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Tuesday, May 5, 2009

An Appeal For Human Capital Development

computer-and-booksImage by DanTheWebmaster via Flickr

If you notice, I haven't written since My Wish List for The Summit of the Americas. Well, the outcome as we all know was disappointing. So, as my mother so wisely taught me, "if you have nothing good to say, say nothing". So here's what I have to say : Nothing.

Moving on....

Tonight, I am departing from my own self-imposed restrictions. Normally, I don't speak about Jamaica. Tonight I will because the situation warrants it.

If you live here, you know we - like many other countries- are facing a tax package. I understand why we have to have one. I accept that not all people can be happy. But there are two particular inclusions that I feel compelled to comment on. Now, for the record, I could comment on ones that materially affect my life - because there are those. But, as usual, my interest is the national interest.

The GOJ has decided to charge GCT on books and computers. I have tried and tried and tried and cannot rationalize this:
  • First, the GOJ and the Opposition (when the roles were reversed) by way of a special parliamentary agreement made specific commitments to education. The whole nation accepts that development of human capital must be the highest priority given the benefits for social stability, employment, growth etc etc. The PM himself reminded us all today in his budget presentation to just accept that the current education system is not producing the desired results and that it must continue to be prioritized and reformed. So why tax the very tools - books and computers - that promote and nourish education and the development of human capital? I accept that schools can get them without the tax, but don't students have homework? So, is it that we don't use books and computers for educational purposes outside of school? Reading a classic novel that is not on the book list is not educational? And if we do not, then is it not perhaps part of the problem? Do we not want to provide our people with the maximum access to those tools that will help them to be able to compete successfully with the best and brightest anywhere in the world?
  • Second, tax policy exists to 1) increase revenue 2) encourage certain activity 3) discourage certain activity. The matter of equity is a separate issue. In this case, computers and books do not provide a massive amount of revenue. If it were something like, say cars, I could see how this would be a harder decision. But, in my very humble view, cars only get you from A to B, they do not develop the human potential. Certainly the possible revenue that could be generated is not enough to negate the potential costs of idleness when people - children, youth and adults - who could have been using computers and could have been reading books instead get into crime. So, let's forget the revenue argument for a moment. Moving on to encouraging and discouraging activity - in this case, an increase is likely to be translated into a real disincentive to purchasing computers and books. Why? Because real disposable income is declining at an increasing rate - depreciation, inflation, the pending JPS increase, the expected recovery of oil prices, the gas tax and pass through effects etc etc. A computer is already a big ticket item for many of the people for whom the policy would wish to have and use it most. I am having a difficult time understanding how a 16.5% tax will not materially dampen demand when I am aware of some of the other serious sacrifices that people are already making.
  • Third, like all other countries, we are having job losses. Job losses are going to continue. Companies and people (even those employed) must re-tool to stay competitive. I commend the PM for all the initiatives for MSME's and entrepreneurship. But I must ask. How does one start any kind of sustainable venture without a computer? How does one develop a competitive advantage in this very open economy that globalization has brought without a computer? If I heard him correctly, the PM correctly noted the lack of access to financing that most people have. Increasing the cost of a computer and reading material just means that they are likely to be unfairly sacrificed for other needs. What about all of the immense opportunities, especially for the younger generation, in computer, IT and new media industries. These are viable opportunities in an era when the PM himself has so correctly highlighted the need to provide the younger people with hope and a real chance. It is true that most small businesses are extremely challenged to survive - yes, they fail. But, they are even more likely to fail without a computer, or if they have to take on the additional costs of computers. As for books and reading material not deemed educational, what will nurture creativity other than books? What about reading about trends and global market needs in publications and periodicals?
  • Finally, is it really even possible to guarantee collection of these taxes? So, for the price we are likely to pay on the impact on development, is the revenue potential - which is relatively minimal - really going to be realized? And will that potential not be dampened by the significant likelihood that demand will be depressed?
I understand the need for revenue. But why not do ALL that is possible to encourage the growth and development of the most precious resource we have - human capital - to create the successful industries and enterprises of today and tomorrow that can even be handsomely taxed because they would be so spectacularly profitable. :)
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Wednesday, April 8, 2009

My Wish List - Summit Of The Americas

CIA political map of the Americas in an equal-...Image via Wikipedia

If you've followed this blog, you may know I rarely mention Jamaica. That's deliberate. So I'm not commenting on the budget or the Cabinet reshuffle.

However, I will comment on something that Jamaica is involved in - and that is a grouping of countries called the Americas. There are many commonalities - geography is an obvious one, dependence on tourism and remittances are others, for example. But there are many differences - language is one, cultures are another, for example.

There's a big meeting coming up next week - April 17-19 2009 - called the Summit of the Americas. There's a theme...but here's what I think they should get done if we are to accelerate this global recovery.

First, please do not spend the time blaming the US for this mess. They know, we know, the world knows..... Let's focus on solutions. We have no time to waste.

Second, please do not spend the time working on things that are really unlikely to happen. For example, lobbying for offshore banking after the G20 communique and declarations is really not the most productive use of time. Save that for another forum. Petition the G20 if you like. Take it up at the next IFI meeting. Anything, but right now at this time, this one is unlikely to go very far. France and Germany threatened no deal with the G20 over this issue (it was one of them).

Third, please focus on a few tangible quick wins. Yes, you can do like the G20 and pledge the world of cooperation, but come out with actual measures - and money and an implementation timetable - for real things to make real differences in the region

Fourth, here are three suggestions for tangible things that I think are win-win for everyone. And here's the best part, President Obama already said he's supportive of them. See his campaign document: A New Partnership For The Americas.

1) Find some way to get the remittance flows to return to at least the level it was before the collapse in September 2008 - even if it is a temporary measure. My two cents? To ease the tensions with Mexico, the US would benefit greatly from the stability that the remittance flows facilitate. This is a real problem with a practical solution. Come to the table with some measures to encourage remittance flows. For example, explore - just explore - facilitating the ease of transfer of funds between countries. And for example, facilitate and allow job programs that allow remittances to flow. Job creation for all people will generate much stability in the region and significantly reduce what the IFIs need to provide on a recurring basis. Translation - that $1T pledged by the G20 can stretch further.

Want to know what Obama's document said when he was Candidate Obama:

"Tap the Power of Remittances:
Obama will work with international organizations, particularly the Inter- American Development Bank, to leverage the financial resources immigrants send to native countries. At more than $50 billion a year, remittances dwarf U.S. foreign assistance. Obama will work to foster a new spirit of partnership and cooperation to maximize the impact of those remittances on social and economic development across the hemisphere." See that "tap the power", "maximize the impact of those remittances on social and economic development across the hemisphere"

2) Pull out all the stops for micro and small business development - special fund or funds, special loan programs, whatever it takes - all the bells and whistles. Job creation in their own counties solves a myriad of problems - poverty alleviation, social stability, crime reduction, growth, wealth creation so people can buy imports, etc. etc. etc. This is a win-win for everyone and with the exchange rates, a little hard currency from the larger developed members goes a long way.

Want to know what Obama's document said when he was candidate Obama:

"A Fund for Small and Medium Enterprises (SMEs): It is neither sustainable nor appropriate for donor countries to focus solely on reducing poverty in the developing world. The challenge is to build the capacity of communities and countries in the developing world to generate wealth on their own and in a way that is sustainable over time. Building on the growing evidence that microfinance is an effective tool to facilitate this growth, an Obama administration will provide initial capital for an SME Fund. Administered through the Overseas Private Investment Corporation, an independent U.S. government agency, the government will provide capital matched by a larger portion from the private sector. The SME Fund will be designed to provide seed capital and technical assistance to catalyze the establishment of job-creating small and medium enterprises, and to build the capacity of entrepreneurs to translate their ideas into viable businesses, including through the creation of regional “SME Universities” supported by America’s business schools." See that..." A Fund for Small and Medium Enterprises", "Building on the growing evidence that microfinance is an effective tool to facilitate this growth..", "seed capital"..... etc etc.

3) Use the brainpower in this region to pipe in and push for IMF reform. I doubt any other region has the depth of experience with IMF programs and its impact like the Americas. Use that experience to guide what "not to do". The IMF just got all the money from the G20 to try to fix the world. Everyone knows the IMF needs reform - including the IMF. Everyone knows the IMF needs to reform its "terms and conditions". In order for the IMF money to really work to fix this global economic mess we are in, the region needs to take an interest and active role in the reform.

Want to know what Obama's document said as Candidate Obama:

"Lead Efforts to Reform the IMF and the World Bank: The International Monetary Fund (IMF) and the World Bank have contributed in important ways to an era of tremendous openness and global growth since 1945, but both institutions face crises of governance and are in need of modernization and reform. Its limits were apparent during Argentina’s economic struggles in the late 1990s and early part of this decade. As president, Barack Obama will lead an effort in the G-8 to achieve a new consensus on the missions of the IMF and the World Bank, while at the same time securing necessary changes in how both institutions are governed
to reflect the increasing influence of middle-income countries." See that..."both institutions face crisis of governance and are in need of modernization of reform" etc. etc.

Let me be clear - if President Obama and the Americas are willing to make sweeping changes on Cuba, support for education, and cooperation for crime and security, and debt relief and energy measures etc. etc. - all those things in that document - I would be the happiest person on earth. But I live in the real world, and we have been talking about some of these things for a long time. Most of these are difficult to get agreement on; and even more difficult to get a realistic implementable plan for.

FURTHER, if we do not get an urgent recovery in remittances, get some serious urgent dedicated and sustainable funding and focus on micro-enterprises and small businesses, and urgently reform the IFIs to ensure that we can access the funds in ways that do not cause severe social dislocation, then frankly, none of these other things are likely to happen in an sustainable manner.

So, I am going to lower my own expectations and limit my wish list to what I have listed above.

I personally would be satisfied if the members could come out of this Summit with at least tangible, realistic, practical and implementable programs for whatever the leaders decide. And seriously, we need it like....yesterday!

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Thursday, April 2, 2009

So Now What G20?

G20 Demo London 034 G20 Summit, London, G20 Lo...Image by zongo69 via Flickr

Let's give credit where credit is due. The G20 met and agreed. The alternative - not meeting, or meeting and not agreeing - is too horrible to contemplate. So let's give thanks for what we have.

Surprisingly, they have said a lot. Really, I've had some experience with communiques and they are usually very vague because its the only way to get all the countries to agree. And how much is a lot? Well, 1 statement and 2 appendices with details. Shocker! Here are the links and they are well worth reading. And if you have followed this for years like me, some of this stuff will make your eyes open very wide because I never thought I'd see this day. So:

All in all, a good start. Seriously. Lots of recognition of problems, lots of promises of things to be done, some specificity, commitments to fight poverty, create and save jobs etc. Sounds - I repeat, sounds - perfect. BUT, see that image of the standoff. Let's not think we have now magically gotten order from the disorder. Evidently they "know" and that's a lot. But the test is really the collective "will". Because nothing has actually happened yet other than the agreement. People have to do things now - things have to happen, money has to flow, rules have to be made and enforced. We needed the agreement ages ago; and now that we have it, we need the action eons before that. There is no time to waste!

What's the bottom line?
  • The IMF gets a ton of money to try to save the world. Other institutions too but the IMF gets the bulk of it. Question though? Access, access, access? Terms and conditions? The terms and conditions contributed to this mess and can contribute to instability. The IMF is famous for "structural adjustment" which you might as well call "social pain". Social pain right now is NOT helpful. Unemployment is rising, incomes are falling and savings are lost. People do not need to be "adjusted" right about now. So this money can be really helpful, only if it can be accessed and it is made available in a way that helps.
  • If the financial sector was a wild animal, the leaders want it tamed. So countries have "agreed" to lots of sweeping measures - oversight for credit ratings agencies (that alone can save the world if done properly), supervision for some - yes, unfortunately some - hedge funds, restrictions for tax havens, accounting reform, a body that warns us if this is going to happen again, measures for executive compensation.....read the separate declaration because it's pretty good "whats". You know where this can all fall down - HOW? Yes, how do you enforce these things? And yes, how do you prevent domestic legislation for overruling or ignoring this - please note the US Congress relaxed mark to market accounting the DAY these lovely agreements were released? And yes, how do you ensure that the intent of all these measures results in a functional financial system? Because frankly, there are easier ways - people may not like them but banking will work again. I have already noted a number of qualifying statements which are just big loopholes if you ask me. But as I said, getting 20 countries to agree does require some vagueness. Leaders should be reminded that whatever they say and agree to, the genius and will of the "engineers" must never be underestimated. They will engineer ways around whatever they do not want to do and they are not concerned with the matters that keep world leaders up at night like avoiding social unrest, preventing poverty etc. So, I take these documents as good intentions on the parts of leaders. And I wait in breathless anticipation for the details. And I hope that people are really realistic in making up those details, and that domestic legislatures are supportive of the intentions that their leaders have committed to. This is NOT a political football - the financial system must work, or we - the whole world - are in big trouble.
The documents are worth reading....but the action steps are really what I am waiting for. The proof of the pudding is in the eating. Nice looking pudding.....but we haven't tasted it yet. The G20 had a great talk...but now it's time to have an even better walk.

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Monday, March 30, 2009

G20 Gets Ready To Deliberate Global Financial Sector Regulatory Reform

G20 UK press conferenceImage by Downing Street via Flickr

Ok...how weird is it that there is a draft statement available before the leaders have met? From Reuters: Draft Communique for G20 Summit. Anyway, never mind. It's inadequate. So let's hope they go back to the drawing board. I'm not commenting on that tonight - I'm going to wait until they realize they must have a concrete job plan for their respective peoples.

Tonight, I'm commenting on financial regulation that's being considered. And specifically, I want to refer to this informative piece from Bloomberg: G-20 Targets Hedge Funds as Leaders Near Consensus

Now, all of this article is interesting....but let's look at some things in particular...

"“Having the U.S. and Chinese on board makes it a whole lot more likely” that an international framework will eventually emerge, says Harvard University’s Kenneth Rogoff, former chief economist of the International Monetary Fund.

Rogoff says that “it seems virtually certain that four to five years from now, the world will have either a global financial regulator or, more likely, a treaty on global financial regulation with a secretariat, akin to the World Trade Organization.” Still, he adds, “nothing is going to happen quickly.”"

See that? "treaty on global financial regulation..." That was on my wish list. See post: My Wish List - The New Global Financial Architecture. A single regulator is not realistic. A treaty is very realistic.


"Geithner suggests empowering the Financial Stability Forum, a group of international market regulators, to “play a more effective role” alongside the IMF and the World Bank in promoting and monitoring new international regulations."

Great...except, guess who is in charge of the Financial Stability Forum now? A former Goldman Sachs exec. Anyone shocked?


"The U.S., which has long expected other nations to follow its lead on regulations, may now have to yield to more cooperation, says former Federal Reserve Chairman Paul Volcker.

“The U.S. is no longer in a position to dictate that the world does it according to the way we’ve done it,” Volcker, head of Obama’s Economic Recovery Advisory Board, told a March 6 conference at New York University."

And here's why I think so highly of Volcker - he lives in the real world.

"The call for greater regulation unites China, possessor of the most vibrant economy in the developing world, and the U.S., possessor of the world’s largest economy. China’s central bank governor,
Zhou Xiaochuan, challenged the West to fix flaws in financial supervision on March 26, the same day U.S. Treasury Secretary Timothy Geithner outlined a broad initiative designed to do just that. "

"“China has to be listened to,” says
Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “What they are trying to do is exert maximum influence on the design of the new global financial architecture.” "

Aha....here's the reality. I think I've said several times to watch China....

"A new collaborative strategy was evident in a working paper released on March 27 by the Canadian government on behalf of the G-20, which comprises 19 developed and emerging economies plus the European Union and represents 85 percent of the world economy. "

Stop the presses. Does this mean that Canada is drafting this document! All my wishes are coming true. I asked for Canada to take a leadership role in this from the very beginning.


Pretty interesting developments...can't wait to see what they end up with.

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Wednesday, March 25, 2009

Winning The War....Even If It Means Losing A Battle

Montage of World War IIImage via Wikipedia

I must say I'm not overly interested in this US budget process.

Yes, it's groundbreaking.

Yes, the President wants his first budget to have education, energy, health care and work towards reducing the deficit. He's pretty fixated on those 4 specific categories and to him they are non-negotiable. All of them - he's said it a zillion times. And in fairness, they are all critical, they are all important, and they have been waiting for too long. But they have been waiting....and they can continue to wait....the world won't fall apart.

Frankly, the world won't fall apart without fixing education AND energy AND health-care AND reducing the deficit in the very next budget. It just won't. Would I like to have all of them? Sure! But there's a MUCH bigger battle which totally impacts this one.

And here it is: the global financial sector/banking system. Because what's a budget if you cannot fund it? What's a budget if it cannot be sustainable because there are no funds to pay for the programs year after year?

Follow me here:

The world WILL - I repeat WILL - fall apart without a functional global financial sector/banking system. We need one yesterday.

Let's examine this. A budget is funded by tax revenues and debt (which is just an expensive advance on tax revenues).

Let's look at tax revenues: Where are the tax revenues when companies are not profitable - because they cannot borrow to expand and invest, for example? Where are the tax revenues when small businesses cannot get back to generating the majority of employment - so you get income tax from the businesses and taxes on salaries and wages?

Let's look at debt: If the society cannot go back to generating private wealth, isn't creditworthiness going to fall - so credit gets more expensive and less accessible? How do you reduce the deficit if you have to keep borrowing because you don't have a functional banking system so people can go back to making money so they can pay taxes? How much more money can the US borrow IF it does not demonstrate that the society will be generating the wealth to repay it?

Frankly, all these lovely programs WILL NOT get funded in a sustainable manner in the absence of a global functional financial sector and banking system. In one of the few matters where Bernanke and I see eye to eye, this is really the deal breaker, folks. All the stimulus in the world is carrying us nowhere without this global banking/financial sector clean up.

I haven't read the budget and maybe if I did I would feel differently. Maybe if I were President I would be seized with the historical significance of the "first budget". And hey if the President can get all four of these done AND the global financial sector/banking system fixed, then great. Except he was visibly annoyed when asked about AIG. And that made me wonder if he is fully seized about what is negotiable on his very full plate.

Because the global financial sector/banking system is a necessary, pre-requisite, must do, have to have, non-negotiable.

Bear with me - it is straining relations between countries, it is encouraging protectionist measures, it is reversing all of the gains that were made in the last 50 years. It requires the dedicated attention of the President - not the Secretary of the Treasury and the Chairman of the Fed. If people believe countries will not end up in civil war over this, or go to war with other countries over this, then they have forgotten history.

Respectfully, we cannot leave the global financial sector/banking system one more second. Even if the President magically gets everything he wants this year in the budget, without a global banking/financial system, that budget will be a one-off anomaly because next year's priorities will be totally different, and may I say not in a positive way. So here are some solutions: maybe we can do all four of what the President wants but not on that scale. Maybe one of them can be delayed until next year.

Hey, I'm not the President, but if I were maybe I would look at the big picture, and realize that my energies are better spent elsewhere - like in a functional global banking system/financial sector so this never happens again. Sometimes to win the war, you have to lose a battle.
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Friday, March 20, 2009

Why Can't We Put Volcker In Charge?

Paul Volcker, former head of the Federal Reser...Image via Wikipedia

Evidently the powers are be are willing to think and act out of the box.

90% tax passing in the House? Unheard of!

AIG bonus payments? Madness!

Requiring the same WRONG credit rating agencies to rate the Government Bonds for the relief effort? Insane!

So, if you all are willing to consider and do all these off the wall, and destructive things, let me suggest an off the wall, and may I say constructive solution.

Can we put Paul Volcker in charge? No more advice. Put him in an "order giving" capacity. He has more common sense, experience and more focus on the big picture that the entire Fed and the entire Treasury put together. He's already done every thing. He understands Wall Street. He understands the power of the Fed (he was the Chairman of the Fed). Who else can get us out of this mess? Geithner has all Wall Street solutions. Hear the new one? Subsidizing the purchase of toxic assets. From the Wall Street Journal, Tim Geithner's Op Ed: My Plan for Bad Bank Assets. Hello - they are "toxic". More waste of taxpayers funds!

Why can't we put Volcker in charge? I am now so thoroughly disappointed with Bernanke's confidence in the ratings agencies. After all those speeches about regulatory reform. Evidently, they are hollow. You cannot be serious about regulatory reform and have an iota of confidence in the ratings agencies. I am so thoroughly disappointed with Geithner's plan to allow the private sector to set the prices and then get huge subsidies to buy them - all with taxpayer's money.

Can we put Volcker in charge of the Fed and the Treasury at the same time? Where are the constitutional lawyers?

Watch Paul Volcker here - doesn't he give you confidence? He gives me confidence. At least I feel like he's telling the truth. And most importantly after today's testimony, I don't feel like he's being condescending. Roughing up from Congress comes with the territory, and without Congress there is no new law, so I'd really like it if Geithner and Bernanke would nicely answer some simple questions about how taxpayers money is being spent. That is Congress' job after all - the people sent them there and the people can make sure they do not go back.

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WORSE Than AIG. Seriously.

world globe in handImage by jeco via Flickr

See that crushed up globe. That's the world. See the hand crushing the globe - that's the hand of the credit ratings agencies.

Ok, yes, I was and am outraged about the whole bonus matter at AIG. Can you believe anything can be worse than that? OH YES! We need a new word in the dictionary to describe the credit ratings agencies because "outrage" will not do. Have you read this madness? Ratings Agencies, To Blame For Some Of The Crisis, Could Now Benefit. The article references today's Wall Street Journal Article: Raters See Windfall in Bailout Program

See this outrage:

"The new rescue effort, run by the Federal Reserve, kicked off Thursday with bond deals totaling more than $7 billion. Each bond issue will need to be blessed by at least two of the three big rating firms: Moody's Investors Service, Standard & Poor's Ratings Services and Fitch Ratings."

WHAT? "Blessed"? Who are they to "bless"?

Please revisit my post explaining in detail why they have no "blessing" credibility: Rating The Rating Agencies

Consider: The ratings agencies told AIG all the garbage they were buying was the greatest thing since sliced bread. The ratings agencies branded all the garbage as priceless so the whole world would buy them. Everybody bought all the garbage and now we are in a mess. When AIG was scrambling for funds to meet the contract requirements of the Credit Default Swaps and the whole financial sector was in a free fall, what did the ratings agencies do? They threatened to downgrade. Well, if you are a country or company looking for funds, and the ratings agencies say they are about to downgrade you, no one will give you one cent. Did I say that the ratings agencies were the very reason why AIG bought the garbage in the first place?

Consider: AIG has a financial products problem that is SO huge that it impacts the entire global financial system. It is "too big to fail". On the other hand, the ratings agencies can rate EVERYBODY - so all products, all countries. The rating agencies have had FAR MORE POWER to destroy the ENTIRE global financial system and the ENTIRE global economy. The ratings agencies make AIG and its dramas look like kindergarten stuff. Ratings agencies can literally cause world war. They are "playing" with a lot of people's lives with rating sovereign debt, in particular. When countries are downgraded, they have difficulty accessing funds. When they need to make decisions so people can live - literally - they have to live under the written threats of further downgrades. The decisions that let people live are usually the complete opposite of what the credit agencies threatens the countries that they better not do or else. Seriously, these ratings agencies think they run countries - and quite frankly they are allowed to. Even the IMF has better bedside manners. The ratings agencies care ZERO about development. At least the IMF will talk about poverty. Can you imagine? The ratings agencies make the IMF look generous. An entire economy and society can hinge on a few utterances from these rating agencies. And if they were right, I would say - it's part of the system. But they're wrong. That's the shocking part. And they are unsupervised with no transparency. Utter madness.

Consider: The rating agencies caused this mess AND admitted that they were wrong, but they are STILL allowed to rate even through they are STILL wrong. They are driving the nails into the coffins of the entire global financial system and companies and countries. If they make a mess of the global economy, and everyone's prospects dim, how do these ratings agencies be allowed to downgrade them? These ratings agencies have to take responsibility. Whatever they say, people still listen to them. So if you are a sound company, and a ratings agency gets it "wrong", too bad for you and your employees. Many companies would be here now, many jobs would be here today if these ratings agencies were suspended after Lehman collapsed. Congress needs to do that analysis - what companies suffered and jobs were destroyed because ratings agencies were allowed to keep chattering after Lehman collapsed. Try this analogy: If the financial sector was bleeding, the ratings agencies opened the wounds wide and made new ones - and the ratings agencies were the ones that inflicted the wounds in the first place! And if you are the Government, the ratings agencies can shut down your relief effort. Don't believe me? From the WSJ article:

"One of the biggest concerns surrounding TALF is the seemingly arbitrary nature of ratings decisions. Many of the ratings firms, for example, changed their view of one part of the auto-financing sector, deciding that loans made to auto dealers were far riskier than they previously thought.

Their downgrades meant that bonds backed by loans to those dealers would be unlikely to get triple-A ratings, effectively shutting them out of the TALF."

NOW, hear this one, the US government's $7B bond rescue effort REQUIRES rating by these agencies. What is the US Government ON? So they are going to listen to these people who caused the mess, said they are wrong and still make a mess? And I hope you are sitting down because they are actually going to PAY them for this service - with taxpayers funds - YOUR MONEY. No, I ask again - have we collectively lost our minds?

Want to know how much money?

"Rating services typically charge $40,000 to $120,000 for every $100 million in so-called structured-finance securities they rate. For the initial $200 billion portion of TALF, that translates to $80 million to $240 million. If the program is extended to $1 trillion as the government plans, those fees could skyrocket to anywhere between $400 million and $1.2 billion."

You know what. I've been very supportive thus far, and tried to be very understanding. But I think that something is gone really wrong here. Forget too big to fail. Let the whole entire thing collapse and let some other monetary system take its place, and some other financial sector system take its place. Because what is happening now is not only completely illogical and completely counter to any form of recovery, frankly it is extraordinarily insulting to any normal person's intelligence.

Americans, citizens of the global economy, are we really going to take this?

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Thursday, March 19, 2009

The Financial Sector Is Destroying Itself

Train wreck at ce ...Image via Wikipedia

I must admit that I am completely lost about what is happening here.

Either these financial sector executives and institutions are completely out of touch with reality and the rest of the world - and the freight train that is about to hit them out of this stratosphere - or they have some genius plan that we are not aware of. Follow me:
  • First it was the free for all with the CDOs, CDS' etc. which unraveled the entire global financial sector.
  • Second, they had to have a zillion dollar bailout, or the earth would crater in on itself. Never mind they got the bailout and people's savings not only did not return, they continue to disappear before their very eyes. I do accept that the sector needed government support. I do not support how that support has been provided. Full nationalization was called for long ago. Moving on.....
  • Third, they refused to take the bailout if there were restrictions on salaries and bonuses. Completely illogical. If they were really falling apart and needed the funds, then they should just take whatever they could get, right? I mean if you were having cardiac arrest, are you really turning away all the best heart specialists unless they allow you to have your own way?
  • Fourth, they agreed to restrictions, except to the ones they hid which are now causing the outrage.
What do they think the rest of world is here for? Do they know that Governments have power. Not to act unconstitutionally, but what about the future. Have they heard of bad faith?

Earth to the financial sector: the more you push for your way that makes a mess and is completely insensitive, the more the rest of the world will push back.

Don't believe me? The House actually passed legislation to tax bonuses at 90% - with Republican support. 90% tax of anything! Legislation drafted in a week - rare. This is no joke. Now this particular bill may be unconstitutional - and therefore unenforceable - but if the intent is there - you know the saying "where there is a will there is a way". Meaning, if they cannot do anything about these bonuses, you can bet they are going to go as far as they can in future. It was very interesting to note this piece in tomorrow's New York Times (online tonight) "Regulators Worldwide Scrutinize Bankers' Pay". Did you note this gem from the article:

"Not only will regulators insert themselves into the secretive realm of bank compensation practices, Mr. Turner said, they will also demand that banks set aside more capital if their pay packages are too high."

“This has never been done before,” said Mr. Turner, who heads the Financial Services Authority in Britain. “But the days of light-touch regulation are over.”

Nothing unconstitutional about future contracts, and future practices - as far as I am aware. Is this really the direction the financial sector wants? This is more than not making bonuses; this is restricting the ability of the financial institutions themselves to even make more money. I've said a thousand times that the financial sector should really get some enlightened self-interest and stop being so confrontational with the general public, legislators, regulators etc. The financial sector and its participants are going to end up with consequences they will not like - restrictions and oversight that will make banking very difficult. Missing the forest for the trees, people!

And if you think the people's outrage is anything to take lightly, watch Keith Olbermann's Special Comment below. Watch when that outrage of the people is helped by the media. Keith Olbermann is right: Enough! And if the financial sector doesn't do it for themselves, then we the people, the governments (as in all of them around the world), the media and all other mere mortals living here on earth will ensure that it is some kind of "Enough!" - our version of enough.....and the financial sector is quite unlikely to like it.

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Wednesday, March 18, 2009

So What Now AIG?

American International Group, Inc.Image via Wikipedia

  • Yes, I did hear most of Liddy's testimony, and I did hear the insistence that these were contracts. So, I ask: if AIG was left to go completely bust, what money would have paid the policyholders? Are those not contracts? Or is it because those contracts are with mere mortals they are somehow less important that those of the financial wizards? Because, taxpayers buy into protecting policyholders - that was the point of the bailout, or so we thought because so we were told. Taxpayers do not buy into big salaries, and cannot comprehend "bonuses" in this context.
  • Yes, I did hear Senator Dodd say he was the one to allow the bonuses because it was a compromise with the Treasury Department. So I ask, who in the Treasury Department? And did that "who" act alone? Specifically, where was Tim Geithner? Don't these meetings have minutes? I hear the Fed knew? Which Fed? Tim Geithner's New York Fed that he was president of at the time?
  • Yes, I did hear Congress up in arms. But I ask: Don't you read every line before you vote on it? I imagine given the public outcry surrounded this legislation, and Paulson's attempt to have no review, no oversight and unlimited power in the first draft that it might, just might, have been a good idea to read every word before you voted on it?
  • Yes, I did hear the Republican members of Congress try to blame this Administration. So I ask: Which Administration presided over the free for all that created this mess? Wasn't the last President a Republican? Now I agree: please use conditions to try to do what you can. But when the horse is out of the gate, and the Republicans opened the gate and egged on the horse to move as fast as he can, can the Republicans really complain about the gate and the horse now?
  • Yes, I did hear President Obama. And without being biased, he's really the one who's the most correct. He didn't sign those contracts, but he takes responsibility. Translation - ok, now that we know, prepare for strict rules and regulations. And then at his Town Hall at Costa Mesa he did a fantastic job of explaining this mess in plain english - you know, the language that us mere mortals speak - and why it has to be fixed. When I find the video, I will be sure to post it.

So where are we?

Well, Liddy has said he has asked for a portion of the bonuses to be returned, and we hear that some people are returning all of the bonus. I commend them for that.

For those who do not want to return any portion of the bonuses, and are really content with Congress taking up time tomorrow for the House to try to tax 90% of these bonuses, and the Senate to try to tax 70% of these bonuses, I humbly submit that you are making matters worse for yourselves, your professional future, and your own profession. Frankly, Congress has lots of work to do to fix the economy that all these exotic products destroyed. It doesn't really have the time to do something it really does not want to do ideologically - and that is impose taxes of this magnitude. Shockingly, neither party wants to do this ideologically. But they will.

Respectfully, you bonus recipients are missing the entire forest for the trees. When the Government gets "tax happy" - watch out!

If this wasn't so important, and so sad, this would be a real soap opera.
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Tuesday, March 17, 2009

Do Yourself A Favour - Get Rid Of The Bonus System

AIG Congressional Hearing: "They Were Get...Image by Barrybar via Flickr

First, let me make a few things absolutely clear.
  • If you are a fully private company, and you deem an employee worth trillions of dollars and are willing to pay that employee trillions of dollars in any shape or form - as long as you and your company are not infringing upon society - then I support the right of PRIVATE COMPANIES to pay their employees as much and in what manner they see fit.
  • If you - as an individual - are some kind of specialist, I support your being worth more than mere mortals like me. So, for example, if you are an oncologist who has never lost one single cancer patient, I say you deserve the world. Not being sarcastic, you do deserve the world. Not to equate a human life with money, but if you are a specialist in the financial sector - like say a derivatives trader - and you make lots of money for the system so we can all have more money, then sure you deserve to make lots of money. But all professions have sanctions. Doctors lose their licenses because of malpractice, accountants lose their licenses because of irregularities, lawyers get disbarred over ethical issues, etc. And mere mortals like us, lose our jobs. NOW: Who makes more money and get "bonuses' when they destroy their own company, their own industry and the entire global financial system and the entire global economy? People in the financial sector, that's who! Is there something not radically wrong with that?
I am insulted to hear anyone say that this matter of bonuses is a "perception" problem and immaterial in the scheme of things. Oh no - I beg to differ. It is the very HEART of the problem.
  • Make tons of money, please do. But if you make a mess, you have to pay for it. The rest of society is structured that way.
  • Make lots of money in a private company, please do. But when taxpayers funds are involved, the rules are different. Taxpayers need healthcare, roads, education etc. There is not enough money for the things taxpayers funds are supposed to do. There is record deficit and record debt. So where is the money to reward people who made a mess? Sorry, that is not on!
Now, I've heard some things today that warrant comment:
  • "The only people can fix this mess are the ones who made it, so you can't afford to lose the talent". Rubbish. This is a perverse incentive. You want someone to fix something, you pay them on the basis of how long they take to fix it. The longer they take, the less they make. And they definitely don't make a "bonus"
  • "A bonus is just the way it is". Wrong again. A bonus is defined - as in the dictionary - as extra, something earned. The very first synonym listed is "reward". You cannot make a mess and be "rewarded" for that. Have we all lost our minds?
  • "These are contracts". Now I am a stickler for the law. If these are contracts, and they are so airtight that they cannot be broken, then these lawyers are the most valuable legal minds in the world. They should be the ones who sue the AIG recipients for a share of the "bonuses" because this legal work requires real talent. If these contracts were entered into after bailout funds were provided, then someone has done something really wrong - they have broken the public trust. And that should be exposed. Even if the "bonuses" are lost. Regardless, no more money for anybody without conditionalities - are the government lawyers sleeping?
Please, financial engineering is critical for a functional market. But if those who financially engineer don't try to meet us mere mortals - who cannot comprehend your value system - halfway, then the people and the Government are going to force a solution. And that means restrictions and over-regulation. And then everyone will lose. But at least, we, the mere mortals, won't be insulted, offended and outraged.
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Monday, March 16, 2009

What Are They Thinking? AIG Is A Disaster.

American International Group, Inc.Image via Wikipedia

Ok, I don't need to post a link to an article. The WHOLE WORLD knows about this one. There has actually been a debate for days- yes days - over this AIG bonus matter.

I need to know what "they" are thinking. But the key question is who are the "they"

First, at the risk of being controversial, who are the "they" that agreed to these contracts in the first place. It has been raised that these contracts were actually entered into after - yes, after - AIG received the first set of bailout funds. Please tell me that it is not so. Because this would mean that after that public outcry, someone actually developed and signed these contracts knowing taxpayers money would be paying for this. Do these "they" have no conscience?

Second, if the taxpayers own 80% of AIG, is that not partial nationalization? I have already spoken and written several times about why partial nationalization is such a disaster. This is exactly why. Case in point. Those in charge get to spend taxpayers money as they like. Fully nationalize and cut out this nonsense.

Third, excuse me, but these are contracts. And if they are contracts, then evidently there are obligations. The American way of capitalism is all about honoring contracts, so I get that. So where were the "they" to make these contracts null and void if government assistance is provided? That is called a "conditionality" - quite another popular feature of the American way of capitalism. Ben Bernanke, please add this to your list for regulatory reform.

Fourth, and here's where I must be missing something. Am I really to understand that derivatives traders - the same "they" who caused this massive mess not just to the AAA rated AIG, but to the entire global financial system - are the "they" who MUST get bonuses, and that these "they" actually want them? Do they live in society with the rest of us? You know, I said that Wall Street was in desperate need of PR. Strike that. All these companies need an entire machinery to explain this NEED for this type of compensation system when 1) people do not perform and 2) when people make a mess of the entire world. I am sorry but us mere mortals do not get it. Because in our world, if we mess up we get no bonus or we get fired. And in our world when those "they" make a mess of the world, we in the rest of the world lose our jobs because of those "they" and we wonder how we are going to literally survive this period. Earth to AIG: The majority of the world wonders where their next meal comes from. Where are the sanctions for making a mess? Ben Bernanke, you need this one on your list too.

AIG and its employees need to get a grip. Nothing lasts forever. We all live in this world. If your customers, clients, target market, regulators and all the people you do business with absolutely abhor you and your practices, not only will the company not last, but all your employees will become unemployable. Respectfully, these "they" are not team players.

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Saturday, March 14, 2009

Geithner: Global Financial Crisis "Still Evolving"

Crisis is "still evolving"? Thank you Christopher Columbus.

Read the Article at HuffingtonPost

According to AP:

"They (the G20) aren't waiting patiently. Brazilian Finance Minister Guido Mantega said there is an "urgency" for the U.S. to solve its banking problem.

"If they're going to be nationalized then go ahead, if they are going to be liquidated then go ahead. But it must be done quickly," he said after the Saturday meeting."

I have written and said a thousand times - just get on with it. Do something.

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Friday, March 13, 2009

When China Gets Worried, I Get Worried

BEIJING - MARCH 16:  Chinese Premier Wen Jiaba...Image by Getty Images via Daylife

See Yahoo News: China "worried" about US Treasury Holdings

If China is worried, it's time to start looking at this whole matter again.

According to the article: "Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference Friday after the closing of China's annual legislative session. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."

"Worried". Premier Wen Jiabao said "worried"

I haven't been worried precisely because China had money, and China was willing to lend the US money. Everywhere else is in a mess, other countries haven't really been trying to help the US and other countries don't have the kind of money China has. It took forever for the G7 to have the first meeting. And since then, Europe has its own internal difficulties - can't agree on form of assistance to its own Eurozone members, amount of assistance etc.

If China is worried, then China is unlikely to keep lending. That is logical. It's worried about the existing assets. Where will the US turn to next?

We may just see a new world order, and a completely new monetary system. WOW!

I have noted China's statements on the need for the G20 to focus on the developing world and the poorest countries in the meeting in April.

From the article:

"Wen also said Beijing wants the G-20 summit in April focus on helping the poorest countries.

The premier said Beijing has met its own commitments to help developing countries by erasing a total of $40 billion in debt owed by 46 countries and giving out 200 billion yuan ($29 billion) of aid to developing countries."

"We must see to it that we show concern for developing countries," he said.

THANK YOU CHINA!! But let's face reality, if the US cannot stabilize that is bad news for all of us. And the US needs China's help - in more than money - to stabilize.

America, the ball is in your court. Ben Bernanke says all you need is the will. Do you know what to do, like he says? Because clearly, you have not yet fully appreciated what is at stake if you do not - or you would have done it. And here's a gentle reminder - what is at stake is much more than China not lending you money, should that be the outcome.

This is really going to be interesting.

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Jon Stewart Deserves An Award. Watch This!

Host Jon Stewart in the studio of The Daily ShowImage via Wikipedia

Remember my post a few days ago: A Plea To Jon Stewart? Well, now, Jim Cramer from CNBC was his guest last night. Please take the time to watch the videos. It's not long - it's just in three parts.

Jon Stewart deserves an award! And this is exactly what I want Jon Stewart to do with the ratings agencies. Remember my posts: Another Look At Ratings Agencies. and Rating The Ratings Agencies. Today, the Jamaica Observer ran a fantastic piece Should Jamaica Continue To Place Faith In the Ratings Agencies? Another worthwhile read.

I wish Jon Stewart would ask these ratings agencies the same kind of common sense, public interest "don't we deserve better" kinds of questions. Let's have some more admissions of guilt and responsibility. And let's get a pledge to do better.

By the way, in my post My Wish List - The New Global Financial Architecture, I mentioned a "grownup" body to keep an eye on everyone else. Remember?

7. In my ideal world, we have a "grownup" - a super stablizer body comprised of membership from the developed and the developing world. How do I explain this? We cannot go through this again. We need some "body" whose job it is to keep an eye on everyone else. Not a regulator, but some kind of independent watchdog group. Maybe the media can form a partnership with some prominent NGOs. Maybe we should start a new NGO. Whatever or whoever, but here's what this body must do:
  • Some "body" to make sure all the powerful people and parties do not abuse their power - and expose them if they do
  • Some "body"to make sure mandatory financial education is taking place, and if it is not, then expose that
  • Some "body" to make sure the foundation is funded and is funding what it is intended to fund, and expose the financial sector if it does not make it's donations, and expose the foundation if it is not doing what it should
  • Some "body" to make sure the free for all is over, and expose anyone getting back into the reckless behavior with no limits, no or limited audits, no or limited regulation, no or limited transparency, no or limited supervision
  • Some "body" to make sure the universities lead the design of this stronger, more stable, more equitable and more sustainable global financial and economic system, and expose them if they get off track
  • Some "body" to make sure domestic regulators are keeping their commitments with regard to the treaties, and expose them if they don't
Well, I nominate Jon Stewart to sit on that board.

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Wednesday, March 11, 2009

Will You Help The Huffington Post And Me?

HelpImage by LiminalMike via Flickr

Ok, would you like to help with a very important project?

The Huffington Post is asking for your help. This is the article: Help Dig Up The Praise That Today's Bailout Bandits Once Received

Basically, they are asking you to submit "heaps of praise that newspapers, magazines and TV news shows doled out when times were good. Now that times are bad, it's even more important to remind ourselves how easily the wool can be pulled over the media's eyes and, consequently, those who consume it." Read the article for some suggested names.

According to the article:
"Email submissions+praise@huffingtonpost.com with the articles you find. Include your name, the date the article was published, and let us know if you would like to remain anonymous. "

Now, why is this an important project? Because I love the media so much - not being sarcastic - that whenever they are used to dupe us, those offenders should be exposed. Also, because I know that you should always question your information - still love the media - it's good for us to see that everything we see, read or hear is not necessarily the truth, the whole truth, and nothing but the truth.

Thanks to the Huffington Post for this excellent idea.

So now I ask you, my readers, do you want to do something for me - for us all?

Please email earnandsavenow@gmail.com with all published incidents (with date and source) of every incident you find when the ratings agencies were wrong. I have already filed away their testimony by the House Oversight Committee on October 22, 2008. If you want a quick reminder of why I care so much about this issue, see my recent post: Another Look At The Ratings Agencies and my earlier post: Rating The Rating Agencies. And just to remind you of the urgency, Moody's has now come out with 283 companies they say are at risk of default. Well, if they weren't before - this publication from Moody's won't help. And this is the precise problem, they have been wrong in the past, but people base their decisions based on whatever these rating agencies say anyway.

Maybe if I gather the information for Jon Stewart, he'll do the piece on the ratings agencies I've made the plea for. (See my blog post: A Plea To Jon Stewart)
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Tuesday, March 10, 2009

President Obama, Congress, G20 - Are You ALL Listening?

Ben Bernanke, chairman of the Board of Governo...Image via Wikipedia

Yesterday, I outlined My Wish List - The New Global Financial Architecture. If you missed it, I outlined 7 features of the reformed financial sector - in my ideal world.

So today, as luck would have it, Ben Bernanke gave a speech entitled "Financial Reform to Address Systemic Risk" His best speech yet! Spot on with the Q & A!

I can't debate the usefulness of TARP since I don't have enough information to do so. BUT, with regard to moving forward, I think we are of complete like mind. I may be a bit harsher, though. :)

Here is my one minute interpretation of what he said:
  • he has explained why "too big to fail" is a disaster, and what to do about it;
  • he has outlined why a holistic approach - with maximum international cooperation - to regulation is required;
  • he has endorsed reform of accounting standards and other requirements that encourage bank behavior that exacerbates the problem and
  • he has called for a "super-investigator" of sorts - an agency that is charged with looking for systemic risk in particular recognizing that a fragmented regulatory system cannot catch everything. This agency really just identifies the problems so we can head them off. Some other body or bodies take care of problems.
  • there is NO economic recovery without fixing the banking system - he said it in the speech and more than once in the Q&A
  • the best thing the G20 can do is develop guidelines for cooperation - agreements and so forth. I did not hear one word about any global regulator which some countries have proposed.
Bottom line: the US knows what to do, there needs to be the will to do the things they know need to be done. Check the Q&A. That was his answer.

My questions: When, Chairman Bernanke? We need this like, yesterday! I hear you that you are doing what you can, and there are things that Congress must do, and there are things the Administration must do, and there are things the G20 must do. So, President Obama, Congress and the G20 - are you ALL listening?

If you missed the speech, here is the video compliments of CSPAN. I would recommend that you watch it because then you get the benefit of the Q&A which is particularly insightful, especially if you are trying to understand how all these pieces fit together.

Or here's the link to the speech compliments of the Federal Reserve website

Or from the Federal Reserve website. Anything in bold is my emphasis:

"Chairman Ben S. Bernanke
At the Council on Foreign Relations, Washington, D.C.
March 10, 2009

Financial Reform to Address Systemic Risk

The world is suffering through the worst financial crisis since the 1930s, a crisis that has precipitated a sharp downturn in the global economy. Its fundamental causes remain in dispute. In my view, however, it is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s. In the simplest terms, these imbalances reflected a chronic lack of saving relative to investment in the United States and some other industrial countries, combined with an extraordinary increase in saving relative to investment in many emerging market nations. The increase in excess saving in the emerging world resulted in turn from factors such as rapid economic growth in high-saving East Asian economies accompanied, outside of China, by reduced investment rates; large buildups in foreign exchange reserves in a number of emerging markets; and substantial increases in revenues received by exporters of oil and other commodities. Like water seeking its level, saving flowed from where it was abundant to where it was deficient, with the result that the United States and some other advanced countries experienced large capital inflows for more than a decade, even as real long-term interest rates remained low.

The global imbalances were the joint responsibility of the United States and our trading partners, and although the topic was a perennial one at international conferences, we collectively did not do enough to reduce those imbalances. However, the responsibility to use the resulting capital inflows effectively fell primarily on the receiving countries, particularly the United States. The details of the story are complex, but, broadly speaking, the risk-management systems of the private sector and government oversight of the financial sector in the United States and some other industrial countries failed to ensure that the inrush of capital was prudently invested, a failure that has led to a powerful reversal in investor sentiment and a seizing up of credit markets. In certain respects, our experience parallels that of some emerging-market countries in the 1990s, whose financial sectors and regulatory regimes likewise proved inadequate for efficiently investing large inflows of saving from abroad. When those failures became evident, investors lost confidence and crises ensued. A clear and highly consequential difference, however, is that the crises of the 1990s were regional, whereas the current crisis has become global.1

In the near term, governments around the world must continue to take forceful and, when appropriate, coordinated actions to restore financial market functioning and the flow of credit. I have spoken on a number of occasions about the steps that the U.S. government, and particularly the Federal Reserve, is taking along these lines.2 Until we stabilize the financial system, a sustainable economic recovery will remain out of reach. In particular, the continued viability of systemically important financial institutions is vital to this effort. In that regard, the Federal Reserve, other federal regulators, and the Treasury Department have stated that they will take any necessary and appropriate steps to ensure that our banking institutions have the capital and liquidity necessary to function well in even a severe economic downturn. Moreover, we have reiterated the U.S. government's determination to ensure that systemically important financial institutions continue to be able to meet their commitments.

At the same time that we are addressing such immediate challenges, it is not too soon for policymakers to begin thinking about the reforms to the financial architecture, broadly conceived, that could help prevent a similar crisis from developing in the future. We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components. In particular, strong and effective regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves to achieve this aim.

Today, I would like to talk about four key elements of such a strategy. First, we must address the problem of financial institutions that are deemed too big--or perhaps too interconnected--to fail. Second, we must strengthen what I will call the financial infrastructure--the systems, rules, and conventions that govern trading, payment, clearing, and settlement in financial markets--to ensure that it will perform well under stress. Third, we should review regulatory policies and accounting rules to ensure that they do not induce excessive procyclicality--that is, do not overly magnify the ups and downs in the financial system and the economy. Finally, we should consider whether the creation of an authority specifically charged with monitoring and addressing systemic risks would help protect the system from financial crises like the one we are currently experiencing. My discussion today will focus on the principles that should guide regulatory reform, leaving aside important questions concerning how the current regulatory structure might be reworked to reduce balkanization and overlap and increase effectiveness. I also will not say much about the international dimensions of the issue but will take as self-evident that, in light of the global nature of financial institutions and markets, the reform of financial regulation and supervision should be coordinated internationally to the greatest extent possible.

Too Big to Fail
In a crisis, the authorities have strong incentives to prevent the failure of a large, highly interconnected financial firm, because of the risks such a failure would pose to the financial system and the broader economy. However, the belief of market participants that a particular firm is considered too big to fail has many undesirable effects. For instance, it reduces market discipline and encourages excessive risk-taking by the firm. It also provides an artificial incentive for firms to grow, in order to be perceived as too big to fail. And it creates an unlevel playing field with smaller firms, which may not be regarded as having implicit government support. Moreover, government rescues of too-big-to-fail firms can be costly to taxpayers, as we have seen recently. Indeed, in the present crisis, the too-big-to-fail issue has emerged as an enormous problem.

In the midst of this crisis, given the highly fragile state of financial markets and the global economy, government assistance to avoid the failures of major financial institutions has been necessary to avoid a further serious destabilization of the financial system, and our commitment to avoiding such a failure remains firm. Looking to the future, however, it is imperative that policymakers address this issue by better supervising systemically critical firms to prevent excessive risk-taking and by strengthening the resilience of the financial system to minimize the consequences when a large firm must be unwound.

Achieving more effective supervision of large and complex financial firms will require a number of actions. First, supervisors need to move vigorously--as we are already doing--to address the weaknesses at major financial institutions in capital adequacy, liquidity management, and risk management that have been revealed by the crisis. In particular, policymakers must insist that the large financial firms that they supervise be capable of monitoring and managing their risks in a timely manner and on an enterprise-wide basis. In that regard, the Federal Reserve has been looking carefully at risk-management practices at systemically important institutions to identify best practices, assess firms' performance, and require improvement where deficiencies are identified.3 Any firm whose failure would pose a systemic risk must receive especially close supervisory oversight of its risk-taking, risk management, and financial condition, and be held to high capital and liquidity standards.4 In light of the global reach and diversified operations of many large financial firms, international supervisors of banks, securities firms, and other financial institutions must collaborate and cooperate on these efforts.

Second, we must ensure a robust framework--both in law and practice--for consolidated supervision of all systemically important financial firms organized as holding companies. The consolidated supervisors must have clear authority to monitor and address safety and soundness concerns in all parts of the organization, not just the holding company. Broad-based application of the principle of consolidated supervision would also serve to eliminate gaps in oversight that would otherwise allow risk-taking to migrate from more-regulated to less-regulated sectors.

Third, looking beyond the current crisis, the United States also needs improved tools to allow the orderly resolution of a systemically important nonbank financial firm, including a mechanism to cover the costs of the resolution. In most cases, federal bankruptcy laws provide an appropriate framework for the resolution of nonbank financial institutions. However, this framework does not sufficiently protect the public's strong interest in ensuring the orderly resolution of nondepository financial institutions when a failure would pose substantial systemic risks. Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by narrowing the range of circumstances that might be expected to prompt government intervention to keep the firm operating.

Developing appropriate resolution procedures for potentially systemic financial firms, including bank holding companies, is a complex and challenging task. Models do exist, though, including the process currently in place under the Federal Deposit Insurance Act (FDIA) for dealing with failing insured depository institutions and the framework established for Fannie Mae and Freddie Mac under the Housing and Economic Recovery Act of 2008. Both models allow a government agency to take control of a failing institution's operations and management, act as conservator or receiver for the institution, and establish a "bridge" institution to facilitate an orderly sale or liquidation of the firm. The authority to "bridge" a failing institution through a receivership to a new entity reduces the potential for market disruption while limiting moral hazard and mitigating any adverse impact of government intervention on market discipline.

The new resolution regime would need to be carefully crafted. For example, clear guidelines must define which firms could be subject to the alternative regime and the process for invoking that regime, analogous perhaps to the procedures for invoking the so-called systemic risk exception under the FDIA. In addition, given the global operations of many large and complex financial firms and the complex regulatory structures under which they operate, any new regime must be structured to work as seamlessly as possible with other domestic or foreign insolvency regimes that might apply to one or more parts of the consolidated organization.

Strengthening the Financial Infrastructure
The first element of my proposed reform agenda covers systemically important institutions considered individually. The second element focuses on interactions among firms as mediated by what I have called the financial infrastructure, or the financial plumbing if you will: the institutions that support trading, payments, clearing, and settlement. Here the aim should be not only to help make the financial system as a whole better able to withstand future shocks, but also to mitigate moral hazard and the problem of too big to fail by reducing the range of circumstances in which systemic stability concerns might prompt government intervention. I'll give several examples.

Since September 2005, the Federal Reserve Bank of New York has been leading a major joint initiative by the public and private sectors to improve arrangements for clearing and settling credit default swaps (CDS) and other over-the-counter (OTC) derivatives. As a result, the accuracy and timeliness of trade information has improved significantly. However, the infrastructure for managing these derivatives is still not as efficient or transparent as that for more mature instruments. The Federal Reserve Bank of New York, in conjunction with other domestic and foreign supervisors, will continue to work toward establishing increasingly stringent targets and performance standards for market participants. To help alleviate counterparty credit concerns, regulators are also encouraging the development of well-regulated and prudently managed central clearing counterparties for OTC trades.5 Just last week, we approved the application for membership in the Federal Reserve System of ICE Trust, a trust company that proposes to operate as a central counterparty and clearinghouse for CDS transactions.

The Federal Reserve and other authorities also are focusing on enhancing the resilience of the triparty repurchase agreement (repo) market, in which the primary dealers and other major banks and broker-dealers obtain very large amounts of secured financing from money market mutual funds and other short-term, risk-averse sources of funding.6 For some time, market participants have been working to develop a contingency plan for handling a loss of confidence in either of the two clearing banks that facilitate the settlement of triparty repos. Recent experience demonstrates the need for additional measures to enhance the resilience of these markets, particularly as large borrowers have experienced acute stress. The Federal Reserve's Primary Dealer Credit Facility, launched in the wake of the Bear Stearns collapse and expanded in the aftermath of the Lehman Brothers bankruptcy, has stabilized this critical market, and market confidence has been maintained. However, this program was adopted under our emergency powers to address unusual and exigent circumstances. Therefore, more-permanent reforms are needed. For example, it may be worthwhile considering the costs and benefits of a central clearing system for this market, given the magnitude of exposures generated and the vital importance of the market to both dealers and investors.

More broadly, both the operational performance of key payment and settlement systems and their ability to manage counterparty and market risks in both normal and stressed environments are critical to the stability of the broader financial system. Currently, the Federal Reserve relies on a patchwork of authorities, largely derived from our role as a banking supervisor, as well as on moral suasion to help ensure that critical payment and settlement systems have the necessary procedures and controls in place to manage their risks. By contrast, many major central banks around the world have an explicit statutory basis for their oversight of these systems. Given how important robust payment and settlement systems are to financial stability, a good case can be made for granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems.

Another issue that warrants attention is the potential fragility of the money market mutual fund sector. Last fall, as a result of losses on Lehman Brothers commercial paper, a prominent money market mutual fund "broke the buck"--that is, was unable to maintain a net asset value of $1 per share. Over subsequent days, fearful investors withdrew more than $250 billion from prime money market mutual funds. The magnitude of these withdrawals decreased only after the Treasury announced a guarantee program for money market mutual fund investors and the Federal Reserve established a new lending program to support liquidity in the asset-backed commercial paper market.

In light of the importance of money market mutual funds--and, in particular, the crucial role they play in the commercial paper market, a key source of funding for many businesses--policymakers should consider how to increase the resiliency of those funds that are susceptible to runs. One approach would be to impose tighter restrictions on the instruments in which money market mutual funds can invest, potentially requiring shorter maturities and increased liquidity. A second approach would be to develop a limited system of insurance for money market mutual funds that seek to maintain a stable net asset value. For either of these approaches or others, it would be important to consider the implications not only for the money market mutual fund industry itself, but also for the distribution of liquidity and risk in the financial system as a whole.

Procyclicality in the Regulatory System
It seems obvious that regulatory and supervisory policies should not themselves put unjustified pressure on financial institutions or inappropriately inhibit lending during economic downturns. However, there is some evidence that capital standards, accounting rules, and other regulations have made the financial sector excessively procyclical--that is, they lead financial institutions to ease credit in booms and tighten credit in downturns more than is justified by changes in the creditworthiness of borrowers, thereby intensifying cyclical changes.

For example, capital regulations require that banks' capital ratios meet or exceed fixed minimum standards for the bank to be considered safe and sound by regulators.7 Because banks typically find raising capital to be difficult in economic downturns or periods of financial stress, their best means of boosting their regulatory capital ratios during difficult periods may be to reduce new lending, perhaps more so than is justified by the credit environment. We should review capital regulations to ensure that they are appropriately forward-looking, and that capital is allowed to serve its intended role as a buffer--one built up during good times and drawn down during bad times in a manner consistent with safety and soundness.8 In the area of prudential supervision, we should also ensure that bank examiners appropriately balance the need for caution and the benefits of maintaining profitable lending relationships when evaluating bank loan policies.

The ongoing move by those who set accounting standards toward requirements for improved disclosure and greater transparency is a positive development that deserves full support. However, determining appropriate valuation methods for illiquid or idiosyncratic assets can be very difficult, to put it mildly. Similarly, there is considerable uncertainty regarding the appropriate levels of loan loss reserves over the cycle. As a result, further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their procyclical effects without compromising the goals of disclosure and transparency. Indeed, work is underway on these issues through the Financial Stability Forum, and the results of that work may prove useful for U.S. policymakers.9

Another potential source of procyclicality is the system for funding deposit insurance. In recognition of this fact--as well as the weak economic outlook and the current strains on banks and the financial system--the Federal Deposit Insurance Corporation recently announced plans to extend from five years to seven years the period over which it would restore the deposit insurance fund to its minimum required level. This plan, if implemented, should help reduce the costs imposed on banks at a time when capital and lending are already under pressure. Policymakers should consider additional steps to reduce the possible procyclical effects of deposit insurance costs while still ensuring that riskier banks pay higher premiums than safer banks. One possibility would be to raise the level to which the designated reserve ratio may grow in benign economic environments, so that a larger buffer is available to be drawn down when economic conditions worsen and insurance losses are high.

Systemic Risk Authority
The policy actions I've discussed would inhibit the buildup of risks within the financial system and improve the resilience of the financial system to adverse shocks. Financial stability, however, could be further enhanced by a more explicitly macroprudential approach to financial regulation and supervision in the United States. Macroprudential policies focus on risks to the financial system as a whole. Such risks may be crosscutting, affecting a number of firms and markets, or they may be concentrated in a few key areas. A macroprudential approach would complement and build on the current regulatory and supervisory structure, in which the primary focus is the safety and soundness of individual institutions and markets.

How could macroprudential policies be better integrated into the regulatory and supervisory system? One way would be for the Congress to direct and empower a governmental authority to monitor, assess, and, if necessary, address potential systemic risks within the financial system. The elements of such an authority's mission could include, for example, (1) monitoring large or rapidly increasing exposures--such as to subprime mortgages--across firms and markets, rather than only at the level of individual firms or sectors; (2) assessing the potential for deficiencies in evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products to increase systemic risks; (3) analyzing possible spillovers between financial firms or between firms and markets, such as the mutual exposures of highly interconnected firms; and (4) identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that pose risks for the system as a whole. Two areas of natural focus for a systemic risk authority would be the stability of systemically critical financial institutions and the systemically relevant aspects of the financial infrastructure that I discussed earlier.

Introducing a macroprudential approach to regulation would present a number of significant challenges. Most fundamentally, implementing a comprehensive systemic risk program would demand a great deal of the supervisory authority in terms of market and institutional knowledge, analytical sophistication, capacity to process large amounts of disparate information, and supervisory expertise.

Other challenges include defining the range of powers that a systemic risk authority would need to fulfill its mission and then integrating that authority into the currently decentralized system of financial regulation in the United States. On the one hand, it seems clear that any new systemic risk authority should rely on the information, assessments, and supervisory and regulatory programs of existing financial supervisors and regulators whenever possible. This approach would reduce the cost to both the private sector and the public sector and allow the systemic risk authority to leverage the expertise and knowledge of other supervisors. On the other hand, because the goal of any systemic risk authority would be to have a broader view of the financial system, simply relying on existing structures likely would be insufficient.

For example, a systemic risk authority would need broad authority to obtain information--through data collection and reports, or when necessary, examinations--from banks and key financial market participants, as well as from nonbank financial institutions that currently may not be subject to regular supervisory reporting requirements. A systemic risk authority likely would also need an appropriately calibrated ability to take measures to address identified systemic risks--in coordination with other supervisors, when possible, or independently, if necessary. The role of a systemic risk authority in setting standards for capital, liquidity, and risk-management practices for the financial sector also would need to be explored, given that these standards have both microprudential and macroprudential implications.

In general, much discussion will be needed regarding what can reasonably be expected from a macroprudential regime and how expectations, accountability, and authorities can best be aligned. Important decisions must be made about how the systemic risk regulation function should be structured and located within the government. Several existing agencies have data and expertise relevant to this task, so there are a variety of organizational options. In any structure, however, to ensure accountability, the scope of authorities and responsibilities must be clearly specified

Some commentators have proposed that the Federal Reserve take on the role of systemic risk authority; others have expressed concern that adding this responsibility would overburden the central bank. The extent to which this new responsibility might be a good match for the Federal Reserve depends a great deal on precisely how the Congress defines the role and responsibilities of the authority, as well as on how the necessary resources and expertise complement those employed by the Federal Reserve in the pursuit of its long-established core missions.

It seems to me that we should keep our minds open on these questions. We have been discussing them a good deal within the Federal Reserve System, and their importance warrants careful consideration by legislators and other policymakers. As a practical matter, however, effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role. As the central bank of the United States, the Federal Reserve has long figured prominently in the government's responses to financial crises. Indeed, the Federal Reserve was established by the Congress in 1913 largely as a means of addressing the problem of recurring financial panics. The Federal Reserve plays such a key role in part because it serves as liquidity provider of last resort, a power that has proved critical in financial crises throughout history. In addition, the Federal Reserve has broad expertise derived from its wide range of activities, including its role as umbrella supervisor for bank and financial holding companies and its active monitoring of capital markets in support of its monetary policy and financial stability objectives.

In the wake of the ongoing financial crisis, governments have moved quickly to establish a wide range of programs to support financial market functioning and foster credit flows to businesses and households. However, these necessary short-term steps must be accompanied by new policies to limit the incidence and impact of systemic risk. In my remarks today, I have emphasized the need to address the problems posed by firms that are perceived to be too big to fail, the importance of efforts to strengthen the financial infrastructure, the desirability of reducing the procyclical effects of capital regulation and accounting rules, and the potential benefits of taking a more macroprudential approach to the supervision and regulation of financial firms. Some of the policies I propose can be developed and implemented under the existing authority of financial regulators. Indeed, we are in the process of doing just that. In other cases, congressional action will be necessary to create the requisite authority and responsibility.

Financial crises will continue to occur, as they have around the world for literally hundreds of years. Even with the sorts of actions I have outlined here today, it is unrealistic to hope that financial crises can be entirely eliminated, especially while maintaining a dynamic and innovative financial system. Nonetheless, these steps should help make crises less frequent and less virulent, and so contribute to a better functioning national and global economy."
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Reasoning The Reasons by Deika Morrison is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.