum.PeteCA

AnonymousApril 19th, 2009 at 9:37 am

This article is just pretentious obscurantism.Nobody noticed that liar and ninja loans were phony? That securitizing and rating them triple A was dishonest? That running up huge debts abroad was unsustainable? That there was serious overcapacity in the auto industry and General Motors was losing cash at an astounding rate?We don’t need more philosophizing or academic debates about regulation. What we need is punishment. The crooks should be dispossessed and thrown into the street penniless along with their wives, children, mothers, fathers, and friends. That’s the kind of lesson that is NEVER forgotten.

MichelleApril 19th, 2009 at 10:33 am

Hear Hear!If the criminals are never prosecuted and punished for their actions, we will never see positive changes and this country is doomed. I highly doubt that we have the political will to see this through, but we can sure hope that citizens start using their votes to cleanse the system of this corruption.

FEDupApril 19th, 2009 at 5:57 pm

Why not confiscate all of their assets, imprison them and paste their faces all over the media with the title “the greediest men of our country’s history”. Their actions have caused more damage to more people than any natural disaster in history. They have no shame, no sense of responsibility, no business ethics, no morals. It’s fine for them to make 100’s of millions of dollars while many Americans still live paycheck to paycheck! Can the government of the strongest and most powerful country in the world bring these people to justice? Of course they can! But, will they? Of course not because right under the noses of the American people a new type of class has come into the spotlight; it’s called TBTF. In other words, the same rules and standards that apply to over 300 million Americans don’t apply to them. In a country that calls itself a model democracy and makes predjudice and discrimination illegal, it’s no wonder that the rest of the world’s opinion of us keeps deteriorating as the naked truth of U.S. HYPOCRISY rears it’s ugly head higher than ever!

kilgoresApril 19th, 2009 at 7:41 pm

@Anonymous on 2009-04-19 09:37:27Please see my response below @ kilgores on 2009-04-19 19:39:11.SWK

MichelleApril 19th, 2009 at 9:52 am

So far the piecemeal actions that have been taken have helped reduce all-out panic, but these are just band-aids thus far and don’t address the real problems of the need to restructure the global financial system. The proper restructuring will take years and requires a global coordinated effort that will more than likely create additional political tensions.Meanwhile, we still have a huge economic problem and job creation is non-existent. The fiscal stimulus package is not going to be enough to create the jobs necessary to allow people to make ends meet let alone absorb all the available housing inventory. This downward trajectory will only get worse as more people deplete savings, unemployment benefits expire, and continued layoffs occur, albeit at a slower rate.Now that spring is here, many for sale and for rent signs have been popping up, EVERYWHERE! Driving around town the other day I lost count, as about every 3rd house was either for sale or for rent. My capitol city does not have enough jobs to absorb this excess inventory as layoffs continue by both the private and public sector. My state’s problem is that the housing boom hit here at the tail-end of the cycle as more speculative money moved in to swoop up cheap(er) real estate. The local builders are still building, albeit at a slower pace in anticipation of an economic rebound. Even during good times, our local gov’t was unable to attract business, even though our wage levels are some of the lowest in the country. So I have to ask: Where are the jobs going to come from?This economic downturn is just getting started and the average consumer is not going to be able to get us out of this conundrum any time soon. We need real jobs with living wages and I don’t see a light at the end of the tunnel except for an oncoming train headed at lightening speed.

PeteCAApril 19th, 2009 at 10:01 am

MichelleWhich city are you in?And as for your concerns about employment … you’re right unfortunately. I don’t see how the USA gets back jobs. The last recovery after the 2001 recession was referred to as the “jobless recovery”. If and when we get any relief from the current downturn, I just don’t expect to see a lot of jobs return at all. Meaning that higher levels of unemployment will become “structural unemployment” in the USA.You correctly pointed out the rise in the $USD last week. Yet as you know, unless the $USD sinks appreciably there’s no way that US workers can become more competitive in the global economy. So the factors that are preventing the dollar from going lower are also contributing to a higher level of unemployment. It’s a complex problem. It seems to me that we reach the point where we either get:1) a collapse of consumer credit in the USA (US dollar stays at high levels)OR2) alternatively we see a sudden drop in the US dollar at some point as investors flee US assets and US debt (i.e. a collapse in general investor confidence in US assets).PeteCA

MichelleApril 19th, 2009 at 10:23 am

PeteCAI live in Boise, and our foreclosure rate is one of the highest in the nation. Last I read, we ranked 6th in the nation. I don’t think you’ll like to hear that most of that speculative money came from California!Regarding the USD, CDS auctions will continue to keep the dollar higher and I expect to see it remain range-bound between 82-86 for another 6 months, but probably longer.I’ve come to the distinct conclusion that foreign investors will continue to buy dollars as their own economies deteriorate, and foreign central banks won’t deviate from their current actions. It seems that the central banks all want stable currencies right now, without large fluctuations either up or down. This could change over time once we see more financial stability, but I don’t see it happening for at least another 12 months. The biggest unknown of course is China, but I doubt they would pull any punches unless they want to start a war, and I wouldn’t be surprised if that happens eventually anyway.

PeteCAApril 19th, 2009 at 12:41 pm

MichelleYou’re living in a beautiful state! It’s ironic that speculators from CA forced your own home prices up – but certainly believable. I was out in southern Utah about a year ago (also very beautiful), and was amazed to discover that McMansions had been built in that remote area too. Houses valued up to $1 million, but with no underlying economy that could ever justify such prices.If you’re right about the US dollar (and you very well could be), then I think that US consumers are going to have a pretty tough battle in the next 12 mo’s. I just don’t see how consumer spending can ever really recover. A partial (temp) increase maybe. But we’re not going back to the old days before the downturn.And BTW, I seriously doubt that China will drop the peg on the dollar any time soon.PetecA

RcoutmeApril 19th, 2009 at 9:40 pm

We were borrowing more than saving (net). We had BETTER NOT get back to the ‘old days’ before the downturn. THAT’S WHAT CAUSED THE DOWNTURN!

Tom KApril 19th, 2009 at 10:37 pm

No amount of government actions will arrest the corrections that have happened, and which will continue for at least another year. Simply because the financial excesses (especially debt), the mis-investment of vast amount into nothing of value, and the degrading of national industrial infrastructure, are too great. People will just have to struggle until the final correction has been reached. What is that final measure of correction? It’s the US dollar. The dollar must drop more, much more, to reflect economic adjustment. It is still being propped up using all kinds of tricks. It is still being played for fool as a struggling reserve currency.When the dollar has lost another 40% of its current value, and when the world has diversified its savings into a basket of currencies, we will enter the true recovery phase. Because then US wages will be much more competitive, exports will rise, and foreigners who hold vast amount of savings will (and will be allowed by Congress) to invest in America thus creating jobs. With a vastly cheaper dollar many G7 countries will find it compelling to outsource into the US – finally reversing the trend. This is the true light at the end of the tunnel. It has always worked this way.Don’t believe me? This is how the US ‘saved’ other economies who have nearly collapsed – the Yanks waited for the collapse of the currency and bought up half the country on the cheap in the name of investment, creating jobs, and restoring economic health. Just that this time around it is the foreigners who will act as the ‘Yanks’.

MarkApril 20th, 2009 at 1:49 am

What worked in the past isn’t guaranteed to work in the future…What we’re witnessing is a general contraction based on resource depletion (due to increasing populations and life styles). This will continue, which is why the future is all down hill. Those jobs won’t be coming back because the resources won’t be there to support them (the costs will then be more closely aligned with resource costs than labor costs).Exports will never be sufficient to offset imports. With the exception of food, nobody needs anything from the US.Mark

HayesApril 19th, 2009 at 9:58 am

The four prescribed ‘changes’ (re-engineering compensation, prevention of exploitative arbitrage, management of systemic risk and enforcement of transparency) that the authors’ describe as paramount to “fixing” the system are destined to fail without the addition of a fifth “change”. That fifth change involves bringing to justice and holding accountable the bad actors who created and participated in the current crisis.Of course it is naive to expect that justice and accountability would be included in any recommendation on “fixing” the system, if for no other reason than those charged with fixing the system are the same ones who through intent or negligence presided over its collapse.

weedy seadragonApril 19th, 2009 at 6:02 pm

h,we have a history of dealing with thesekinds of problems by “sweeping them underthe rug”. but..we may be looking at a case of “too big to..”sweep. (under the rug)..or, as in “jaws”, the movie, they “need a bigger..”rug.”no lie can live forever”.

rcoutmeApril 19th, 2009 at 9:44 pm

As pacifistic as I am, I wonder what happened to the New Yorkers who got laid off (see Lehman Brothers) when Bernie Madoff was in his multi-million dollar apartment. Where were the pitchfork and torch wielding masses? If the government refuses to punish these people properly, maybe it is time that the people of the United States take matters into their own hands.

MarkApril 20th, 2009 at 1:51 am

In due time, in due time… That’s what’s always happened, it’s what will always happen…Quite sad.Mark

HayesApril 19th, 2009 at 10:26 am

Jupiter, FL, April 8, 2009 — Several of the nation’s largest banks, including JPMorgan Chase, Goldman Sachs, Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, plus more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts, according to Martin D. Weiss, Ph.D., president of Weiss Research, Inc., an independent research firm….http://blogs.moneyandmarkets.com/martin-weiss/jpmorgan-chase-goldman-sachs-citibank-wells-fargo/

GuestApril 19th, 2009 at 2:03 pm

JP and Goldman are being backstopped by the U.S. Do you think they can still fail? Are they too big to save, ultimately?

HayesApril 19th, 2009 at 10:34 am

How the Quants Perpetuate Market Distortion (an article by ZH featured on SeekingAlpha)http://seekingalpha.com/article/131333-how-the-quants-perpetuate-market-distortion

PeteCAApril 19th, 2009 at 11:07 am

HayesIf people argue that excessive speculation on the futures markets is causing gross distortion of some prices – then I would be the first to agree. Noted author & banker Matt Simmons has argued strongly that oil prices are being severely mispriced because of the price oscillations in the futures markets. I agree with him.However, I’m not sure to what degree the “quants” are responsible for this. It may be too much to blame quant traders for mispricing. They are simply implementing algorithms based on previous market patterns. If they are wrong – their profits will fall apart. The real blame belongs to very large traders and funds who are taking very large positions – often based on a quest for short term profit (cornering the market) rather than any long-term economic rationale.PeteCA

HayesApril 19th, 2009 at 12:36 pm

I have no idea if the quant thesis is correct, though the data he provides certainly supports his argument. It stands to reason that if the quants are deleveraging then one third of the market volume will be/is under some serious stress. Either way it is an intriguing perspective and even a bit ironic as it was the mysterious work of quants (not quant funds) that was an important enabler of the credit crisis.

PeteCAApril 19th, 2009 at 1:12 pm

The lowly quant … abandoned by his masters (the tyrannical oligarchs), and now humbled, humiliated, and forced into financial serfdom.Well, figuratively speaking :-;PeteCA

MarkApril 20th, 2009 at 1:54 am

It’s the analogy of the listing ship, in which everyone runs to the other side… Capital really doesn’t have anywhere to go, and the System has been so wired to provide returns to so many “programs” that it’s all going to wind to a halt.Mark

PhilTApril 19th, 2009 at 11:44 am

The Concorde was a brilliant engineering and technology feat and proof that collaboration of 2-(European) Governments could actually yield a very positive outcome.The “shadow financial system” and associated products are innovative and novel which are words that are also used to describe cancer therapies.The Concord product was offered to the interest of a very narrow market place. What percentage of the flying public actually could take advantage of this engineering and technology marvel? After decades of safe service, when the Concorde finally had one accident (which was not a predictable event), the impact was severe to a narrowly defined market niche, but not systemic.The shadow financial system also serves narrow interest , and when it failed, which was predictable and just a matter of time, the impact to economies on macro and micro levels and to individuals who know nothing about these products is intense, widepsread and without limit at the moment.To equate the design and integrity of the Supersonic product and service of Concorde with these shadowy instruments is unacceptable.Certainly there are other analogies that would have surfaced more immediately and with more relevance.Further to the point, there was (to my knowledge) never even a hint of criminal behavior in the demise of Concorde. A point, that is continually concealed by the vail of denial surrounding US financial markets, regulators and individuals involved.

blind de miloApril 19th, 2009 at 5:29 pm

p,agreed. some analogies, maybe most or all,have embedded in them a subtle, or overt,deception. ?

Tom KApril 19th, 2009 at 8:00 pm

I disagree. Comparing the Concorde jetliner with the US economic system is incorrect and ineffective in illustrating valid points.The Concorde was daring vision, the most advanced engineering, international cooperation – for the benefits of mankind. It was done honestly, with passion, and with the greatest expertise available at the time. The Concorde crash, while unfortunate, is because man cannot build the perfect machine. The Concorde demise is due to the economics of fuel, which the builders have no control.On the other hand the current US economic crash is entirely deserved, and predictable by and large. For decades the US has followed the ‘quick buck’ mantra. Short term is everything. This ‘quick buck’ culture reached it ultimate maturity when it infiltrated into every aspect of consumer and business life, all the way to Wall Street and government. Now add a good does of politico-big biz-finance corruption, mix in superpower hubris of Bush The Idiot era, and the rest followed automatically. The quick-buck mantra, aka ‘trickle-down’ economic ideology, is designed to serve only one class of people – the elites who are in charge. Now, everybody gets what they deserve. So what’s the problem?

MarkApril 20th, 2009 at 2:15 am

Complexity kills! That’s the real message that needs to be gleaned.People need to read these:The Thirty ThesesYou can pick out whatever topic is most applicable, or read all of it (took me several weeks a couple of years ago).Mark

GuestApril 30th, 2009 at 9:08 am

The Continental mechanics who incorrectly installed a metal flange on a DC-10 engine nacelle, the same flange that fell off during takeoff and subsequently shredded the Concorde’s tire, are being tried for involuntary manslaughter.http://news.bbc.co.uk/2/hi/europe/7487282.stmEven though it was UNINTENTIONAL INCOMPETENCE, the perpetrators are being prosecuted. The same prosecutions are desperately needed in the financial crash of 2008. Otherwise the message is “It doesn’t matter if you do a poor job.”

London BankerApril 19th, 2009 at 1:22 pm

Excellent metaphor! I have carried a silver Concorde keyring with me for fifteen years, since my first Mach 2 flight across the Atlantic. Each time I look at it now, I will see the lessons of complacency, forbearance and sudden collapse of confidence.It is such a small thing, and an unusual affectation for me. Now it has meaning, I will feel less self-conscious of it.

ptmApril 19th, 2009 at 2:53 pm

Albert Bartlett’s lecture Arithmetic, Population and EnergyRe-thinking Bartlett’s lecture, I realized that I missed Bartlett’s emphasis on translating percent-of-growth into the doubling interval. There are also Wikipedia pages on the topic.Seeing the doubling interval gives a more intuitive sense of the long-term impact of growth than simply viewing the percentage growth rate.For a constant growth rate of X%, the formula for the doubling time Td is given by Td = log(2)/log(1+X/100). Time scale is a function of what is measured. Doubling times Td given constant X% growth (X% per minute, doubling time per minute; X% per year, doubling time in years, etc.)By definition, growth in each interval exceeds the sum of growth of all earlier intervals.X% ===== Td0.8 === 86.99 – USA population growth per year1.0 === 69.661.1 === ~60 – Recent estimate of world population growth per year1.4 === 49.86 – Approximate increase in electrical consumption per year2.0 === 35.00 – 1963 rate of world population growth per year3.0 === 23.454.0 === 17.675.0 === 14.21 – Approximate increase in oil & coal consumption per year6.0 === 11.907.0 === 10.248.0 ==== 9.019.0 ==== 8.0410.0 === 7.27 – Historical inflation growth per year11.0 === 6.6412.0 === 6.1213.0 === 5.6714.0 === 5.2915.0 === 4.9616.0 === 4.6717.0 === 4.4118.0 === 4.1919.0 === 3.9820.0 === 3.80Politically these alternatives are too catastrophic to consider; however, as Bartlett points out, this is simply an arithmetic and logic argument, what people choose to do politically is another issue.In the short term it’s nice to know that we are living at the apex of man’s culture. Even if cold fusion or Bussard’s magnetic plasma confinement fusion were able to replace fossil fuel, they would only provide a few more decades of breathing room until the “problem” doubles one final time.Now you know what the economic elite know (TPTB). It’s to their advantage to centralize power and wealth and use it to decrease the world’s population.http://en.wikipedia.org/wiki/Polywell.http://en.wikipedia.org/wiki/Cold_fusionhttp://en.wikipedia.org/wiki/Albert_Bartletthttp://www.guba.com/watch/3000053112http://en.wikipedia.org/wiki/Doubling_timehttp://en.wikipedia.org/wiki/World_populationhttp://en.wikipedia.org/wiki/Population_growth_ratehttp://en.wikipedia.org/wiki/Peak_oilhttp://www.eia.doe.gov/emeu/steo/pub/gifs/Fig20.gifhttp://www.federalreserve.gov/releases/h6/hist/h6hista.txtHat tip again to Mark

ptmApril 20th, 2009 at 9:00 am

Another great URL Mark. I like this quote:”The members of the American economics profession, as Arnold contended, performed a vital practical role in maintaining this unique system of corporate socialism American style. It was their role to prevent the American public from achieving a correct understanding of the actual workings of the American economic system. Economists instead were assigned the task to dispense priestly blessings that would allow business to operate independent of damaging political manipulation. They accomplished this task by means of their message of ‘laissez faire religion, based on a conception of a society composed of competing individuals.’ However false as a description of the actual U.S. economy, this vision in the mind of the American public was in practice ‘transferred automatically to industrial organizations with nation-wide power and dictatorial forms of government.’ Even though the arguments of economists were misleading and largely fictional, the practical — and beneficial — result of their deception was to throw a ‘mantle of protection … over corporate government’ from various forms of outside interference. Admittedly, as the economic ‘symbolism got farther and farther from reality, it required more and more ceremony to keep it up.’ But as long as this arrangement worked and there could be maintained ‘the little pictures in the back of the head of the ordinary man,’ the effect was salutary — ‘the great [corporate] organization was secure in its freedom and independence.’ It was this very freedom and independence of business professionals to pursue the correct scientific answer — the efficient answer — on which the economic progress of the United States depended.” [ Robert H. Nelson in http://dieoff.com/page235.htm ]

HayesApril 19th, 2009 at 5:00 pm

Some good data points from CS,b>House Prices Finally Approaching Fair Value…(but)http://www.businessinsider.com/henry-blodget-housing-market-2009-4

PeterJBApril 19th, 2009 at 5:19 pm

Professor Roubini,may I respectfully refer below to your analogy of the Concorde?The Concorde was a fatally flawed abortion from the very start from the time of its conception until the relief of its final and hard demise.The design of its outward appearance gave the perception of elegance and synthesized harmony of a magnificent bird and this Dear Professor, is where all that was good, finished.Typical of government managed that is, both political and bureaucratic, the Concorde was indeed an abortion borne in “committee”.It represented a management solution that could not turn a profit and this in turn create a passenger aircraft that was both murderously uncomfortable and innately filled with the instilled dynamics of fear related focus; uncomfortable, to say the least.Passengers got high speed travel indeed but was it elegance? Was it value? Or, was it depleted expectation justified in the brag of unique experience of the commercial World.Give me a G2 any day and stuff your silver wand from the Dark Side.But Professor, a most excellent and indeed, elegant choice of analogy; an analogy that truly and precisely meets its specific requirements in your context of the atrocities of “leadership” and their false Gods…To that question somewhere above: Economics, that is to say loosely, capitalism, as it is practiced, IS, a priori, by preference and consensus, willingness and priority, – a religion; nothing more and everything less! A compromise and mediocrity, just like the Concorde!This is the problem. The solution for the Concorde was to decommission at management level.What is happening to the World of “economics”, is to keep the aircraft in commission along with its management, a priori!..@PeterJBWhat is your area of expertise physics, economics….? Thanks @ Guest on 2009-04-19 07:57:36What is the difference between economics and religion?Answer: There is none.(I have a BSc.)..So, upon reading this comment and the context of this Thread, one should be now able to understand the expression of (Mark Twain, I believe?) “picking the cat up by the tail.Ho hum

MarkApril 20th, 2009 at 2:31 am

Always happy to read your posts Peter!The most telling failure is that the Dr. and everyone else continues to refer to sustained economic growth as though that could happen! It’s a fundamental flaw, one in which, as you suggest, and if “economics” is to continue to be no more than burning chicken feathers, results in “economics” being worthless (except to TPTB for their control).Mark

PeteCAApril 19th, 2009 at 6:45 pm

Re-posting an item I put on the last thread, here in abbreviated form. Food for thought …———————————–From Karl Denninger: Excellent chart on US debt and GDP which can be found here:Effectiveness Of $1 In Debt to Increase GDP of USAThis chart shows the effect of one dollar of US debt in boosting the GDP of the country. Notice that the effect is declining steadily, and hits the “zero hour” around 2014-2015.———————————-Article by Eric Janszen: See second chart showing long-term trends in Personal Consumer Expenditures in the USA.Janszen Article with PCE ChartSince 1980 this important variable has been decreasing steadily on a long-term basis. Note that GDP is heavily dependent upon PCE. Strong US recessions correspond to significant downturns in PCE, but even when PCE recovers afterwards – it never stabilizes. The trend is always down in the long-term.——————————-OVERALL MESSAGE: The downturn that started as the “mortgage crisis” in 2007 can be viewed in the bigger picture as the early impact of a series of “economic earthquakes” as the USA approaches a collapse point – roughly five years from now. At that point no amount of Ponzi finance can sustain the system.Legal Disclaimer: Actual results of an economic collapse may vary. Some people may experience nausea, hallucinations, or the desire to overthrow the Government. Consult a your doctor if you have these symptoms, or you have thoughts about investing.:-)PeteCA

GuestApril 20th, 2009 at 7:50 am

Yikes. I’m too old to start farming, too poor to not work most of my remaining years to retirement, and have too much family in the area to move out of California, and/or the U.S. (Canada is looking pretty good these days).Depressing.

GuestApril 19th, 2009 at 6:50 pm

Using the supersonic Concorde aircraft is really a poor example in this case. The US canceled their version before completion. It was never a favorite among people with economic sense and it later years became a target of the green people. There is a person who lost his job at my company by flying the Concorde – excessive cost for the ticket. Being a newbie on reading this column I have come to realize a lot of the experts lack a broad understanding in how thinks really work, they have become to focused in their narrow field and do not see the big picture.

GuestApril 19th, 2009 at 7:16 pm

@PeterJBI always apreciate your comments. There was no pun intended in my question. . To me religion and science are the two faces of same coin ( depending on what religion one adheres to). In my opinion relegion says that beleive whats reveiled and science and evolution will catchup with the relegious beleifs as knowledge is aquired by mankind. Thats why its called faith. But since there are many faiths in the world mankind should be able to scrutinize faith in the light of existing scientific knowledge to find the true faith.

GuestApril 19th, 2009 at 7:21 pm

Countinued from aboveOn the other hand we the people have democratized faith and have cherry picked what we want to beleive and what we don’t want beleive.

kilgoresApril 19th, 2009 at 8:14 pm

Not everyone who is religious “cherry-picks” the facts. The late biblical scholar James Barr of Glasgow, among others, criticized so-called fundamentalist scholars for the doctrine of scriptural inerrancy, noting that only scriptures deemed to comport with a pre-established paradigm of reality are considered inerrent, whereas other scriptures are conveniently re-characterized or explained away to buttress what they have already decided to be true.Science and religion are not inherently incompatible, as any reader of Fritjof Capra or Frithjof Schuon can tell you. I’m not talking about embracing pseudo-scientific claptrap such as “intelligent design” in lieu of accepting the validity of evolution, either. Some faiths, such as Bahà’i, accept as a basic precept that religion and science must be compatible, which does NOT mean rejecting scientific theories — conclusions that have yet to be disproved by empirical facts — that don’t comport with some pre-determined articles of faith about the world.SWK

Tom KApril 19th, 2009 at 10:57 pm

Nuts SWK!”Science and religion are not inherently incompatible,” – you are full of ignorance.Religion is about believing in ‘truths’ revealed by some supernatural means. No evidence is necessary – you either believe or you don’t. That’s why all religions require faith. Moreover, once you believe in these ‘truths’, you are obliged to perform a most irrational act. You must worship them. To sustain that worship, ‘truths’ are turned into dogma, typically by an organization with special expertise – church, mosque, etc.Science is a procedure to discover knowledge, and verify that knowledge independently. Verification comes when a newly discovered knowledge is able to make predictions, that those predictions again confirmed independently. If not the knowledge is discarded, or modified. Science is the exact opposite of religion. There is no dogma, and nothing is worshiped. There are no organization dedicated to ‘preach’ science because nothing in science is fixed by man. But there are thousands of universities who grands publicly recognized degrees confirming one’s mastery of both the procedures and the body of scientific knowledge. Science advances by accumulation of reliable knowledge. Religion advances by elimination of all knowledge outside of its predetermined dogma.

kilgoresApril 20th, 2009 at 7:38 am

Tom:I am a registered patent attorney with an academic background in science and mathematics. I also hold a degree in philosophy, and have spent a great deal of time studying religion in the context of metaphisics (the nature of existence) and epistemology (what can be known). Feel free to attack what I say on the merits, but ad hominem attacks based on your imagined assessment of my “ignorance” say more about you than me. If I’m not mistaken, you are the same TomK who was making sweeping, supercilious statements about how marvelous your generation (and mine) — the Boomers — were in standing up against the government in the 1960s, and how lacking subsequent generations are. You won’t win and friends, much less arguments, with such tactics.SWK

kilgoresApril 20th, 2009 at 9:51 am

TomK:Now, addressing the substance of the balance of your post, your descriptions of both religion and science are cartoonish and intellectually shallow. Religion is not, at its core, so much about the exoteric symbolic trappings of different religious traditions as it is about Absolute Truth, which inherently lies beyond the possibility of intersubjective verification, since it is not acquired through sense experience. That such truth is not verifiable empirically does not mean it is invalid. Indeed, science cannot reveal truth about values, morality, or things beyond empirical experience. Science can neither confirm nor invalidate the truth of matters that are not empirically observable. Any scientist will confirm that for you. This has been the dilemma of religious mystics in every culture across centuries: their direct experience of Ultimate Reality, of the Absolute, of Godhead, is ineffable.Scientific truth is not, as your post would suggest, absolute, but relative, in that the scientific method is dependent upon sensory observation and verification. It is a closed system of knowledge based on rational thought, which is predicated on pre-established axiomata taken to be true, and is therefore implicitly incomplete. Science is only as reliable as its last empirical observation. Luminiferous aether was a scientific truth until the Michaelson-Morely experiment. As Nassim Taleb has noted, the notion that swans were only white, backed up by hundreds of years of empirical observation, fell by the wayside with a single observation of a black swan. The truth of science is, by its very nature, subject to revision.As Albert Einstein reportedly told the New York Times Magazine in 1930:Accordingly, a religious person is devout in the sense that he has no doubt of the significance and loftiness of those superpersonal objects and goals which neither require nor are capable of rational foundation. They exist with the same necessity and matter-of-factness as he himself. In this sense religion is the age-old endeavor of mankind to become clearly and completely conscious of these values and goals and constantly to strengthen and extend their effect. If one conceives of religion and science according to these definitions then a conflict between them appears impossible. For science can only ascertain what is, but not what should be, and outside of its domain value judgements of all kinds remain necessary. Religion, on the other hand, deals only with evaluations of human thought and action: it cannot justifiably speak of facts and relationships between facts. According to this interpretation the well-known conflicts between religion and science in the past must all be ascribed to a misapprehension of the situation which has been described.I will grant you that there are misguided religious fundamentalists who would use dogma to challenge valid scientific conclusions, just as there are misguided atheists who are every bit as zealous and hostile in clinging to scientific findings in an attempt to discount the beliefs of religious adherents. These remind me of medieval debates about how many angels could dance on the head of a pin: they are much ado about nothing. This sort of petty bickering doesn’t enhance our knowledge of the truth, does not involve fair argument, and does nothing but spread ill will and division between people who should be working together to resolve real day-to-day problems that can make life better for all of us.SWK

kilgoresApril 20th, 2009 at 9:53 am

I should have inserted quotation marks before the word ‘Accordingly’ and after the word ‘described.’ Sorry for any confusion.SWK

PeterJBApril 20th, 2009 at 2:18 am

Also try that great American Alvin Boyd KuhnNote: There is a huge difference between true, of-the-heart personal religion and commercialized institutional religion and I believe that these differences are distorting the arguments.There are also huge differences between “capitalism” of the mercantile natures to that practiced as commercialization and these differences are causing the coming Dark Age for Americans… and a global economic collapse for most others – mileage will vary.Ho hum

Tom KApril 20th, 2009 at 1:12 pm

SWK:You should thank me for actually reading your long-winded big word respond, full of self-righteous nonsense. You just confirmed what I said. You gave me the strong impression that are confusing and mixing religion with philosophy.I said nothing about the merits of religion and science. I simply refuted your statement that the both are same or compatible. Someone has to defend science when its reputation is being tarnished by linking it to religious practice. You brought up this kind of sensitive subject – prepare to take it as you dish it out.But, alas, this is not a blog on religion or science. So I say no more here.

kilgoresApril 20th, 2009 at 4:59 pm

The original poster (Guest on 2009-04-19 19:16:29), to whom my first reply was addressed, remarked that science and religion were two sides of the same coin. I did not say that, although I might personally see some merit in the statement. All that I said in response was that science centers on empirically based truths, religion does not, and that this fact doesn’t necessarily imply conflict between the two of them, i.e., they need not be considered incompatible. You refutation was thus no refutation at all.My comments may seem like nonsense to you because you simply don’t have a sufficient academic grounding to appreciate them. For that I can forgive you.I don’t think, however, I was being verbose or self-righteous in the least. I choose my words carefully. Perhaps you are projecting, Tom. After all, you evidently fancy yourself a self-appointed champion and defender of the reputation of science, which you seem to feel I am seeking to “tarnish” by “linking” it with “religious practice” (a completely baseless charge, based on what I actually said in my posts).You are welcome to read my comments or not, and respond or not, but I’m certainly not going to thank you for your continued feeble attempts in insult me in this forum after you deign to read what I have to say. If you are intimidated by the “big words” you think I use, you might want to ignore my posts from now on.I will agree with you that we are here to speak about economics, not science and religion, and I will move on as well. I would note, however, that it was not I who initially raised the “sensitive” (revealingly, your word) topic of science and religion: I was merely responding to two preceding posts when you chimed in with your churlish and arrogant assertion that I am “full of ignorance.”SWK

kilgoresApril 19th, 2009 at 7:39 pm

>The crooks should be dispossessed and thrown into the street penniless along with their wives, children, mothers, fathers, and friends.A lot of people were guillotined in the French Revolution, but that bloodbath didn’t result in any lasting social and political justice for the average Frenchman. While perhaps momentarily gratifying to imagine in light of our anger over the circumstances that gave rise to this crisis, the sort of mob justice you propose would not be just, nor would it change anything. Harshness of punishment isn’t an effective deterrent. What IS effective is the surety of consequences that comes with comprehensive regulation and oversight.Why weren’t credit default swaps, which carry a notional value of $70 trillion — about the entire net worth of the United States and many multiples of the U.S. annual GDP — subject to reasonable regulation in the Commodity Futures Modernization Act of 2000 (ask Phil Gramm)? Why didn’t Congress step in to change the National Banking Act of 1864 after the 1978 U.S. Supreme Court decision in Marquette National Bank v. First of Omaha Service Corp., which effectively construed that Act to prohibit individual state usury laws from being enforced against out-of-state credit card companies? Why were the provisions of the Glass-Steagall Act prohibiting a bank holding company from owning other financial companies repealed by Congress in 1999 (again, ask Phil Gramm)? The fact is that our government, through these and other actions and inactions over the past thirty years, have created the conditions for the financial sector to crowd out manufacturing and other valuable sectors of the economy by making astronomical profits and compensation possible, which, in turn, led to greater manipulation of Congress and the White House by the financial sector.I would suggest that our energies and our focus should be on fixing the underlying problems in our regulatory structure, rather than on seeking revenge against a few individuals who took advantage of an economic environment that our own elected representatives had an important hand in creating. No lasting change came to French society out of the Reign of Terror of 1793-94, but lasting change certainly DID come from the civil code created and adopted by Napoléon. To create lasting change, we need to look to the Rule of Law.SWKSWK

MarkApril 20th, 2009 at 2:38 am

But the regulators are ALWAYS corrupted. Nassim Taleb paints them as being stupid; whichever the case, gatekeeping is inherently a risky business, too risky to weave such power as economic (money = power) control though.As the System gets more complex and concentrated it means that failures will steadily become more problematic. Sooner or later the Dr. Strange Love scenario will occur.Mark

kilgoresApril 20th, 2009 at 10:10 am

That’s not universally true in my experience working as a lawyer in the public sector. In this case, however, the federal regulators at the top — Greenspan and Bernanke at the Fed, Cox at the SEC, and Snow and Paulson at Treasury — were all too cozy with and complacent about the financial sector, and too close to it to see objectively the vast and serious problems that were evolving. I would suggest that in revamping our federal regulations, we take care to ensure that these sorts of problems are minimized or eliminated. For example, perhaps we should try to close the revolving door between Goldman Sachs and the Treasury Department by paying top regulators salaries comparable to what they would receive in the private sector, creating a disincentive to leave or to serve the interests of the industry they regulate in the expectation of receiving employment and other favors after they leave office? Better yet, let’s go back to enforcing usury laws so that the financial sector can’t make the outrageous profits that it has been of late for creating specious financial instruments that contribute no real value to society, and can’t pay obscene compensation to management for doing so?SWK

MarkApril 20th, 2009 at 6:46 pm

were all too cozy with and complacent about the financial sector, and too close to it to see objectively the vast and serious problems that were evolving.So, people don’t see because they are too far from the problem AND they don’t see because they are too close?No, they didn’t see it because they didn’t want to see it! Their real charter is to protect the rich; if you take it from this point then all else makes perfect sense.Laws are for those who cannot buy influence.All your suggestions of regulations and enforcement are all well and good, but they will ALWAYS fail in the presence of concentrated power (money): sure, here and there there may be some public floggings, but the real culprits always carry on…When you start talking removal of citizenship/personal rights from corporations THEN we can start talking all this other stuff…Do people demand a really just system? Well, we’ll arrange it so that they’ll be satisfied with one that’s a little less unjust … They want a revolution, and we’ll give them reforms — lots of reforms; we’ll drown them in reforms. Or rather, we’ll drown them in promises of reforms, because we’ll never give them real ones either!! – DARIO FO, Accidental Death of an AnarchistMark

Free TibetApril 20th, 2009 at 7:11 am

A lot of people were guillotined in the French Revolution, but that bloodbath didn’t result in any lasting social and political justice for the average Frenchman.

Are you kidding? It ended a monarchy. Works for me. Law only works where the ground has been prepared. Our law has been perverted to favor those who can bend it. The revolving door Bush/Clinton/Bush/Clinton/Govt./WS/GS dynasty comes to mind. Time to plow that under. Off with their heads.

kilgoresApril 20th, 2009 at 9:58 am

It ended a monarchy and led to a dictatorship. That’s progress? Come on, Free Tibet! I know you’re not that myopic! ;-)SWK

RcoutmeApril 19th, 2009 at 9:01 pm

How to fix Corporate AmericaProblem: CEO’s make too much, or Americans believe they make too much (they would also include other top officers in companies).Solution: We are talking about publicly traded corporations only. If somebody owns a private corporation (or has it with select partners and the portions are not publicly traded) then the following would not apply. Basically anyone who owns his own business has the right to do what he wants (within the framework of current laws).1. No one employed by a publicly held corporation may be paid salary more than twenty times (20x) the amount of the lowest-paid person working for that corporation (more or less full time.) Note that I said, “working for”, not “employed by.” The distinction is critical! When I worked for McNeil Consumer Products (subsidiary of Johnson & Johnson), they hired a cleaning agency to clean the place at night. They also hired an agency to handle security. Those people worked full time (more or less) at the facility—so their pay would be included in the calculation.2. The exception to the pay would only be allowed in stock options. The stock options could be at a level no less than the price of the stock on the date of issuance of the option (i.e. earning the option) or the price of the stock on the day the employee started his current position—whichever is higher. This is needed to prevent boards from rewarding CEO’s who have lost half the value of the stock for gaining back some or all of the value lost during their time.3. The stock options could not be executed for three years from date of issuance.4. There should be a limit to the stock options offered as enticement (in other words, no offering 1 million options to someone just because he starts day 1).5. Benefits could be partially excluded from these calculations. I would suggest, however, that some sort of commensurate level be applied. For instance, I will grant that a corporation has a reason to provide a limo for transportation of their top executives (you want them at work). This need not be applied to each and every employee. However, some sort of rationality needs to be fixed into the system. In my opinion, the corporations should not be paying for vacations to exotic locations (other than bonuses, which would be included in salary calculations) for their employees.6. How to handle bonuses and commissions: Some people ‘earn’ much of their money through direct measure of their performance. Examples abound, but the current financial fiasco has flagged quite a few of them. Answer: Those who immediately net income for the corporation may be exempted from these limitations. Those who ‘sell’ assets that do not immediately realize the benefit to the company may not be exempted. For example: if someone sells (for delivery this year) twenty million sets of cookware for which he is paid $100 commission each, he can be paid his $2 billion (please note that the figure and the item don’t really qualify to reality). On the other hand, if someone sells portions of derivatives totaling $20 billion, but the corporation must invest $80 billion to create the derivatives, then the corporation has not netted any value until that $80 billion is secured. The second employee’s salary would not be permitted to rise above the limit (other than stock options).7. Here is how this would change corporate America as we know it: top executives in a corporation would virtually have to care about the long-term welfare of their corporations. Much of their compensation would be tied up in the long-term welfare, so if they underperform over the long-term, they get nothing. The current financial crisis arises from CEO’s and other top executives constantly worrying about the stock price for the next quarter. If their compensation is tied up with the stock price three years hence, that is where their focus is likely to remain.8. Please note that this does not really limit any employee’s compensation. If the corporation prospers, so will any employee with stock options. Meanwhile, bloated salaries of underperforming executives will (more or less) be a thing of the past.9. When it comes to musicians, sports figures and other entertainers, the law would likely never apply. Why? Because they do not work for publicly traded corporations. In addition, only corporations that operate in more than one state would be affected (due to interstate commerce) as companies that do all their business in a single state are not subject to federal laws.As an example, Disney stock was trading at 0.9 on March 1, 1980. The split adjustment factor for that time is 48. The stock closed at 16.77 on March 1, 2009 (with a split adjustment factor of 1). It closed at 15.88 (with a split adj of 3) on the same date in 1994. That means that the stock appreciated from 0.9/48 to 15.88/3 during those 14 years. Thus: one share of stock in 1980 went from a value of 90 cents to $254.08. That is rather good appreciation in 14 short years. Michael Eisner should be proud of his achievement.If these rules were in effect during that time, any stock options Mr. Eisner had been issued in March 1, 1980 that were cashed in on March 1, 1994 would have netted him about $253 per share. If it were 1 million, well, so be it—he earned it. If he chose to cash them in as soon as he was allowed (1983), he would have received $1.61 per share (a net of 71 cents—still rather good if we are talking about 1 million shares).Since we are not limiting (or perhaps are limiting, but only to reasonable levels, thus not offering one thousand times the number of shares actually trading) how many shares the corporation may offer, there is no limit to the amount of compensation an employee could make. We are simply delaying when that employee may begin realizing the extra compensation.The reason that this would work in this country is that most Americans have no problem with someone earning his way to billions of dollars. They only have a problem with someone receiving billions while depriving those for whom he works of their assets. A three-year delay would prevent the short-term thinking that dominates most of corporate America. It would not deprive higher-paid employees of their ‘just’ compensation; it would facilitate it. Furthermore, any employee who moved from one corporation to the next would not want to ‘sabotage’ his previous employer for the benefit of his current one, as much of his compensation would still dependent upon his previous employer’s success.

Average JaneApril 19th, 2009 at 9:05 pm

I watched the blurb on “60 Minutes” this evening basically telling We The Sheeple that the entire notion of 401(k)s was a huge scam and resulted in ill-gotten profits for the Financial Services Industry. Little vignettes of those of us in our 50s and 60s who basically bought the notion that our retirement accounts were “safe” in the stock market (Guaranteed Returns!!) and who are now staring bleakly at the prospect of having to work until we’re 70. Or 75. Or 80. The horror.What would have happened had the much-vaunted Financial Services Industry never had our billions of retirement dollars with which to play, had all of us in fact simply saved our pennies or bought oh, I don’t know, Series I bonds?And now what do you think will happen to the Financial Innovators who “innovated” 60 million of us into near poverty? With the numerous companies now suspending their contributions to 401(k)s? And the scared baby boomers withdrawing what little money they have left? What will the Masters of the Universe do without all of our money to play with?Because you know, when you gamble with someone else’s money, it’s one thing. It’s quite another when you gamble with your own.

MarkApril 20th, 2009 at 2:49 am

Hi Jane!But couldn’t we say that everything was horribly inflated over the course of the life of the 401k? Didn’t we all have a Madoff experience?If people have viewed the Dr. Albert Bartlett video they would realize that even if we were to accept a 1% return on our “investments” that we’d be looking at a doubling in 70 years time. That “doubling” means that we’d be doubling our economic output by that time, which means, ultimately, since consumption made up roughly 70% or our/US GDP, we’d be consuming TWICE as much in the course of 70 years! That’s just for 1% growth! Look at us now and ask whether we could double everything, and forget even thinking about the time span, just whether we could! But you dont’ hear people saying that we should accept 1% growth!Dr. Bartlett uses the phrase “strength through exhaustion” to point out the absurdity of expecting consumption (everyone’s rooting for China to step up!) to pull us out!Mark

TobyApril 20th, 2009 at 7:09 am

My analysis after understanding Dr Bartlett is the same, I have been thinking along these lines for the last half year. There are unfortunately to few people who gets it och even care. Thanks, I am more prepared now.

2centsApril 20th, 2009 at 12:18 am

Am I missing the picture here?I read where the Obama administration says it will not need any additional funding from Congress anytime soon. (NY Times) Via accounting regs, the bank’s capital can be expanded by converting the existing government gratuity to common shares! Mind you, no additional monies will be received, but via the magic of accounting, the bank will nonetheless expand its regulatory capital!The government FED/Treasury can then parlay those common shares into collateral to loan to regional banks as the CRE market tanks! Brilliant! We’ll just shift the ponzi pyramid to the left a little, add a little government leverage and everything will work out just fine!This is being implemented because of political constraints, but I’m afraid that when the moment comes it will go something like this: My fellow Americans the government has taken the extraordinary step of trying to save the financial system by backstopping the financial economy with the full support of the government. As you know, my fellow citizens, you are the ones providing that ultimate backstop. So due to extraordinary circumstances you are now the majority holders of the equity in the financial system! As any rational investor knows, there are market ups and downs. We believe that we have positioned the taxpayer in a very favorable long term position, and given time the taxpayer will receive a dramatic windfall via this investment. Think of a future where your grandchildren look back and realize what a fortunate position they are in that taxes have been reduced to nearly zero because of the windfall we are positioning them for at this very moment.Of course there are those who seem to believe that this is all a complete folly. I ask you my fellow Americans, do you want to see your grandchildren live virtually tax free, or do you want to cash out of this investment now and see your taxes double and your grand children’s taxes quadruple?Amazingly, this hope for a better future is what will sell. Never mind that there will be conflicts of interest for the government as they juggle the responsibility to maximize the value of their bank shares on behalf of taxpayers verses the larger economic health of those same taxpayers. The reality is that it is mathematically impossible to enhance the return on the bank “investments” while also enhancing the overall economic health of the average American.

MarkApril 20th, 2009 at 2:54 am

Yeah, there’s this horrible disconnect going on. It’s a continuance of the money-for-nothing mentality that has become so prevalent in our society. Just shift money around and the problems will magically resolve themselves: never mind that nowhere is extra work being performed.Mark

GuestApril 20th, 2009 at 6:07 am

http://turnerradionetwork.blogspot.com/2009/04/leaked-bank-stress-test-reults.htmlSunday, April 19, 2009LEAKED! Bank Stress Test Reults !The Turner Radio Network has obtained “stress test” results for the top 19 Banks in the USA.The stress tests were conducted to determine how well, if at all, the top 19 banks in the USA could withstand further or future economic hardship.When the tests were completed, regulators within the Treasury and inside the Federal Reserve began bickering with each other as to whether or not the test results should be made public. That bickering continues to this very day as evidenced by this “main stream media” report.The Turner Radio Network has obtained the stress test results. They are very bad. The most salient points from the stress tests appear below.1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent.2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans.3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.5) Five large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with four in particular – JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank – taking especially large risks.6) Bank of America`s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank`s was 278 percent; JPMorgan Chase`s, 382 percent; and HSBC America`s, 550 percent. It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital!7) Not only are there serious questions about whether or not JPMorgan Chase, Goldman Sachs,Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, can continue in business, more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts!The debt crisis is much greater than the government has reported. The FDIC`s “Problem List” of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter.Put bluntly, the entire US Banking System is in complete and total collapse.More details as they become available. . . . . .UPDATE 0147 HRS EDT Monday, April 20, 2009 –For those who may be skeptical about the veracity of the stress test report above, be reminded that only last Sunday, April 12, this radio network obtained and published a Department of Homeland Security (DHS) Memo outlining their concerns that returning US military vets posed a domestic security threat as “right wing extremists.” That memo, available here, is marked “FOR OFFICIAL USE ONLY” and contained strict warnings that it was not to be released to the public or to the media. We obtained it and published it days before other media outlets.That DHS report appeared on this blog at least two full days before the story was picked up by The Washington Times, and virtually every other US media outlet.Details of certain aspects of the stress test reported above have now been CONFIRMED through REUTERS News service when they disclosed the risk-capital percentages publicly on April 6, 2009 at this linkFurther, todays Wall Street Journal (April 20, 2009) is confirming at this link that lending by the largest banks has DECREASED 23% since the government began the T.A.R.P. program, causing many in Congress to ask where the money has actually been going. Apparently, it has been going into propping-up the failing banks instead of out in loans to the public.Additional details and proofs are forthcoming. . . . . continue to check back on this developing story.Posted by HalTurnerShow.com at 10:32 PM

serialsaverApril 20th, 2009 at 8:06 am

But HEY! They are reporting profits in the face of insolvency. Thanks to the fresh M2M FASB accounting rules, debt can be kept off the books if they are considered “temporary” by their own judgment. The Stress Test were conducted internally, regulators merely reviewing the bottoms lines-never mind Tier 1 Capital statements were cooked before but now cooked into leather no one can swallow.The traders market will eat it up and splash it with short selling gravy to soften it up and make the leather smell like fillet minion.As Professor Roubini points out, without international coordination of standardized regulatory oversight, the rest is merely frantic ad-hoc toothpicks being used to support a dizzy elephant. Central banks are running out of bullets. Now it will come down to the solvency of nations. Financial innovation and creativity by those who saw no risk that wasn’t appealing is missing.Paradigm shifts are being realized as Wall Street discovers they really can’t separate themselves from Main Street any longer. Political capital is being wasted on former emperors with no clothes!! Silent taxes are being levied and loud shouts of making work pay to the tune of an extra $13/mo. Its positively ridiculous, the public is waking up albeit slowly as trillions are disappearing down a black hole without accountability.The Phoenix will rise from those who value more than their portfolios in life. Human rights is the core issue. Until the governments of free nations realize banking structure isn’t socialization, (restoration of Glass-Steagall) that commodities are something other than paper trades (repeal of the CFMA) and the legislative heavy lifting is done to enable working people to live ordinary lives without a financial guru taking on more importance than a personal physician-the catastrophe will only continue. (restoration of common money markets separated from Wall Street risk). Confidence once lost is difficult to regain-if remedial actions for the use of taxpayer funds isn’t forthcoming, then confidence of the government itself will result. Has mankind become sophisticated enough, creative enough to avoid the end game history points to? This time the nuclear genie is out of the bottle.

HayesApril 20th, 2009 at 7:37 am

at risk of appearing as a shill for ZeroHedge – a very interesting (long) post from yesterday:Sunday, April 19, 2009Bill Miller Correct: “Value” Funds Burying Quants… For NowPosted by Tyler Durden at 10:02 PM…he concludes with this paragraph”We are at a critical crossroads for the future of efficient markets. If the bear market rally persists, Bill Miller and 401(k) holders will be happier temporarily, however the end result would be a broken market. Readers who took offense to the photo of the Challenger explosion earlier, should wake up and realize that we are on the verge of the very same event occurring within the fabric of the free and efficient market system. The threat to the equity markets is not being exaggerated. If the powers that be are intent on rising stock prices one day at a time continually, then even as retail investors enjoy another day of moderate gains, in a few short days/weeks markets will reach a point of no return, and the resultant collapse in confidence in the free market system will force the majority of investors to forever depart from investing in equity markets. The consequences of this would be beyond the scope of even this blog.”http://zerohedge.blogspot.com/2009/04/bill-miller-correct-value-funds.html

serialsaverApril 20th, 2009 at 8:27 am

The oligarchs got too greedy, they want MY money but refuse to provide anything TANGIBLE in return so instead, we got a philosophical mind meld that is and was horrifically flawed. The societal consequences are only beginning. Macroeconomics and economies of scale have some very basic lynch-pins which were made fodder and led to massively dysfunctional markets and economies which excluded more and more people to fuel the excesses. Globalization of enterprises and markets led to a wild-wild west that included slave labor forces that flooded products at below cost of production to capture entire market sectors-despite international laws of trade and commerce to the contrary. We’ve met the enemy, they hold no national interests or political interest-only self interest.

GuestApril 20th, 2009 at 7:59 am

Has anyone here read “The Great Bust Ahead” by Daniel A. Arnold?If so, curious what you think.Hearing in recent years of all the baby boomers that will be retiring in coming years made me wonder if there wouldn’t be a significant effect on the stock market, as people getting older moved their money away from stocks into bonds, CDs, etc. I found this book last year, and wish I had the time and smarts enough to better analyze it. Also wished I had found it sooner.

MM CAApril 20th, 2009 at 8:15 am

I would say the U6 number in calif is now at 18-20%… CA is a ticking time bomb…. So goes CA goes the nation(04-17) 12:06 PDT SAN FRANCISCO — The state unemployment rate soared to 11.2 percent in March, the highest since before World War II, leaving a record 2.1 million Californians out of work, according to a report issued Friday.http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2009/04/18/MNPQ174BVL.DTLState unemployment in MarchLabor force*18,604,000Total employment16,524,000Total unemployment2,080,000State unemployment rate11.2 percent*People with jobs

GuestApril 20th, 2009 at 9:25 am

TOM WAITS lyrics – Coney Island Baby.Every night she comesTo take me out to dreamlandWhen I’m with her, I’m the richestMan in the townShe’s a rose, she’s the pearlShe’s the spin on my worldAll the stars make their wishes on her eyesShe’s my Coney Island BabyShe’s my Coney Island GirlShe’s a princess, in a red dressShe’s the moon in the mist to meShe’s my Coney Island BabyShe’s my Coney Island Girl