Wednesday, June 8, 2011

Isn’t It Ironic?

Hey, it’s the nose on your face.

In the last few days the news was full of stories that indicate some people can’t see the nose on their face. These are the same people who want to solve any problems you, me, or anyone might be facing. They just don’t connect the dots.

Let’s start with these two stories.
1) Food-contamination illness in US has fallen over the past 15 years.
2) EPA plans to ban sale of some rodent poisons.
Do you think not having rodents running around our kitchens might contribute to less contamination illness?
Oh, but EPA may have looked into the issue. Want to bet your health on it?
You just did.

But it gets better. Here are two from Tuesday’s WALL STREET JOURNAL.
1) The first few lines of an article entitled “Clock Ticking on New Rules” in the print edition, or online as “Regulatory Delay Stokes Unease over Dodd-Frank” reads: “Banks, investors and companies are scrambling to cope with uncertainty caused by regulators' delays in fleshing out the Dodd-Frank financial-overhaul law.... More than 100 new derivatives requirements in the law take effect on July 16, even though regulators have yet to issue final rules in the affected areas. The holdup raises concerns that a large swath of the financial system might be thrown into legal gray areas.”

2) On the same page, article two, “Geithner Wants Global Rules on Derivatives,” here’s a quote to consider: “Treasury Secretary Timothy Geithner called for global standards in the way derivatives contracts are structured in order to prevent a global ‘race to the bottom.’ Mr. Geithner's comments in a speech Monday could open a new front in the clash among regulators, banks and industrial companies over how rules should be structured following the financial crisis.”

Now, some people never ran a business, or perhaps, never even played sports, so maybe they don’t know it’s important to know the rules. Geithner might think proposed rules are better than real rules people can follow. On the other hand, Geithner’s little income tax embarrassment may indicate he doesn’t think rules are important. If rules didn’t necessitate his paying his taxes, he may be thinking a good show is better. Perhaps he’s positioning for a standup comic job. He would be a great straight man.

The wizards in Congress are easier to understand. Since they spend their time making rules, it really doesn’t matter whether anyone actually follows them. Congress has an out: “It’s not my job.” They made rules. Whether it’s even possible for mere mortals to follow them isn’t an issue that has gotten to Congress. Gods can’t be expected to let mere mortals limit the Gods.

The quotes were included because you can’t make this stuff up. Do you think they understand that the objective is to reduce systemic risk? Or, do they plan to stop the world (yea, yea, it’s just the economy) until they figure it out? I doubt they’ll figure it out until they learn to laugh at themselves.

Keep in mind this comment is from a blog that pointed out the need to regulate derivatives back in March 2010 in “Putting the adults in charge of derivative trades.” It was also a blog that pointed out the need for an international approach even earlier in “Efficient capital allocation doesn’t require perfect liquidity.”

As Sonny and Cher song said, “The beat goes on.” Now it could just be that some editors just have a sense of humor. Why else place these two stories together?
1) California unveils its plan to comply with prison overcrowding.
2) Latino gangs charged with conspiring to drive African-Americans out of a California city.
Well, do you think there might be gang members in prison? If we let them out of prison where do we expect them to live? Or, maybe prison teaches everyone to get along, love thy neighbor, etc.? Perhaps we just have gangs planning for future growth?

Back to economics for more:
1) Another story focuses on Goolsbee’s resignation as the head of the Council of Economic Advisors. It notes “During the campaign, he advised against allowing the capital gains and dividend tax rates to rise back to Clinton-era levels, even for the affluent households…. He based that …on academic work that he said showed high rates of taxation on investments adversely affect the behavior of would-be investors.”

2) Obama lends support to closing loop holes, a euphemism for tax deductions that oil companies use. (The deductions cover more than just oil companies although their business is particularly dependent on the activity involved).

Makes sense to me; if Obama wants a PR person, hire one. If he wants an economist, be aware they have opinions on economic policy. But, for heaven sake, Mr. President, don’t go and learn anything. Lincoln set the bar too high with “you can fool all of the people some of the time and some of the people all of the time, but you can’t fool all of the people all of the time.” Presidents only have to fool the majority of the voters twice. So, if you have an ideology that’s working, why go looking at reality?

3) Peter Diamond on the other hand withdrew his name from consideration for the Federal Reserve Board.

Now why would the administration go looking for another economist? The darn guy may go and disagree with Obama on something. Peter Diamond on the other hand displayed that classic academic inability to respond to Shelby and others who might question his beliefs. How the heck could he function on a board that strives for consensus?

See what happens when you read too much news. You start laughing. Here’s more:
1) Another headline reads: “Fed Sees Recovery Lagging.”
2) Three stories: Citigroup plans to sell $1.7 billion in assets, Bank of America and Wells Fargo plan to cut costs with BofA planning to close 10% of its branches, and Morgan Stanley’s cost cutting extends the Blackberry use.
3) Credit still tight at Banks.
4) FED floats proposal for higher capital requirement for systemically important organizations.

Remember the A-Number-One responsibility of the Fed is maintaining a functioning banking system that supports economic growth. What do item 2 and 3 say about that?

As to 1, 3 and 4 it isn’t rocket science. Like the posting on March 3, 2010 (“Regulatory capital and who’s got the money?”) said: “Increased capital is ultimately the solution. But, timing changes is probably more important than the level. What we know about reserves is that people lower them in good times and raise them in bad times. We also know this aggravates the cycle. Well, surprise, surprise, governments are people; they do the same thing. Unfortunately, the government has a long history of changing capital requirements in the wrong direction over the business cycle. It’s the fallacy of composition writ large. Individual banks are safer with higher reserves, but if every bank raises more capital, oops, no credit even for productive endeavors.”

How could anyone not see this coming?

Does it seem the Fed has lost its way when the sector they supervise is less than healthy and one Jamie Diamond, who seems to know something about banking, openly blames the Fed? Of course he is talking his book, but he isn’t making it up.

The capital requirements mess-up is classic bank regulator pro m-cyclical behavior during downturns. Instead, why not tilt against the trend? That’s what the Fed is supposed to do.

The temptation is to list more, but then given we all make fools of ourselves periodically, the best thing to do is learn from it and move on. We can hope others will do the same.

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