Negative yields

Dreihaus Capital has tweeted that excluding America, nearly 45% of the global bond market is trading in negative yields.

Michael Lebowitz has a wonderful piece in ‘’ and unfortunately or mysteriously or both, it is not available there. It is available via Zerohedge.

This explanation of negative yields, in particular, is brilliant:

It implies that the future is more certain than the present – that the unknown is more certain than the known!

Enjoy reading it as much as I did.

In the meantime, President Trump tweeted exactly the opposite of what Michael Lebowitz is trying to convey:

The Economy is doing really well. The Federal Reserve can easily make it Record Setting! The question is being asked, why are we paying much more in interest than Germany and certain other countries? Be early (for a change), not late. Let America win big, rather than just win! [Link]

and this:

Germany sells 30 year bonds offering negative yields. Germany competes with the USA. Our Federal Reserve does not allow us to do what we must do. They put us at a disadvantage against our competition. Strong Dollar, No Inflation! They move like quicksand. Fight or go home! [Link]

Desperate for re-election, he is forgetting all that he said before getting elected for the first time in 2016. Negative interest rates all along the German bund yield curve is a sign of sickness and not health. European banks are hurting from negative yields.

The European Central Bank, originally modelled after the German Bundesbank, had become absolutely reckless and it believes that it has saved the single currency. Perhaps, it did, temporarily only to make the problem re-appear much later. It is inevitable.

The fact that the German economy is contracting in less than a year after enjoying a weak Euro for years and ultra-low interest rates says a lot about the non-efficacy of ultra-low and negative interest rates.

Through his constant haranguing of the Federal Reserve, he is staking a lot more than his re-election. More on that on another occasion.

Finally, it is impossible not to feel disappointed with the Independent Evaluation Office (IEO) of the International Monetary Fund (IMF) for its kid-glove treatment of the Fund on its advice during the post-crisis years with unconventional monetary policy. It was not even a rap on the knuckles. The costs of UMP have far exceeded the short-term benefits and the costs continue to mount. The Fund cheer-led it. IEO has nothing to say on the consequences – political, social and economic – of UMP. Egregious pricing of junk bonds (negative yields!) and tech. unicorns and some of them being able to get away with accounting and other practices weirder than the ones that prevailed in the dotcom mania years of 1996-2000 are also traceable to ultra-cheap money.

IMF warns today about the consequences of real estate bubbles and leveraged loans. But, UMP is directly responsible for both. IMF endorsed and encouraged. It discouraged the Federal Reserve from raising rates even gingerly in 2015 and in 2016. IEO has neither done evaluation nor is it independent.

For a true independent evaluation, read ‘The Rise of Finance’. Available here.

Invisible hand of morality

I enjoyed writing my MINT column for Tuesday on the rise of socialism among millennials and how capitalism – both ‘arms-length’ and ‘arms-around’ varieties – brought about this love for socialism. The MINT column was triggered by ‘The Economist’ cover (16th February 2019) and the ‘leader’ on the topic. While researching for the topic, I came across a paper by Amar Bhide titled, ‘An accident waiting to happen’ written in 2009. It is a well-written paper – both cogently and passinately argued.

In my MINT column, I argue that both arms-length capitalism and relationship capitalism (citing an example from India) had failed and the common reason for that failure is that morality has disappeared from both forms of capitalism. The common belief stemming from a faulty reading of Adam Smith’s ‘Wealth of Nations’ was that morality was not required. Self-interest was both necessary and sufficient to drive collectively beneficial outcomes. It is quite possible that Adam Smith never meant it that way. I had covered that in an earlier blog post. The visible hand of morality was the foundation or pillar of capitalism. My argument and Amar Bhide’s arguments are not mutually exclusive.

In his paper, Amar Bhide argues that the crisis of 2008 was a case of humans lacking in humility (excessive belief in mathematically determined probabilities) and failing to factor in the law of unintended consequences. He argues that tight securities market regulations (investor protection laws; insider trading rules, etc.,) created arms-length capital markets in which nobody had a stake and hence, managers looked after themselves. No single shareholder was powerful enough or interested enough to stop excesses of managements.

Similarly banking or financial deregulation, he says, enabled banks to take on risks that they otherwise would not have. He cites abolition of inter-state banking, repeal of Glass-Steagall, proprietary trading, etc. Federal Deposit Insurance encouraged banks’ excessive risk-taking: moral hazard. Ho brw come economists ignored moral hazard in this matter? With deposit insurance, depositors were not interested in monitoring risk-taking by banks.

He writes:

In the narrative offered by Rajan and several other economists, exogenous technologies played a deterministic role, inexorably forcing changes in regulation and financing arrangements. But technology might, instead, have facilitated relationship banking…. The outcome was not predetermined. In fact, in the story that I have told here, the increased share of securitized financial assets was driven mainly by the beliefs of financial economists and regulators. [Link]

His conclusion is pithy, sharp and correct:

Economics has underpinned securitization through its embrace of mathematical models to the exclusion of other perspectives, and through a complementary tendency to ignore the downside of liquidity and arms-length relationships. Regulation has brought this way of thinking into the world of practice in two paradoxically related streams: by increasing the scope and effectiveness of the New Deal securities acts and subsequent rules that fostered the growth of arms-length transactions in corporate control; and the progressive dilution of New Deal banking acts, which nurtured and protected long term relationships. This is the complicated story that may explain why developments in mortgage banking, of all things—traditionally the plodding, conservative bread-and-butter of depository banking—should have led to the implosion of the world economy.

I also chanced upon two of his op.-eds. One calls for the end of the Federal Reserve (as we know it) and the other faults the IMF for encouraging reckless lending by banks in foreign currencies to emerging sovereigns. Who, in their senses, could disagree with his (and his co-author’s) arguments?

Notwithstanding all of these, I could not resist pointing out in my column that the love of socialism is misguided and that humans were once again falling back on lazy answers. In this regard, the article I had cited in my MINT column on the case for wearing fur and leather was very thoughtful. The costs imposed on societies by misguided and/or uninformed do-gooders are substantial. I encourage you to read it.

I would also like to recommend reading a blog post I had written little less than six months ago.

“Dictatorships do not grow out of strong and successful governments, but out of weak and helpless ones” and other links

On September 15, 2008, Lehman Brothers filed for bankruptcy. That marked neither the beginning nor the end of the financial and economic crisis of 2008. Yet, there has been such a deluge of coverage in the last one week of the crisis. That is part of the crisis. Excessive event-oriented attention that does little to improve the process.

Central bank hubris and complacency and the ‘Rise of Finance’ (the title of an upcoming book authored by Yours Truly and Gulzar Natarajan) played a part in the 2008 crisis. They are still around and alive. The world is unprepared because of the protagonists of the crisis of 2008 are unrepentant. That is the burden of my column in MINT on Tuesday.

Ben Bernanke summarises his own research published by the Brookings Institution (he is a Senior Fellow there) in this post. He is partly right. I have alluded to that in my column above. Why did the financial panic become global? The role and the rise of Finance have a lot to do with it. He does not go there. That is where my column went.

It is obligatory to refer to the piece that Paulson-Bernanke-Geithner wrote because it contains nothing of meaning except this passing ‘mea culpa’ reference:

Although we and other financial regulators did not foresee the crisis, we moved aggressively to stop it. [Link]

It is instructive to see the links that come up below the article. They sum up the failure of their post-crisis efforts too:

NYT Headers.png

Staying with Ben Bernanke and his former colleagues, we note the speech by Peter Fisher (not to be confused with Richard Fisher, former President, FRB Dallas) at James Grant’s Symposium last year. Peter Fisher has served in the U.S. Treasury and in the Federal Reserve. See his profile here.

A key extract from his speech delivered in March 2017:

Curiously, the Fed has acknowledged no failures. All the experiments have been successful, every one: no failures, no negative side effects, no perverse consequences, only diminishing returns.

The third claim, inviting us to imagine how much worse things would have been had the central banks not done exactly what they did, suggests exactly the opposite of the scientific method and a striking lack of imagination. It implies that the only other possible courses of history would have been worse. It leaves no room for perverse consequences or negative side effects. It claims the counterfactual all to itself, leaving no room for doubt….

… So, as I see it, forward guidance is the process through which the Fed – through its more explicit influence on the expected rate of interest – becomes the much more explicit owner of the “conventional valuation” of asset prices.

One person who referred to this speech is John Authers of FT. His remarks:

Ten years ago many of us, myself included, thought a rerun of the Great Depression was very likely, and some of the actions taken in desperation during the crisis hold up slightly better than might have been expected. But long waves of monetary ease, fiscal austerity, and legal leniency for the guilty did not need to follow from this, and have left the bulk of the populace angry and embittered. [Link]

What John Authers has done in the piece linked above is something similar to what I am attempting here. He has linked to several pieces of writing on the crisis. The good thing for you, dear reader, is that his coverage and mine have only few common elements. So, if you read this blog post and his column, you will have covered a pretty good range of the writings that marked the 10th anniversary of the global financial crisis.

But, pieces such as these were not very common. We have another one by Peter Doyle, former IMF staffer in FT Alphaville. A key extract from his post:

But these ex-firefighters cannot bring themselves to say — though let’s hope it hasn’t entirely escaped their attention — that: public debt has more than doubled, curbing critical fiscal capacity (even if only due to political constraints) to respond in future; that policy interest rates are barely off their floors and QE is barely off its ceiling, so they are not much in reserve for the future either; that banking concentration has increased since pre-crisis; that no-one has any idea if international bank resolution frameworks will actually work in the heat of battle; and that the whole policy response to the crisis has emphatically underscored to big institutions that they will collectively be bailed out — spurring herd, concentration, and moral hazard behavior further. Focussing only on policy actions taken (raising the flood barriers) and ignoring the increased moral hazard and other impairments arising from the crisis response itself (the higher tide), everyone wants to agree that things are “safer” now; but absolutely no-one wants to be asked if things are safe.

However, I believe that Peter Doyle lets bankers off too lightly. He does not ask the question that John Authers asks. He is dismissive of the fact that no real big cat banker went to jail.  Peter Doyle is happy with political accountability.

Also, I am not quite sure that China bailed out the world economy and that they did it out of their generosity or enlightened public interest. Of course, policymakers who were part of the G-20 deliberations at that time tell me that those who had the capacity to stimulate were asked to stimulate their economies (those with external surpluses). China had one of the largest external surplus.

But, central bankers have their defenders too. A prime example is Neil Irwin of NYT. The header of the article gives the story away:

The Policymakers Saved the Financial System. And America Never Forgave Them [Link]

It comes across as a pathetic attempt to paint policymakers as victims of irrational, ungrateful lynch mobs.

I think Peter Fisher demolishes the argument that they saved the world. Assuming that American policymakers did indeed save the world, the question that comes to mind is this:

If a firefighter puts out the fire dousing the house with water, one will be thankful. But, what if he continues to douse the house with water, long after the fire is put out?

Joseph Sternberg in Wall Street Journal asks the right questions:

After decades of financial transformation, globalization and policy experimentation, central banks know less than they used to about the effects they have on Main Street. It’s likely to be some time before we figure out what central banks actually did to the economy after the Lehman crisis, let alone whether it worked. [Link]

He says that central banks lost control of the transmission to the real economy after the 1970s. Quite true. They never admitted to it. The change happened with the Rise of Finance as banks created money (credit) plentifully since then.

Matt Stoller of the Open Markets Institute contrasts the Roosevelt bailouts with that of Geithner-Obama bailouts. He says that the Paulson-Geithner-Bernanke bailout eroded the social contract that lies behind the capitalist America – home-ownership. He has a pithy quote from Roosevelt:

In 1938, Franklin Delano Roosevelt offered his view on what causes democracies to fail. “History proves that dictatorships do not grow out of strong and successful governments,” he said, “but out of weak and helpless ones.” Did the bailouts of ten years ago work? It’s a good question. I don’t see a strong and vibrant democracy in America right now. Do you? [Link]

I have to agree with Franklin Roosevelt there. Obama administration is responsible, in more ways than one, for the economic and social polarisation of the American society.

Anand Giridhardas takes a different but related line about the elites (ht: Rohit Rajendran). The burden of his song is that philanthropy is a very poor (even morally wrong) substitute for self-aggrandisement of the elites in their normal lines of business or commerce. Quite true. Their true philanthropy will come through or should come through in the manner in which they run their businesses and treat their employees. You can read his interview and his article here and here.

But, the interesting thing – no fault of Giridhardas – is that he has very few cogent answers’ to elite aggrandisement. His ideas – assuming student loans and doing some affordable housing – sound too naive. I do not blame him. That is the nature of the world. Even democracy is only a symbolic fig leaf for the dominance of the elites. It gives the ordinary folks a belief (false) that they have a stake in the process and they shape it. It is far from the truth. They benefit when the tide is so big that it lifts all boats. But, they fail to notice that some of the boats are lifted higher and those are bigger and more powerful boats too. The second time their needs get some attention is when a crisis like the ‘Great Depression’ strikes.

In a way, by preventing the ‘Great Depression II’, the crisis managers – Paulson, Bernanke and Geithner – prevented meaningful benefits and better lives for the ordinary masses which Teddy Roosevelt managed to deliver using the Great Depression as the trigger.

Barry Ritholtz, a bear (Pre-2008) turned bull (post-2008) has a short and pithy column on ten things that people still get wrong about the crisis. One tends to agree with most of what he had written. Talking of Barry Ritholtz, one should read this column by Joshua Brown (ht: Rajeev Mantri) who had commented on how he met Barry and benefited. The column is about how intellectually open-minded Bary was (and, if I may add, lucky) after the crisis and turned bullish. That merits a separate blog post. I shall do it after this one.

Aaron Brown of AQR Investments wrote (ht Rajeev Mantri) in Bloomberg that crisis autopsies asked the wrong questions. He wonders why banks accumulated illiquid assets, cut loan-loss reserves and raised dividend payments after 2006 when the problems were beginning to manifest already. That could be due to poor risk management, complacency and indefinite extrapolation of near-term optimistic trends.

In India, Ila Patnaik could not resist taking potshots at RBI for claiming to have handled the crisis fallout far better than other countries did. But, that is true. Not only did RBI do well in the immediate aftermath but some of its pre-crisis measures are only now becoming de rigueur in the Western world.

This sentence is too clever by half:

It (India) was at the other end of the spectrum, where instead of worrying about sophisticated derivatives products being traded, most derivative products have restrictions, or are banned, and the bulk of the population has no access to bank loans. [Link]

It is too clever because ‘non-access to bank loans’ is a serious problem but not trading derivatives is not. It is gambling by another name. Putting both in the same sentence or mentioning them in the same breath is to draw an utterly false equivalence between the two.

If India had absorbed the lesson from the crisis that financial sector liberalisation had to be pursued even more deliberately than before, it was then a lesson well learnt, unlike what Ms. Patnaik thinks.

Niranjan Rajadhyaksha (now with IDFC Institute) wonders if there is so much a need for a new economics as there is one for a dialogue between different schools of economics, in the wake of the 2008 crisis:

Too many critics have lazily equated modern economics with a certain style of macroeconomic thinking that was dominant in the financial markets as well as in central banks, especially the ability to forecast future outcomes. It is a bit like criticizing all of modern medicine because oncologists are not yet capable of predicting when cancer will strike. [Link]

He praises Olivier Blanchard for intellectual honesty. But, Blanchard has not deviated from the Washington – New York consensus as much as he made us believe that he has done so. Niranjan’s praise is not fully earned, yet.

Ira Dugal has a good conversation with Dr. Subbarao, who stepped into RBI and stepped into the crisis, into G-20, etc. His entire tenure was marked by a series of global and local crises. Her interview with Dr. Y.V. Reddy is here.

My favourite academic-politician Yanis Varoufakis was part of a panel of experts whose views ‘The Guardian’ newspaper sought. I had not read all their views. But, here are his proposals to make the world better:

What should be done? First, we need a global green investment programme to put the global glut of idle savings to useful purpose. A multilateral partnership of public investment banks could issue bonds in a coordinated fashion, which their respective central banks would support in the secondary markets. In this manner, global savings would be energised into major investments in jobs, the regions, health and education projects, and the green technologies that humanity needs.

Second, trade agreements must commit governments of poorer countries to minimum living wages for their workers. Third, we need a new Bretton Woods agreement to rebalance trade, re-couple trade and capital flows, put the financial genie back in the bottle, and create an international wealth fund to alleviate poverty and support marginalised communities across the world. [Link]

His ideas make sense to me. But, that also means that they won’t be taken up seriously. Comments by rest of the panel also, at the headline level, make sense. But, one has to dig deeper. I have not done that.

The panel by FT – a novel one – was not a panel. It simply asked seven people as to how their lives changed post-crisis. Each one was interesting and human in its one way. Comments by Nick Bayley, who was the Head of Regulation at the London Stock Exchange are appropriate in this context.

This episode alone would make for an interesting case-study:

I was on the Sunday night conference call on September 14 2008 when Paul Tucker from the Bank of England told representatives of all the big City firms and infrastructure that the Barclays acquisition of Lehman had failed, and Lehman was going to go down the pan the following morning.

It was just a monumental time. Lehman was a global titan. The idea that it would collapse was unthinkable. We knew there were issues in the market; prices were all over the shop. But we went into that weekend assuming that someone would step in and a deal would be done.

There must have been 30-odd institutions on that Sunday night call. When Paul told us that Lehman would go down the next day, nobody said anything. He said he wanted to go around the call and hear that we were ready and this wouldn’t cause a problem. He said he’d start with the London Stock Exchange, so I was the first person to speak.

When in doubt, keep it short. I made a few noises about Lehman’s important role in the equity markets and that we have default rules that come into play, and then I shut up. We went around the call and everybody said the same thing. Nobody told Paul Tucker, ”This is going to cause huge problems, and there will be a major domino effect.” [Link]

No one says what every one knows to be true because no one wants to be the bearer of bad tidings! Nor does Paul Tucker probe them (based on this recollection here, of course).

Andy Kessler (I have read one of his books but forgotten which one it is!) has a good piece on the politics of the collapse of Lehman Brothers. His concluding words:

There is more concentration in banks today than pre-Lehman. They’re better capitalized with better reserves, but it’s still fractional reserve banking. And the shadow banking business that got drenched in derivatives may be larger today than it was before the crisis. Leveraged loans are rampant. That doesn’t point to stability.

In downturns, equity hurts but debt kills. Like an electrode-implanted rat that can’t stop pushing a pleasure lever, banks will lend until they implode. A decade ago, the Fed failed as the lender of last resort. It’s still failing at preventing the next crisis. [Link]

This is the best quote (by Nick Bayley) to end this blog post:

We live in a bubble in financial services. Anyone who tells you otherwise is probably kidding you. We get paid more than most industries do. Do we deserve it? Not in my view. Are people much cleverer in financial services than in other industries? No, not in my view.

Ten years after the crisis and ten years of crises

Martin Wolf reviews Adam Tooze’s ‘crashed’ in FT. You can read it here. I posted the following comment on the review:

I will not put the blame on the savings glut of China for the US crisis in 2006-08. That was Bernanke’s subterfuge. It was American monetary policy and regualtory laxity. Add capture by finance and hubris (‘Great Moderation’) that went global to the mix.

China’s savings glut was the topping that America encouraged. American firms set up shop there and exported to the United States. China earned export revenues and recycled them. Americna corporations made huge profits because they located production in China. Wall Street earned huge fees intermediating the capital flows. China’s savings glut helped, at the margin, keep interest rates low but the Fed, under Greenspan and then under Bernanke, with their policy transprency and predictability removed risks and uncertainty for market participants. To me, that is the key issue.

Whether, post-crisis, the political Right managed to translate a crisis of financial excess into a fiscal issue is an interesting argument. I am unpersuaded. The Left was right to initiate regulation on Finance. But, it was piecemeal and half-hearted because much of the advisers to Obama were drawn from the Clinton era who were close to or were from Wall Street. Second, Democrats left the monetary policy framework untouched. They bailed out banks but not the borrowers. None of note went to jail. What ever happened to the Financial Crisis Inquiry Commission Report by Senator Carl Levin?

So, shifting the blame for the disaffection to the political Right’s evil conspiracy’ to make financial sector excess into one of the Left’s political excess falls well short of the intellectual rigour and cogency needed to understand the popular protests and backlash that have brought Brexit, Trump and other huge political shifts in continental Europe.

Quite simply, the swamp was left untouched by Democrats. They did not clean up after 2008 – a big opportunity lost. Trump had not drained the swamp either. But, Democrats have no moral right to question him on that and neither are Trump’s voluble critics because they did not hold the Democrat President to account for his failure to clean up and still do not.

Paul Tucker is on to something better with his observations on policy by and for the ‘Davos man’. Indeed, early in his book, ‘Unelected power’, he alludes to the transfer of policymaking power to international institutions and ‘elites’ who were employed by them, away from democratically elected governments, from the 1990s. It makes sense.

Recent political shifts on either side of the Atlantic and developments such as Brexit  are not merely a consequence of the crisis that is only about a decade old. That they are a result of deep-seated and systematic- benevolently motivated or mala fide – takeover of decision-making from democratically elected governments by elites without democratic legitimacy and accountability is a hypothesis that holds much promise for further analysis and examination. The policy implications that flow from that line of thinking are straightforward. That also explains why neither elites nor their cheerleaders in the media look in that direction.

In sum, the crisis was a consequence of the overreach and hubris of the elites. To date, they have neither admitted to the folly of their ways nor have they changed their ways. Of course, that follows naturally from the first.

Their cheerleaders  – such as the journalists of this newspaper – are trying to turn our gaze and rage towards others who are merely consequences of the elite follies.

So, the world waits for a ‘better’ encore than 2008 to see if elites will finally be humbled and consigned to the dustbins of history along with their policies. We can then begin afresh.

Who pulled the plug on Lehman Brothers?

We must thank Professor Laurence Ball at the Johns Hopkins University for filling a very important information hole on the demise of Lehman Brothers. He has done a wonderful service although, for reasons beyond your control, there are unanswered questions. The decision was taken by Hank Paulson, the then Treasury Secretary, although he had no locus standi to take that call.

Several questions cropped up in my head on reading his 218-page long paper published last year on the bankruptcy of Lehman Brothers:

(1) Is there no consequence for Bernanke not responding to the FCIC request for information on Lehman Collateral and his refusal to provide the information?

(2) When Prof. Ball made the FoIA request for details on the collateral from AIG against which the Federal Reserve lent, it was already 2012. By then, the collateral had been liquidated. Why was it still not feasible for the Federal Reserve to comply with Prof. Ball’s Freedom of Information Act (FoIA) request? It would not have jeopardised price discovery of AIG collateral since they had been liquidated, by then. Pity that the courts too did not agree with him.

(3) I can understand, to a degree, why Hank Paulson did not want to commit public money after the backlash he received for Bear Stearns bailout. But, did it involve taxpayer money? Lending against collateral is the job of a central bank and it is a call that it should take.

To be sure, I agree that if the collateral were of dubious value, then eventually the burden becomes fiscal. But, that is a judgement that the Federal Reserve had to make and the risk of that judgement is part of the job.

In other words, no taxpayer funded bailout should not have meant that Lehman Brothers should be barred from the Fed Primary Dealer Credit Facility (PDCF).

[I learnt from Professor Ball’s interview (see below) that, after Dodd-Frank, the Treasury Secretary has to authorise Fed lending to a stricken institution.]

(4) Why has Hank Paulson not been questioned/tried/fined/ imprisoned for overstepping his authority vs. the Federal Reserve, not to mention yelling at Cox of SEC?

(5) Why has there been no follow-up action to the Financial Crisis Inquiry Commission (FCIC) report in terms of holding public officials accountable for their decisions? The Federal Reserve had dodged information requests from FCIC on the extent of collateral available from Lehman Brothers, on the Fed’s assessment, etc., They were not given that information. Is there no consequence for that?

(6) There is some escape avenue for Paulson because he had tried to arrange a private sector solution. He had spoken to Dick Fuld on fifty occasions between July and September. The paper mentions that. He spoke to Alastair Darling to waive the Financial Services Authority (FSA) insistence on Barclays’ shareholder approval, etc.

But, he could have easily allowed the Fed to fund Lehman for sixty days for Barclays to obtain shareholder approval and let the firm fail, after that, if it did not materialise. That could have also given the system to prepare better?

(7) In an interview for the ‘Promarket’ blog at the Stigler Center at the University of Chicago Booth School of Business, Prof. Laurence Ball specifically rules out ulterior motives for the then Treasury Secretary:

Q: In the aftermath of the crisis, there were rumblings that the reason Lehman was allowed to fail while other institutions were bailed out had something to do with the fact that the government was filled with former competitors of Lehman, and they were the ones calling the shots.

A: I read that. I don’t think that’s really true. There were also stories about Henry Paulson who had been in charge of Goldman Sachs and supposedly didn’t like Richard Fuld, who was head of Lehman Brothers—that may be true, I don’t know, but I think it’s pretty clear that Henry Paulson did not want Lehman Brothers to fail and did not think this was a good thing or tried to get back at his rival on Wall Street. Paulson knew that at best he was taking a very big risk, and he did work very hard to try to arrange for some kind of private sector rescue of Lehman. The last big hope being the Barclays acquisition that didn’t work out, and he was very unhappy. In the end he did everything he could to prevent Lehman’s bankruptcy, whether he liked or didn’t like Richard Fuld. Except he wasn’t willing that the Fed put in money because of the political consequences of that. [Link]

(8) It is funny to see the slant of the interview from the ‘pro-market’ blog. They were trying to argue that the whole crisis was probably much ado about nothing because, had Lehman Brothers been bailed out, it might not have become so serious as it did and therefore what was the fuss really about?!

Never mind that there was a global real estate crisis, bank failures in a few countries in Europe, etc. The interviewers for the blog were trying to argue that the Federal Reserve made a miscalculation and did not rescue Lehman Brothers. They did not want to acknowledge that investment banks were leveraged 40:1 or that Countrywide engaged in predatory lending and that subprime mortgages had grown too much too quickly and that they were securitised multiple times over. None of these constituted a problem. This kind of market fundamentalism is actually repulsive and distasteful.

There is one explanation in their favour. Possibly, they were merely being provocative. That cannot be ruled out.

Those who do not wish to read the 218-page long paper might wish to read this short NYT Deal book article and this 18-page summary paper by Prof. Ball himself.

Answers to questions on my stance on President Trump

A reader had posted the following comment on my  blog few days ago:

I am an avid reader of your blog. I am a faculty in a US engineering school (working in the area of econometrics) and follow economic news with interest. That is how I found your blog and have been reading it for the last few years. In general, I am quite impressed with your articles and am keen to follow your thoughts – for example, I was curious about how you rated the budget. But over the last 6 months your articles on the US election and Trump in general are quite disturbing to me. I have been wanting to respond to your support to Trump.

To clarify, I am right of center in economic policy and quote liberal in religious matters. In India, I support the BJP govt. at center. So, I am not a pseudo-secular guy taking issue here. As a morally upstanding person, how can you support Trump? Forget his economic policy, I have seen all his 15+ debates and never does he come across as a sensible person. I mean he is openly fascist, misogynistic and thin skinned. His statements on John McCain among other things clearly show what kind of a person he is. Given this background, how can you support him? What standards are you setting for leadership if Trump is a good leader? To be sure, I am not blind to the fallacies of NYT and American press and Hilary Clinton. But Trump’s ignorance of facts and his lies should make you question his motives. But I see you support him with little reservation. His cabinet is full of billionaires with no scruples who made money in the financial sector (a group of people you criticize) – so how do you justify your support?

I thank him for engaging rather than giving up on reading the blog in protest. I am not sure that I will be able to answer him convincingly – i.e., persuade him successfully. But, it gives me an opportunity to engage and to sharpen my own understanding of the phenomenon of Trump.

I had written two op.-ed.s in MINT on Trump, the candidate. You can see them here and here. To a large extent, the two columns spell out my reasons and also my reservations. It is not as though the case for Trump, in terms of his personality, was clear-cut. But, that is also his strength.

One of the things I had mentioned in my second column – published on Nov. 8 morning in India – was that with Mr. Trump in office, democratic accountability would be safe, for his every move of hands and lips would be scrutinised microscopically. That is being proven correct, to the point of inciting instability and a breakdown of civil order. In fact, their goal is either an impeachment or worse. The so-called Liberals (illiberals, in reality) might get what they want and I hope they live to regret it deeply.

Whereas with Hillary Clinton, there would not be much scrutiny at all. That was based on the accountability (or, the lack thereof) enforced on President Obama. One only had to read Jeffrey Sachs’ conversation with ‘Project Syndicate’ to understand that. One of the principal reasons – if not the principal reason – for the global refugee crisis has been his botched handling of Libya and Syria. Ms. Clinton was party to at least one of the decisions, if not both.

On Russia, United States has gone back on the promise of NATO non-expansion in Russian sphere of influence. What the United States did in Ukraine was thoroughly objectionable as was the regime change pursued in Syria. President Trump was perfectly correct in posing a question in the O’ Reilly interview if the United States was innocent. Read what Senator Chuck Grassley said about the United States’ interference in elections overseas.

It is not just Jeff Sachs but also Prof. Steve Cohen who has been writing about it and talking about it for quite some time.

How much did the intelligentsia and the media hold Obama accountable when he was in Office and now? Zilch. Nada. Nothing.

On the so-called Russian interference, I think commentators have to decide which way they want to go: Do they want to consider their victory in the popular vote (contributed to by about three counties in California) as legitimate or do they want to say that Russia interfered with and succeeded in changing the final verdict? They cannot have both. The 7-minute interview of former Democratic Congressman (Ohio) Dennis Kucinich for Fox Business News in the ‘Morning with Maria’ programme is worth watching.

On China and as to why the relationship needs a reset, one has to read a lot more to understand the agenda of the new American government. It is not a knee-jerk or impulsive decision. We may not like it and we may think it is unjustified – I, for one, do not – but that is the reality. American relationships with nations are reset at different intervals, depending on their national interest and geo-strategic calculations.

One has to read David Shambaugh’ ‘China’s future’. Robert Luttwak’s book on China (The rise of China vs. the logic of strategy), Richard McGregor’s ‘The Party’, James Kynge’ ‘China shakes the world’, columns by Jamil Anderlini in FT and the regular briefings coming out of the Mercator Institute of China Studies. Or, from the economics angle, read the papers of Peter Schott and Justin R. Pierce. I had blogged on them.

George Yeo, the former Foreign Minister of Singapore spoke to the Harvard Business Association in Hong Kong. While he clearly felt that a conflict between the U.S. and China would not be in the best interests of the rest of the world, he did say the following with respect to China:

China is not like that. This is a civilisation which has deep instincts of its own past and of its own nature. And because of that, China will never harmonise with the rest of the world. Whether we’re talking about cyber space, cultural policy or capital markets, China will never harmonise with the rest of the world. [Link]

Such is their blind hatred for and prejudice against Donald Trump that they could ignore the lessons of history and even contemporary reality and look up to China to uphold liberal order!

It was left to James Kynge to expose their stupidity of hailing Xi Jinping as the champion of the liberal world economic and political order:

Yongjin Zhang, professor of international politics at the University of Bristol, sees a chasm between the way China defines globalisation and the way the wishful high priesthood of global capitalism at Davos wanted to understand it. ..

… But China’s investments and diplomatic alliances are overwhelmingly in the developing world. In this sense, its vision is not global but sub­global; it is aiming to influence those countries where it can make a difference, reap the rewards and remain insulated from western demands to liberalise its political system and inculcate democratic values. [Link]

Of course, China exposed the hollowness of the anti-Trump and pro-China brigade – both moral and intellectual – with its abduction of a businessman from Hong Kong and now, the British and American Universities are getting a taste of their own medicine of intolerance and illiberalism in the name of political correctness and diversity. See here and here. Also, please remember to read Prof. Mark Lilla’s conversation with the Chronicle of Higher Education in January  titled, ‘Campus Identity Politics Is Dooming Liberal Causes. (It could be behind a paywall, though).

Trade Protectionism

On protectionism, it is blithely asserted that technology and not trade that is the problem. That is incorrect. Often repeated, many hope – and they have probably succeeded – that lies would stick. Readers should check out the research of Peter Schott (of Yale University) and Justin R. Pierce of the Federal Reserve on the ‘role’ of China in the crisis of jobs in U.S. manufacturing and in the destruction of communities within the United States.

Many commentators try to appear very erudite by haughtily proclaiming that it was not trade but technology that had led to the employment and other social impacts in U.S. communities. By sheer dint of repetition but not rigour, they seek to establish this as a fact. It is almost impossible to disentangle the effect of trade from technology on U.S. manufacturing employment. Both worked in tandem. It is also difficult to say if technological developments boosted international trade or the other way around. I am sure that there is a bit of both going on. But, trade had an important role to play in the angst that prevails in the United States. That is what the sustained contribution of Schott and Pierce seeks to establish.

Yes, on balance, India and China benefitted considerably (the latter more so) from globalisation but many Americans did not. The American capitalists who profited did not find any reason to nor did the politicians compel them to share their extraordinary prosperity with low-wage workers and others. The result is a clamour for jobs protection. Some of us will be losers but that is inevitable. These things – trade and immigration policies – come and go in cycles. The people to be blamed are not the current President and his administration but the ones who were in office before that and did not do much about the uneven distribution of the benefits of globalisation.

Some – with a bit of conscience – would concede the problem but would assert that Trump’s solutions (to walk back on TPP, for example) would not work and that the situation would be made worse. May be or again, may not. Who knows? Professor Ha-Joon Chang at Cambridge might have different views on it. After all, didn’t these economists predict an economic and financial market meltdown after Brexit but had utterly failed to foresee the real meltdown of 2008?

On immigration

As for immigration, again, many countries have quietly tightened their immigration rules in the last several years, in response to slowing economic growth and vanishing. They may not have spelt out racial or religious criteria but income criteria and they end up affecting a particular country or set of countries or religion.

Similarly, President Trump’s order did not target a particular religion but only citizens of particular countries and that too for a temporary period until some reviews are done. Let us not forget that citizens of many EU states and a considerable chunk of the American population have supported the decision. In fact, only 20% disagreed with the motion that banning would be bad. Quite a large proportion chose to remain silent as some Americans did during the election campaign period.

Of course, it is possible to argue that leaders should not pander to the population’s baser instincts. But, it is even better to ask the question as to why things came to this pass. That responsibility lies with the elites, the previous administration, governments in Europe and with the Muslim community itself. It is wrong to question the manifestation while ignoring the underlying causes. Well, not a surprise because that is what American policy elites have done over the years. Ask the Federal Reserve. They are the experts in that.

On the financial sector

As for the financial sector, yes, I had already done one blog post on President Trump’s appointments and the policy agenda (allegedly) driven by Gary Cohn (ex-Goldman Sachs). I had mentioned this in my column for MINT on November 8 too. This is an area of concern. But, three caveats. One has to wait and see the specific policy decisions taken. Two, one has to make sure that one does not rely on mainstream media to know about them. Three, some of the worst financial sector capture happened in the era of Bill Clinton and Obama and, of course, George W. Bush, Jr. Just sample this story on Mary Jo White, the SEC chair, in the Obama Administration.

Of course, there is a limit to how far one could throw the charge back at the previous government. Trump has been elected to drain the swamp and not clog the drains further with swamp of his own, esp. in the Finance Sector. This one needs watching, for sure.

On Trump’s billionaire cabinet and conflicts of interest

The media is watching like a hawk on the so-called conflicts of interest of his Cabinet with respect to China and other aspects of his policy. So, I will hear plenty of it and that, in itself would be an effective check and balance on them. That said, I would be very careful in basing my conclusions in these polarising matters from the reporting in the mainstream media. His Cabinet members are billionaires and, therefore, they are unlikely to be stupid or self-destructive.

President Trump’s tweets on Nordstrom negotiations or cancellation of its contract with his daughter were unacceptable and, more importantly, stupid. There was no upside to his tweeting on them. Again, perhaps, he is not so stupid as the intellectuals were when they looked up to the Chinese leader to stand up for globalisation and liberal principles. I will come to that in a moment.

As for President Trump’s chaotic first four weeks, read what John Mauldin has to say:

The media will be writing about how Trump can’t keep people and about all the chaos in the White House and other parts of government. But from Trump’s perspective, and given his management style, that’s not necessarily bad in terms of his longer-term goal of changing things.

We have not had a president with this type of management style in my lifetime. Since it’s not something that any of us are going to be familiar with, it is going to make some of us uncomfortable until we get used to it (and some people never will).

If you listen to the media you might have the impression that the Trump transition team is in complete disarray. Talking with leaders of the transition team certainly didn’t leave me with that impression. They have broken the transition process down into over 30 departments and have created a “landing document” for each department. The analogy they are using is that this process is like planning an invasion, and they are going to hand the landing document off to the “beachhead teams” who will then execute the plans.

I was briefly allowed to look at (without actually being able to read) the plan for one cabinet-level department. It appeared to be about 100 pages plus of serious detail as to exactly what executive orders would need to be removed and added, what personnel would have to be replaced (both appointees and regular staff), what policies would need to be changed, and so forth.

I was told that this level of planning was being done for every department. My impression is that there are a lot of people from various think tanks and others with experience in the presidential transition process who are involved in directing the plan for each department. That level of detailed planning doesn’t happen in less than two months. My guess is that some of that thinking has been going on for years, and now it can be implemented.

Steve Moore passed on a story to me. He and my friend Larry Kudlow were meeting with Trump, and Trump asked them if they would like to be part of his economic advisory team during the campaign. They looked at each other and back at Mr. Trump and said something to the effect of, “You can’t use us. We believe in free trade.” And Trump then said, “But we agree on nearly everything else. Let’s agree to disagree on trade and figure out where we can work together.”

Not many presidents are willing to have that level of disagreement from the outset. That is somewhat comforting to me. [Link]

In the same speech, referred to earlier, George Yeo, like John Mauldin and Dr. S. Jaishankar, India’s foreign secretary, had some sensible advice to offer on how to understand President Trump:

We do know that Mr Trump has certain deep instincts. He sees a lot of problems in American society. He wants to reinvigorate it. So trade has to be fair, in his mind. I’m not sure it’s going to help just by arm twisting automobile companies to manufacture in the US, because the global economy is much more complicated than that.

But it does win him applause from the gallery, and some things we must expect him to do for political reasons. As he himself has said, he’s from Wharton, so he can’t be stupid. And he’s not. To think that he is would be a serious miscalculation.

He says, ‘Look, we got to deregulate’. He wants to simplify the tax code and reduce the general level of taxation. He wants to revamp infrastructure in America, much of which has gone to disrepair. And that’s the right direction to go. He wants to control the borders better. Again, he may have made outrageous remarks, but the deep intention is, ‘We’ve got to have a handle on illegal immigration, and also to control conduits which may bring in radicals and terrorists’.

But there are two things which are troubling. One, it is easy to spend, it’s easy to reduce taxes, people would cheer you. But how do you cover the deficit? The other area which is a bit troubling is what appears to be a very deep conflict between Mr Trump and the intelligence agencies. He has become very distrustful of them.

And he takes a practical approach towards international security. Must we interfere in Syria? Was it right – Iraq, Libya, and the cornering of Russia? Maybe this is driving them into the arms of China. Does it make sense?

There are many people whose entire careers are formed on certain perspective and he’s challenging them. It’s important to get past the common criticisms against Mr Trump, quoting him against him, laughing at some of his inanities, and ignoring his deep purposes. I think it’s much more important to look at his deep purposes because he’s not a man to be disregarded. [Link]

Penultimate point

I am not seeking a spiritual guru to demand an upright moral code. I am being realistic. Not too many contemporary politicians would pass the test. There is very little to choose between them. Lying is a policy and political instrument. Further, I have no idea as to who is lying – either the President or those who call him a liar. The mainstream American media and the world over carry a far less trust quotient than the current American President.

Final point

Just consider this: four more years of the failed policies of the last three and half decades would have made the world more dangerous, more unstable and more fertile for a real demagogue and a fascist.

The biggest charge (a criminal one at that) against many of those who rail against Trump is that they did not call out the egregious excesses and wrong things that were going on in the world in the name of globalisation and liberal world order. Even now, there is no admission of guilt, let alone contrition. Instead, they are gunning for President Trump, who is the consequence of all that went wrong.

The world is where it is today – feeling unsafe, unsure and uncertain – not because of him because he has been in office for less than thirty days but because of what has been going on for the last thirty years.

As they seek to destroy President Trump and his agenda, they are seeking to destroy their own creation. But, if they succeed in doing so, they will only be removing the manifestation or the symbol of their acts and crimes of omission and commission.  They will feel vindicated. They will go back to their old ways. Nothing in their behaviour before and after the election in America, before and after the Brexit referendum suggest that they have learnt the lessons, least of all, the lesson of humility. That is the biggest danger to the rest of the world. Not President Trump or his policies.

Good reads from December

Barry Eichengreen thinks that James Galbraith’s ‘The Age of Uncertainty’ of the Seventies would be more like the ‘Age of assurance’ compared to today’s situation.

Michael Boskin on the lessons of the American election: he mentions the inability of people, in general, to cope with rapid change and “growing opioid epidemic and a tedious and intolerant form of political correctness,..”

Mohamed El-Erian argues that growing internal tensions and contradictions, together with over-reliance on monetary policy, are destabilizing the mediocre or new normal that he propounded years ago. But, his structural reforms do not sound like structural reforms, though. They are too easy.

Chris Patten does well to inveigh against the closing of the academic mind. There is not much to choose between some campuses in the West and authoritarian governments in other parts of the world.