Let them default. The radical solution to the sovereign debt crisis.

Uploaded by NewsOnABC on Sep 15, 2011

Economist Ann Pettifor predicted the GFC. Her solution to the sovereign debt crisis is to let those countries default, then bail out the banks in return for major reforms.

http://www.project-syndicate.org/commentary/taleb1/English

The Great Bank Robbery

Nassim Nicholas Taleb and Mark Spitznagel

2011-09-02

The Great Bank Robbery

NEW YORK – For the American economy – and for many other developed economies – the elephant in the room is the amount of money paid to bankers over the last five years. For banks that have filings with the US Securities and Exchange Commission, the sum stands at an astounding $2.2 trillion. Extrapolating over the coming decade, the numbers would approach $5 trillion, an amount vastly larger than what both President Barack Obama’s administration and his Republican opponents seem willing to cut from further government deficits.

That $5 trillion dollars is not money invested in building roads, schools, and other long-term projects, but is directly transferred from the American economy to the personal accounts of bank executives and employees. Such transfers represent as cunning a tax on everyone else as one can imagine. It feels quite iniquitous that bankers, having helped cause today’s financial and economic troubles, are the only class that is not suffering from them – and in many cases are actually benefiting.

Mainstream megabanks are puzzling in many respects. It is (now) no secret that they have operated so far as large sophisticated compensation schemes, masking probabilities of low-risk, high-impact “Black Swan” events and benefiting from the free backstop of implicit public guarantees. Excessive leverage, rather than skills, can be seen as the source of their resulting profits, which then flow disproportionately to employees, and of their sometimes-massive losses, which are borne by shareholders and taxpayers.

In other words, banks take risks, get paid for the upside, and then transfer the downside to shareholders, taxpayers, and even retirees. In order to rescue the banking system, the Federal Reserve, for example, put interest rates at artificially low levels; as was disclosed recently, it also has provided secret loans of $1.2 trillion to banks. The main effect so far has been to help bankers generate bonuses (rather than attract borrowers) by hiding exposures.

Taxpayers end up paying for these exposures, as do retirees and others who rely on returns from their savings. Moreover, low-interest-rate policies transfer inflation risk to all savers – and to future generations. Perhaps the greatest insult to taxpayers, then, is that bankers’ compensation last year was back at its pre-crisis level.

Of course, before being bailed out by governments, banks had never made any return in their history, assuming that their assets are properly marked to market. Nor should they produce any return in the long run, as their business model remains identical to what it was before, with only cosmetic modifications concerning trading risks.

So the facts are clear. But, as individual taxpayers, we are helpless, because we do not control outcomes, owing to the concerted efforts of lobbyists, or, worse, economic policymakers. Our subsidizing of bank managers and executives is completely involuntary.

But the puzzle represents an even bigger elephant. Why does any investment manager buy the stocks of banks that pay out very large portions of their earnings to their employees?

The promise of replicating past returns cannot be the reason, given the inadequacy of those returns. In fact, filtering out stocks in accordance with payouts would have lowered the draw-downs on investment in the financial sector by well over half over the past 20 years, with no loss in returns.

Why do portfolio and pension-fund managers hope to receive impunity from their investors? Isn’t it obvious to investors that they are voluntarily transferring their clients’ funds to the pockets of bankers? Aren’t fund managers violating both fiduciary responsibilities and moral rules? Are they missing the only opportunity we have to discipline the banks and force them to compete for responsible risk-taking?

It is hard to understand why the market mechanism does not eliminate such questions. A well-functioning market would produce outcomes that favor banks with the right exposures, the right compensation schemes, the right risk-sharing, and therefore the right corporate governance.

One may wonder: If investment managers and their clients don’t receive high returns on bank stocks, as they would if they were profiting from bankers’ externalization of risk onto taxpayers, why do they hold them at all?  The answer is the so-called “beta”: banks represent a large share of the S&P 500, and managers need to be invested in them.

We don’t believe that regulation is a panacea for this state of affairs. The largest, most sophisticated banks have become expert at remaining one step ahead of regulators – constantly creating complex financial products and derivatives that skirt the letter of  the rules. In these circumstances, more complicated regulations merely mean more billable hours for lawyers, more income for regulators switching sides, and more profits for derivatives traders.

Investment managers have a moral and professional responsibility to play their role in bringing some discipline into the banking system. Their first step should be to separate banks according to their compensation criteria.

Investors have used ethical grounds in the past – excluding, say, tobacco companies or corporations abetting apartheid in South Africa – and have been successful in generating pressure on the underlying stocks. Investing in banks constitutes a double breach – ethical and professional. Investors, and the rest of us, would be much better off if these funds flowed to more productive companies, perhaps with an amount equivalent to what would be transferred to bankers’ bonuses redirected to well-managed charities.

Nassim Nicholas Taleb is Professor of Risk Engineering at New York University and the author of The Black Swan. Mark Spitznagel is a hedge-fund manager. The authors own positions that profit if bank stocks decline in value.

Copyright: Project Syndicate, 2011.
www.project-syndicate.org

You might also like to read more from Nassim Nicholas Taleb and Mark Spitznagel or return to our home page.

Mish's Global Economic Trend Analysis: Gallup Polls Show Years of Stagnation in Job Creation, Unemployment, Consumer Spending; Bank Stocks Signal Financial Recovery is Over

Mish's Global Economic Trend Analysis: Gallup Polls Show Years of Stagnation in Job Creation, Unemployment, Consumer Spending; Bank Stocks Signal Financial Recovery is Over

Recent Gallup polls show that Three Years After Crisis, Little Sign of Economic Relief in U.S.

1. There has been no improvement in underemployment (counting part-time workers) from a year ago
2. Job creation has been in a narrow range since October 2010
3. Consumer spending has been stagnant since January 2009
4. Economic confidence is near the lows seen at the depth of the depression

click on any chart for sharper image

Economic Confidence: Back at Recessionary Levels

Americans' confidence in the U.S. economy is now at its lowest point since February 2009 -- near the conclusion of the recession that officially ended in June 2009. Gallup's Economic Confidence Index was -52 in August, above its financial crisis lows, but much lower than the -21 to -35 range measured from June 2009 to June 2011.

Americans' current level of economic confidence -- which represents their views on the current state and future direction of the nation's economy -- is decidedly negative. Seventy-seven percent said the economy was getting worse in August, the highest -- by far -- since February 2009, the month in which Congress passed a $787 billion stimulus bill in hopes of lifting the U.S. economy out the depths of the recession.

Job Creation: Improved From 2009-2010 Lows, but Far From Early 2008 Levels

The +13 Job Creation Index for August falls into the +10 to +15 range Gallup has measured since October 2010. The good news is that for nearly a year, Gallup has found consistently higher rates of net new job creation (the difference between hiring and letting go) than it did for the first two years after the global economic collapse. The not-so-good news is that the current rate of job creation is still just half of the +26 score Gallup found when it began tracking this metric in January 2008, when the nation was already technically in a recession.

Currently, 32% of workers say their employer is hiring and 19% say their employer is letting workers go, compared with 40% and 14%, respectively, in January 2008.

Underemployment and Employment: Stuck at Year-Ago Levels

Gallup found 18.5% of workers underemployed, including 9.1% unemployed, in August 2011. These figures are based on Gallup's measure of employment, which is not seasonally adjusted. Both of the current figures are statistically similar to what they were a year ago, meaning the employment situation in the U.S. is no better now than it was at that time.

Consumer Spending: Nowhere Near 2008 Levels

Americans' spending has remained essentially stagnant since it fell dramatically in January 2009. Spending in stores, restaurants, gas stations, and online has averaged $66 per day so far in 2011 -- similar to the $65 is 2010 and $64 in 2009. This compares with an average of $96 per day in 2008. That year, Americans' daily spending ranged from $81 to $114 per day in monthly averages. Since 2009, monthly spending averages have ranged between $58 and $75.

No Real Recovery

Clearly there has been no real recovery from the point of view of consumers. There was a financial recovery that is now crumbling, led by bank stocks.

BAC Bank of America



$BKX Banking Index



C Citigroup



Banks Stock fueled the decline in 2008 and have done so this year as well.

There was never a recovery in the real economy and now bank stocks signal the financial recovery is over as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Great moveon links re the coming crisis over the debt ceiling

1. "Obama ends tense debt talks with a warning," Los Angeles Times, July 14, 2011 

http://www.moveon.org/r?r=211239&id=28939-18984773-cfR_hNx&t=4

2. "Debt Ceiling Warning: Inaction Would Double Interest Rates, Crash Market," U.S. News & World Report, May 10, 2011
http://www.moveon.org/r?r=211236&id=28939-18984773-cfR_hNx&t=6

3. "The Risks of Debt Default on the Economy and Jobs," Center for American Progress, July 7, 2011
http://www.moveon.org/r?r=211238&id=28939-18984773-cfR_hNx&t=7

Job Gains and Losses in the "Recovery" by Job Type; Mish Shedlock

Interactive Map: Job Gains and Losses in the "Recovery" by Job Type (Healthcare, Education, Mining, Construction, Finance, Real Estate, etc)

This is the second part of a two-part interactive map series on jobs. For part one, please see Interactive Map: Employment History Since 2001 by Job Type (Healthcare, Education, Mining, Construction, Finance, Real Estate, etc)

Part two has a focus on job creation and losses during the economic recovery. Please consider the following interactive map, using Tableau Software, with data courtesy of Economic Modeling Specialists.

This interactive map may take a bit to load. Please give it time on a slow connection.

Note on Economic Modeling Data

“Our data is used by many to research and understand regional employment trends and dynamics. It’s composed of comprehensive information on industries, occupations, demographics — as well as things like occupational skills, education, training, and even the names and size of companies in your region broken down by industry.

To do this we link nearly 90 data sources — from federal sources like the Bureau of Labor Statistics to state and private sources.

If you’ve ever worked with this sort of information, you know it can be hard to collect and present. It’s also often incomplete and outdated. So we organize the data, bring it up to date, and build software and reports around it so you can put it to use more quickly and effectively”

Jobs Gained or Lost Since Dec 31, 2007
Industry	2008	2009	2010	2011
Health Care	461,860	792,679	1,023,907	1,278,794
Finance & Insurance	323,802	629,082	490,384	444,530
Mining & Oil	195,813	345,116	337,917	422,752
Educational Services	121,337	195,899	236,766	295,498
Government	358,591	451,680	398,853	90,393
Arts & Entertainment	92,418	108,263	77,181	65,855
Management	60,985	25,371	16,323	26,615
Utilities	13,019	20,773	13,771	11,275
Professional	203,493	-107,607	-164,853	-39,124
Agriculture & Forestry	-18,909	-26,033	-33,643	-71,928
Other Services	-30,456	-221,109	-246,875	-82,177
Food & Lodging	71,681	-242,538	-273,658	-145,099
Information	-30,863	-203,185	-299,866	-331,269
Real Estate	-76,068	-232,452	-335,391	-359,874
Transportation	-107,538	-501,697	-559,415	-486,346
Admin & Support	-389,951	-1,226,173	-1,097,484	-774,404
Retail & Wholesale	-428,934	-1,759,253	-1,977,146	-1,854,109
Manufacturing	-478,023	-2,072,959	-2,415,322	-2,290,390
Construction	-612,184	-1,955,402	-2,468,184	-2,519,538
Totals	-269,927	-5,979,545	-7,276,735	-6,318,546

Jobs Gained or Lost vs. Year Ago
Industry	2008	2009	2010	2011
Totals	-269,927	-5,709,618	-1,297,190	958,189
Admin & Support	-389,951	-836,222	128,689	323,080
Health Care	461,860	330,819	231,228	254,887
Other Services	-30,456	-190,653	-25,766	164,698
Food & Lodging	71,681	-314,219	-31,120	128,559
Professional	203,493	-311,100	-57,246	125,729
Manufacturing	-478,023	-1,594,936	-342,363	124,932
Retail & Wholesale	-428,934	-1,330,319	-217,893	123,037
Mining & Oil	195,813	149,303	-7,199	84,835
Transportation	-107,538	-394,159	-57,718	73,069
Educational Services	121,337	74,562	40,867	58,732
Management	60,985	-35,614	-9,048	10,292
Utilities	13,019	7,754	-7,002	-2,496
Arts & Entertainment	92,418	15,845	-31,082	-11,326
Real Estate	-76,068	-156,384	-102,939	-24,483
Information	-30,863	-172,322	-96,681	-31,403
Agriculture & Forestry	-18,909	-7,124	-7,610	-38,285
Finance & Insurance	323,802	305,280	-138,698	-45,854
Construction	-612,184	-1,343,218	-512,782	-51,354
Government	358,591	93,089	-52,827	-308,460

Job Table Notes

• Data is as of May 31, 2011
• 2011 comparison is to December 31, 2010
• Job gains in 2011 are higher than reported by the BLS. I see no reason to believe the BLS.
• Since December 2007, the economy has lost 6,318,546 jobs
• In 2011, the big job gainer is not healthcare but "administration"
• Healthcare and Education are the two bright spots throughout the recession.

The 6.3 million jobs lost since the beginning of 2008 is deceptively low. The Economy should have been gaining 1.8 milling jobs a year, not losing jobs. In other words, the economy is down 10 to 12 million jobs from where it should be.

Thanks to Ross Perez at Tableau Software and also to Economic Modeling Specialists for this post.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com