the visible hand

it is the theory which decides what can be observed – einstein

Archive for May, 2009

perspective: finance vs non-finance performance

Posted by ecoshift on May 14, 2009

These charts from bizzXceleration provide a bit of perspective on where we stand now and how we got here. There has been much talk about the details of securitization, poor risk analysis and innovative investment mechanisms as root causes of the crisis, but few charts such as the one below showing the role of financial markets in the composition of overall corporate profit.

According to these charts corporate profits ex finance have consistently grown below GDP since 1980 and finance has been the primary driver of corporate profits for a number of decade with a huge bubble in financial profits in recent years. No surprise, but with important strategic implications as we attempt to rebuild the real economy.

Here’s bizzXceleration on the topic:

The Real Story on Profits: Finance vs Non-Finance Performance

Take a look at the accompanying chart which breaks down real (inflation-adjusted) corporate profits between the Finance and Non-Finance parts of the economy going back to 1950. In some ways we consider this one of the most important charts we’ve ever posted for many reasons, starting with the bottom sub-chart. It shows cumulative growth in GDP, Finance and non-Finance profits over that period, which we consider startling. There was indeed a bubble in non-Finance profits but the more important stories are the under-performance for decades of the non-Finance businesses, the HUGE bubble in Finance profits and their relative sizes. There a lot of strategic implications here. Look at the top sub-chart now…between 1950 to 1980 Finance had about 30% of the profits but after de-regulation there was a major structural shift where it grew to 50%. Stop and think about that – the Finance sector between 1990 and now generated 1/2 of all corporate profits ???!!! Say what ? And we got what for our money ? Returning to the 3rd sub-chart you’ll notice that the non-finance businesses under-performed GDP ever since. We think the hypothesis is not only did the Financies use leverage and liquidity to maximize their gains at the expense of the rest of us and then to threaten the viability of the economy (of society ?) but they damaged the rest of the real economy in the process. That probably needs some more investigation before we assert it but on the surface a good starting point. We’ll come back to these points in future posts but two points: 1) if anybody thinks tomorrow’s Finance industries will bear any resemblance to yesterday’s we beg to differ and 2) the leadership of the sector appears to be in a complete state of denial, worse than the management of the “real” businesses.


Posted in ecoecon | 6 Comments »

Derivatives crackdown: step in the right direction

Posted by ecoshift on May 14, 2009

U.S. regulators seek OTC derivatives crackdown | Reuters
By Charles Abbott and Kevin Drawbaugh

WASHINGTON (Reuters) – The Obama administration moved on Wednesday to exert more control over the shadowy over-the-counter derivatives market, now closely linked to the global credit crisis.

Federal regulators proposed subjecting all over-the-counter derivatives dealers — whose trades are not made through an exchange, making them hard to monitor — to “a robust regime of prudential supervision and regulation,” including conservative capital, reporting and margin requirements.

The plan, sketched out by Treasury Secretary Timothy Geithner and top regulators at a news conference, marks a big step in the administration’s push to rewrite rules for banks and financial markets in response to a credit crisis that has sent economies around the globe reeling.

Posted in ecoecon | Leave a Comment »

Charlie Rose – A conversation with Naomi Klein and William Greider

Posted by ecoshift on May 13, 2009

On his May 11th show, Charlie Rose asked Naomi and author William Greider about the state of the economic crisis and the next steps President Obama should take. Naomi points out that “the love of Obama is so over the top and this thing that happens to us, particularly in times of crisis, where we almost regress and we want to believe our leaders are going to take care of us–I think that’s unhealthy–I think it’s time to put away the t-shirts and all the memorabilia. He is the president of the most powerful nation on Earth and the superfan culture of the campaign has to be replaced with an engaged citizen culture that puts respectful pressure from below.” Watch the rest of the discussion about Obama’s handling of the economy.

Posted in ecoecon | 1 Comment »

Rachel Maddow interviews Naomi Klein

Posted by ecoshift on May 13, 2009

Makes sense to me.

Rachel Maddow Asks Naomi About Wall Street Impunity

Naomi spoke with Rachel Maddow last week about the bank stress tests, crony capitalism and the impunity of Wall Street. Naomi explains that her prime concern “is that the crisis on Wall Street created by deregulated capitalism is not actually being solved; it’s being moved. A private sector crisis is being turned into a public sector crisis.”

Posted in ecoecon | Leave a Comment »

credit defaults and reorganization

Posted by ecoshift on May 9, 2009

As I watch events unfold I remain puzzled by the apparent commitment (by former free market advocates) to devote copious amounts of taxpayer funds to recapitalization of failing banking and investment management institutions. I thought risk was the reason for all the rewards of past years. The risk of negative outcomes. Like the ones we are experiencing right now.

Instead it appears bondholders have the country by the short hairs. In the videos below both Joseph Stiglitz and Bill Ackman provide clear rationale for forcing bondholders into debt for equity swaps through bankruptcy or other reorganization proceedings. The debt would disappear and toxic assets currently on the balance sheet could avoid sale into distressed markets — thereby recovering their full real value over time whatever that value turns out to be. Of course bondholders resist moving from their current secured debtor status to a risk sharing equity status. Yet the value of the collateral that provides that “security” would ordinarily be recovered through liquidation sales into distressed markets — clearly not a way to get a full dollar back on the nominal value of the debt they hold — unless they agree to proposed reorganization scenarios.

So I’m thinking to myself that someone should play a tape loop of JP Morgan buying stocks into the crash of ’29 in order to stop wholesale panic and destruction of financial markets until the bondholders get the message: we, the people of the United States, the people of the global economy and the small-enough-to-fail businesses that provide the majority of the jobs, innovation and markets in the real economy – the economy that feeds the returns enjoyed by financial elites: we need you – the financial elite – to step forward, take this haircut, and share our risks going forward. Your willingness to do this will put you in a controlling position in a stable if not growing economy. Your failure to do this will leave you king of the hill on moldering zombie economy that ensures the continued degradation of all of your assets. Sure we can print up enough money to make you whole, but it’s only going to put the dollar into a tailspin — decreasing the value of your holdings. More than that – it’s just the right thing to do. You reaped the profits of the bubble. So you can justify your gains now by providing a much needed service to the nation—the forgiveness of debt and the assumption of risk.

But I forgot about the credit default swaps. I mean we already bailed out AIG and lost our leverage. As noted below: if bondholder debt is insured by CDS they are in a very strong negotiating position: make us whole – or we scuttle effective reorganization… and still get paid.

Ah, capitalism. Risk is only for governments and taxpayers — not for the smartest guys in the room.

Posted in ecoecon | Leave a Comment »

stiglitz and ackman on charlie rose

Posted by ecoshift on May 9, 2009

stiglitz and ackman on charlie rose

In Charlie Rose’s interview Bill Ackman and Joseph Stiglitz articulate the debt for equity solution to bank insolvency quite clearly. Both parts of the interview linked to here are worth a listen. I can’t find part three on youtube, if you have the link, let me know in the comments. Thanks.

Posted in ecoecon | Leave a Comment »

CDS Blamed For Corporate Bankruptcies

Posted by ecoshift on May 9, 2009

CDS Blamed For Corporate Bankruptcies
The AIG Bailout Is Pushing Other Companies Into Bankruptcy
Joe Weisenthal|Apr. 17, 2009, 8:14 AM|

This week, mall operator General Growth Partners (GGP) and newsprint maker AbitibiBowater both filed for bankruptcy, after failing to persuade bondholders to restructure voluntarily.

Now lawyers involved in these bankruptcy proceedings tell the Financial Times that the credit default swaps are the problem — mainly, bondholders who have purchased CDS on this debt have little incentive to negotiate or play ball, since the CDS, if the counterparty honors the agreement, makes them whole.

Posted in ecoecon | Leave a Comment »

Intrametropolitan Patterns of Foreclosed Homes

Posted by ecoshift on May 5, 2009

Intrametropolitan Patterns of Foreclosed Homes: ZIP-Code-Level Distributions of Real-Estate-Owned (REO) Properties during the U.S. Mortgage Crisis
Federal Reserve Bank of Atlanta: Community Affairs Discussion Paper Series

During the mortgage crisis, community developers, policymakers, and others have become increasingly concerned about the extent to which lender-owned homes, often called real-estate-owned or “REO” properties, have accumulated in their neighborhoods and communities. REO properties are usually vacant and, especially when geographically concentrated, can have destabilizing impacts on neighborhoods and communities. However, due to data challenges, little systematic research has been done on the intrametropolitan distributions of such properties, especially across different metropolitan regions as of November 2008. First, the urban-versus-suburban distribution of REO is found to vary significantly across metropolitan areas. In general, in traditionally weak-market metros—many of which had substantial REO levels before the advent of the national mortgage crisis—REO tend to be relatively concentrated in central cities. Conversely, in regions where REO accumulated more recently and in those with high central-city housing prices, REO tend to be somewhat more suburbanized. Second, while ZIP codes with high REO densities are disproportionately located in central cities, this pattern varies significantly across metropolitan areas. In particular, in the formerly “hot-market” regions where home values have declined rapidly, a large majority of ZIP codes with “severe” REO levels are suburban. Finally, among suburban ZIP codes, those with long commute times experienced larger increases in REO over the November 2006 to 2008 period than those with shorter commute times. The paper concludes with some broad implications for community development policy and planning.

Intrametropolitan Patterns of Foreclosed Homes is available online [as a pdf] at:

About the Author: Dan Immergluck is a visiting scholar in community affairs at the Federal Reserve Bank of Atlanta and an associate professor of City and Regional Planning at the Georgia Institute of Technology.

Posted in ecoecon | 1 Comment »