There are two things that some of President Obama’s base is finding out. First, you just cannot walk away from war. Before you are “in the office” you can say all you want about ending wars or not getting into wars, but once “you get the seat” just being against war is not a sufficient policy. There are dumb wars and there are smart wars; there are well run wars and there are stupidly run wars; but wars are always present in one way or another. To many of President Obama’s supporters, President Obama is not walking away from war, and they don’t like it!
The second thing is that powerful nations need a healthy business sector. Regardless of how important you feel the role of government is in a society, without a strong economic system that is performing well your government will always be weak relative to other countries that have strong economic systems that are performing well.
I addressed this point from a different perspective in a recent post: see “Emerging Markets and the Future”, http://seekingalpha.com/article/214661-emerging-markets-and-the-future. One can deduce a similar point from Floyd Norris in today’s New York Times, “How to Tell A Nation Is at Risk,” http://www.nytimes.com/2010/07/16/business/economy/16norris.html?_r=1&hp.
Norris writes: “Which governments will not be able to pay their bills?
The ones with private sectors that are not doing well enough to bail out the government.
That should be one lesson of the near default this year of the Greek government. Government finances are important, but in the end it is the private sector that matters most.
If so, those who focus on fiscal policy may be missing important things. Spain appeared to be in fine shape, with government surpluses, before the recession hit. Now Spain is being downgraded and has soaring deficits.”
The take away from these two pieces: You need to have a strong, vibrant capitalistic system in place, even if it is a state driven capitalism like that of China. The exception is those despotic nations that have a monopoly on a natural resource like Venezuela or many of the middle eastern fiefdoms, but these situations have their own problems. Economic weakness and slow growth lead to waning economic power. Check out much of Europe.
Today’s New York Times was filled with signs that the Obama administration was cognizant of the role the business sector must play in the economy in order to ensure its success and continuation. On the front page of the Times we read of the “Obama Victory” with respect to the financial reform package. This is the coin thrown to some of his supporters.
The real news, to me, is on the front page of the business sector in bold headlines: “Cut Back, Banks See a Chance to Grow: Its fight ended, Wall St. Is Already Working Around New Regulations.” (See http://www.nytimes.com/2010/07/16/business/16wall.html?ref=business.)
Funny, but some of this article seems especially like my recent post “Financial Reform: Ho, Hum”, http://seekingalpha.com/article/213263-financial-reform-ho-hum. The authors of the Times article write:
“The ink is not even dry on the new rules for Wall Street, and already, the bankers are a step ahead of everyone else…
So after spending many millions of dollars to lobby against the legislation, bankers are now turning to Plan B: Adapting to the rules and turning them to their advantage."
The Obama administration and those in Congress that wrote the bill had to have enough in the bill to “declare a win” but many are looking at the legislation as just a cost and an inconvenience. Main street must be given something to justify the possibility of re-electing those currently in office. But, Wall Street must be healthy so that the Administration can stand up to China!
Financial institutions spent a lot to keep a lid on Congress and its “spewing into the gulp” and in this respect have been more successful than BP with its oil spill. But, now that the cap is on in terms of the financial reform bill going to the President, it is time to get back to business. And, really, that is what the administration wants as well.
The third important headline on the front page of the business section (the other two articles were there too) is “With Token Settlement, Blankfein Unscathed”, http://www.nytimes.com/2010/07/16/business/16deal.html?ref=business. The New York Times claims that the deal Goldman Sachs reached with the Securities and Exchange Commission was a “Token”…mere pocket change. The people from the S. E. C. declared this to be a victory. What a joke! Well, now we can get back to business!
Just one more piece of information being shared this morning: Treasury Secretary Tim Geithner seems to be very opposed to Elizabeth Warren becoming the head of the new consumer protection agency created by the financial reform package. She is apparently too strong, too emotional of an advocate for the consumer. It seems as if such a person would rock the boat.
The reality of the situation seems to be that the Obama administration needs a strong, rebounding economy. It needs a strong, rebounding economy to not lose much ground in the elections this November. And, it needs a strong, rebounding economy to give the United States more bargaining power in the world.
The United States is still the number one economic and military power in the world. It is just that at this time, with a somewhat weakened economy, room is given to those large emerging nations to be more assertive in world affairs and to gain confidence in their ability to present their positions in world forums. Again, see my post on “Emerging Markets and the Future.”
The Obama administration is walking a narrow line. It cannot afford to lose the support it has been given in the past by the Independent voter and the middle of the political spectrum. And, it cannot afford to be captive of the sovereign wealth funds of the world that control large amounts of financial capital.
In order to achieve these goals, the Obama administration cannot stifle the United States business engine. The issue it now faces is how to support Wall Street and business without appearing to be abandoning Main Street. The danger the administration runs is that in attempting to walk this narrow line, it might not please anybody.
Showing posts with label Senate. Show all posts
Showing posts with label Senate. Show all posts
Friday, July 16, 2010
Friday, May 21, 2010
The "Sound and Fury" of Banking Reform
Well, the Senate finally passed a banking reform bill. It is said that President Obama wants to sign the final bill around July 4.
All I can really say about the bill is that it represents a lot of “sound and fury signifying nothing.”
The bill will be costly. The bill will result in a lot of inconvenience.
But, banking and finance will recover and will continue on their merry old way!
The reason that I say this is that finance is just information and with the accelerating pace of information technology in the United States and the world, finance will continue to expand and prosper. The regulators cannot control how information is used or transformed!
History has shown that information spreads and although the pace of its spread can be slowed down, it has never been stopped. Just ask all the religious medievalists in our world today that are fighting a losing battle and are defensively striking out at everyone else.
I have stated some of the reasons for my position in a series of posts beginning January 25, 2010: see “Financial Regulation in the Information Age”; http://seekingalpha.com/article/184153-financial-regulation-in-the-information-age-part-a.
I have also highlighted the place of information in the practice of modern finance in my review of the book “The Quants”: see http://seekingalpha.com/article/188342-model-misbehavior-the-quants-how-a-new-breed-of-math-whizzes-conquered-wall-street-and-nearly-destroyed-it-by-scott-patterson.
Furthermore, attempts to reform and re-regulate the banking system will ultimately do more damage to banks that are not among the 25 largest banks in the country than it will do to those banks that the administration and Congress are really after. And remember, the largest 25 domestically chartered commercial banks in the United States control about two-thirds of the banking assets in the country.
Another factor that I have tried to stress over the past year is that the largest banks have already moved on. The legislation in front of the Congress is aimed at preventing the last financial crisis from occurring again. In my estimation, the largest banks are beyond this feeble effort and are moving into areas we will learn about in the next round of “popular” books explaining what has happened to our financial system.
An example of this was a recent report in the press about how Congress is trying to alter the status of how hedge funds reward their managements so that more of this income is taxable. The response of the industry was to have already hired scores of lawyers to “get around” any legislation about hedge fund fees.
Can you imagine any other kind of response from the financial industry…or, for that matter, any industry?
Reform and re-regulation face a moving target and, consequently, they are aiming their efforts at the past, not the future.
The financial reform package will change the playing field for a limited amount of time. However, in this age of information you can bet that the lag between what “the Feds” do now and how the financial system reacts to these actions will be shorter than ever before.
NOTE: we now have 775 commercial banks on the list of “problem banks” put out by the FDIC, up from 702 banks at the end of 2009. When this latter list was presented, I argued that the FDIC would close between three and four banks a week for the next 12 to 18 months. We have been averaging 3.8 banks closed every week this year through May 14. Using a rough “rule of thumb” my estimate now is that at least four banks will be closed every week through the end of 2011.
I still have grave concerns about the solvency of the 8,000 “smaller banks” in the United States. I define the “smaller banks” as any bank below the top 25 largest banks in the country. These 8,000 “smaller banks” control only one-third of bank assets in the United States. I derive this concern from the actions of the Federal Reserve who continues to subsidize the banking system with extremely low interest rates, and the FDIC. Although the Fed and the FDIC are not “owning up” to this problem, everything they are doing raises questions about how solvent these smaller 8,000 banks really are. I guess the big issue concerns what would happen to the value of bank assets IF interest rates were to rise. Would this result in a “cascade” of “small” bank failures?
All I can really say about the bill is that it represents a lot of “sound and fury signifying nothing.”
The bill will be costly. The bill will result in a lot of inconvenience.
But, banking and finance will recover and will continue on their merry old way!
The reason that I say this is that finance is just information and with the accelerating pace of information technology in the United States and the world, finance will continue to expand and prosper. The regulators cannot control how information is used or transformed!
History has shown that information spreads and although the pace of its spread can be slowed down, it has never been stopped. Just ask all the religious medievalists in our world today that are fighting a losing battle and are defensively striking out at everyone else.
I have stated some of the reasons for my position in a series of posts beginning January 25, 2010: see “Financial Regulation in the Information Age”; http://seekingalpha.com/article/184153-financial-regulation-in-the-information-age-part-a.
I have also highlighted the place of information in the practice of modern finance in my review of the book “The Quants”: see http://seekingalpha.com/article/188342-model-misbehavior-the-quants-how-a-new-breed-of-math-whizzes-conquered-wall-street-and-nearly-destroyed-it-by-scott-patterson.
Furthermore, attempts to reform and re-regulate the banking system will ultimately do more damage to banks that are not among the 25 largest banks in the country than it will do to those banks that the administration and Congress are really after. And remember, the largest 25 domestically chartered commercial banks in the United States control about two-thirds of the banking assets in the country.
Another factor that I have tried to stress over the past year is that the largest banks have already moved on. The legislation in front of the Congress is aimed at preventing the last financial crisis from occurring again. In my estimation, the largest banks are beyond this feeble effort and are moving into areas we will learn about in the next round of “popular” books explaining what has happened to our financial system.
An example of this was a recent report in the press about how Congress is trying to alter the status of how hedge funds reward their managements so that more of this income is taxable. The response of the industry was to have already hired scores of lawyers to “get around” any legislation about hedge fund fees.
Can you imagine any other kind of response from the financial industry…or, for that matter, any industry?
Reform and re-regulation face a moving target and, consequently, they are aiming their efforts at the past, not the future.
The financial reform package will change the playing field for a limited amount of time. However, in this age of information you can bet that the lag between what “the Feds” do now and how the financial system reacts to these actions will be shorter than ever before.
NOTE: we now have 775 commercial banks on the list of “problem banks” put out by the FDIC, up from 702 banks at the end of 2009. When this latter list was presented, I argued that the FDIC would close between three and four banks a week for the next 12 to 18 months. We have been averaging 3.8 banks closed every week this year through May 14. Using a rough “rule of thumb” my estimate now is that at least four banks will be closed every week through the end of 2011.
I still have grave concerns about the solvency of the 8,000 “smaller banks” in the United States. I define the “smaller banks” as any bank below the top 25 largest banks in the country. These 8,000 “smaller banks” control only one-third of bank assets in the United States. I derive this concern from the actions of the Federal Reserve who continues to subsidize the banking system with extremely low interest rates, and the FDIC. Although the Fed and the FDIC are not “owning up” to this problem, everything they are doing raises questions about how solvent these smaller 8,000 banks really are. I guess the big issue concerns what would happen to the value of bank assets IF interest rates were to rise. Would this result in a “cascade” of “small” bank failures?
Subscribe to:
Comments (Atom)
