When did the crisis begin?
I like reading James Surowiecki, because he’s smart, and because I tend to read exactly the same facts he reads and draw precisely the opposite conclusions.
In two recent Surowiecki posts (here and here), Surowiecki points out that during the banking crises of the early eighties and early nineties, banks were arguably as insolvent as our banks are today, but hey, with a little time and without any radical changes, everything turned out great.
The means by which banks recover their rude health, if you give them time, deserves a critical review. I mean to pen some nasty polemic about that, but for the impatient, Yves Smith tells much of the story (with all too little nastiness). See also here, and think about how much poorer people who run credit card balances have paid over the years on loans tied to the “prime rate”.
The fundamental difference between my perspective and Surowiecki’s is that I don’t think those previous recoveries were real. My view is that the crisis that we’re in now is precisely the same crisis we’ve been in since at least the S&L crisis. We’ve had a cancer, with some superficial remissions, but fundamentally, for the entire period from the 1980s to 2008, our financial system in general and our banks in particular have been broken. They have profited from allocating capital poorly, from funneling both domestic loans and an international deficit into poor investments (current consumption, luxury housing) rather than any objective that might justify arduous promises to repay. We all got a reprieve during the 1990s, because internet enthusiasm persuaded many investors to fund our consumption via equity investment, which we could wash away relatively painlessly in a stock market crash. Debt investors don’t go so quietly. Thanks to the cleverness of our banking system, we have a very great many lenders, both domestic and foreign, who’ve invested in trash but who demand to be made whole at threat of social and political upheaval. That is the failure of our banks. That they are insolvent provides us with an occasion to hold them accountable, and to reshape them, without corroding the rule of law or respect for private property.
(Incidentally, I don’t think that the problem is overconsumption or that austerity is the solution. I think we can afford to throw a perfectly good party, but it has been easier to put everything on the credit card than to come up with smart ways to pay for the economy we want in real time.)
Surowiecki seems to believe that if we could resolve the current crisis in pretty much the way we resolved the previous crises, that’d be okay. For me that’s the second-worst-case scenario, after a major social collapse. Because I know that a superficially reformed financial system, both in terms of banking and international architecture, will continue to do great harm, permitting imbalances and injustices that will bring a serious collapse or a dangerous war if they are not addressed. We are fortunate, very fortunate, that things have pretty much held together so far, and for that people whom I usually criticize, Messrs Bernanke, Paulson, and Geithner, deserve some credit. But if they manage to “save the world” like that famous committee did during the LTCM crisis, with a lot of empty talk but no real changes once the crisis had passed, we will be here again, and we won’t get lucky forever. This is a very serious business.
There are profound economic problems in the United States and elsewhere that our financial system has proved adept at papering over rather than solving. Those of us who’ve played Cassandra over the years have been regularly ridiculed as just not getting it, as economic illiterates and trade atavists. Unfortunately, as Dean Baker frequently points out, the people who could never see the problems are the only ones invited to the table when the world cries out for solutions. The solutions on that table are those Surowiecki tentatively endorses, weather the storm, take some time to repair, the temple is structurally sound. But the temple is not sound. We either build a decent financial system, or suffer real consequences, in unnecessary toil and lost treasure, in war and conflict over false promises set down in golden ink.
The banking mess and the high unemployment rate are not the crisis, they are symptoms. This is not “dynamo trouble”, it is a progressive disease, and what is failing is the morphine. Those of us who believe that financial capitalism is a good idea, that it could be the solution, not the problem, do their cause no favors by resisting radical changes to a corrupt and dysfunctional facsimile of the thing. We need to approach financial capitalism as engineers, and to largely rearchitect a crumbling design. If we don’t, we may be so unfortunate as to suffer yet another superficial remission. But error accumulates, and error on the scale now perpetrated by national and international financial institutions is unlikely to be without consequence.
- 14-Mar-2009, 5:30 a.m. EDT: Changed an ungrammatical “are” to “is”. Subjects and verbs must agree.
- 14-Mar-2009, 5:55 a.m. EDT: Changed “banking crisis” to “banking mess” to avoid using “crisis” twice in a sentence.
SRW, I thought the premise was good, but then not really supported by the essay.
It would have been helpful if you’d detailed how the banks have, in the past, “recovered their rude health”. I think your point here is that banks historically have recovered from insolvency crises caused by speculative lending practices with even larger cycles of fresh speculative lending practices that while successful for a time have eventually resulted in a bigger insolvency crisis further down the road. But that’s not exactly what Yves Smith writes @ the link and it’s not what you wrote (since of course you haven’t written it yet).
The root problem, really, is the Minsky Conundrum: once you get into a financial mess of these dimensions, it’s so immediately painful and long-term frightening (because the outcome may involve “major societal collapse”) that the people in power will do almost ANYTHING to get us out of it so their name doesn’t get carved in granite up on the mountaintop of history with “Hoover”, “Smoot” and “Hawley”. And as you point out, if we eventually resolve this crisis much as we resolved the crises of the 1980s and early 1990s (I’d personally add the smaller 1998 ruble/asian <CM panic to the list), then that won’t help us avoid another major financial debacle down the road.
At this point, I’m not positive that we’ll get out of this crisis without major societal collapse, but I am pretty confident that if we do get through without wrecking our civilized community that the financial system will end up looking pretty much like the one we started with – though maybe with only 15-1 leverage instead of 20-1 or 30-1.
March 14th, 2009 at 7:49 am PDT
link
Sometimes I think Steve reads my mind. We may not have the exact same perspective or always draw the same conclusions, but most of the pieces are there. I’ve been thinking about this idea quite a bit lately. My perspective on the issue has been one of serial bubbles. Before the real estate bubble, there was the tech/dotcom bubble, before that it was the emerging markets bubble of the mid/late 90’s. Each bubble burst but was immediately followed by the Fed turning on the liquidity firehose, so the bust phase was always mitigated and a new bubble immediately formed. Even the bursting of the housing bubble ultimately led to the current Treasury bubble. Another way to look at it is one of hot financial capital chasing one opportunity after another, leaving destruction in its wake each time.
More disturbing is the trend of some key stats over the past decade or so. Debt to GDP levels have steadily increased. Inflation has steadily decreased. Interest rates have experienced a secular decline, in additional to the current cyclical lows which have placed short rates at 0. We may be reaching the end of the Fed’s ability to pick up the pieces and blow another bubble to get things going again.
I think a case can be made that this time really will be different. The recessions of 2001 and 1990-91 did not result in enough restructuring of debt to correct the imbalances that had accrued. In effect, we are not just dealing with the after effects of the past cycle of 8 years, we are dealing with the after effects of the previous 2-3 cycles and 20+ years all at once. Also, we have not even begun dealing with the CRE market and the credit card market, and unemployment is rising fast. We may be in the calm before the storm at this moment.
March 14th, 2009 at 8:08 am PDT
link
SRW –
I see you writing about the need for financial architecture reformation, but I’m not detecting quite as much emphasis on what I might call macro analytical guidance.
E.g. if one has a narrow view of excessive money, narrowly defined, as being the root of all evil, you’re going to miss the importance of the macro credit aggregates. It’s obvious that broadly defined debt measures have produced a constant warning signal for the past 20 years, and that warning is itself consistent with a seamless interpretation of the crisis over that time period.
The financial industry tends to be short on macro level imagination. Most security analysts are useless because they insist on following a “bottom-up” stock pickers approach. In many cases, they deliberate eschew the macro view as being outside the boundaries of their role. The same criticism holds for professional money managers, although arguably to a lesser extent. And this omission is particularly dangerous in CEOs. If this crisis has taught us anything, it is the importance of macro level risk and the dubious value of bottom up risk analysis, such as value at risk. At the ultimate level, I see the crisis as a failure of macro risk management by regulators and central bankers. One of the ironies here is that banks have had micro risk management functions that failed, not due to lack of effort or institutional ballast, but due to lack of macro imagination, as per Taleb’s criticism of value at risk. The banks developed cookie cutter systems of internal constraints that were completely ineffective as protection against the real risks.
One person to keep an eye on here is David Dodge, former governor of the Bank of Canada, who also has worked as a deputy minister of finance. He’s just been appointed as co-chair of a global task force on risk; a sensible guy who oversaw what was arguably the least bad banking system and who may add some value at the macro level.
March 14th, 2009 at 8:28 am PDT
link
I was pretty sure you would talk at some length about asymmetric information, and the monopoly CEO’s have on information disclosure. (see, for example, here)
In other words, we don’t know so well what the health of the firms was during the rougher periods, any more than we know during this rough period. I believe the option not to disclose that value has a benefit primarily to CEO’s, but also somewhat to shareholders at the expense of bondholders.
March 14th, 2009 at 10:17 am PDT
link
When the big banks were granted forbearance on their Latin American assets in the 1980s, recycled petrodollars all, we were the greatest creditor nation in the world, and our greenback was unchallenged.
Now we’re the greatest debtor. We have our hand out to the Chinese (and isn’t it charitable of Paul Krugman to blame the *Chinese* for creating *our* problems with their “savings glut”?) to finance deficits that will soon *exceed* WWII ratios to GDP.
And if the Chinese can’t come up with the scratch, the Fed will have to buy the debt. But if hyper-p-dot ignites Ben can always raise reserve requirements, right…? LOL
Everything in the beautiful literature on networks and econophysics suggests that the Founders knew what they were doing. Sparsely connected networks are stable, densely connected networks explode.
Break the big zombie banks up, limit bank size, audit the Fed, for starters.
And scalp the speculators who are holding naked CDSs by declaring them *null and void* (why do I suspect Goldman is a major holder?). These people are profiting from the pain of others.
We don’t have the ability to forbear this time. This is just a way of sneaking it onto the Treasury’s tab, as has been widely pointed out, and we can’t afford it.
March 14th, 2009 at 11:15 am PDT
link
“My view is that the crisis that we’re in now is precisely the same crisis we’ve been in since at least the S&L crisis.”
That’s it. That’s why looting is now being understood, finally, to be a cause. It’s been a taxpayer funded joy ride for the financial sector. No wonder middle class wages are stuck.I keep referring back to Pizzo’s “Inside Job”. If you just read that and Fisher’s “Debt-Deflation” essay, you’ll have a better handle on how we got here and why it’s so bad this time. It’s working for me.
March 14th, 2009 at 12:18 pm PDT
link
If it’s true that ” . . . . . the crisis that we’re in now is precisely the same crisis we’ve been in since at least the S&L crisis”, and I think it probably is true, then doesn’t that suggest that the current model of deregulated assets but explicit/implicit guarantees of liabilities is fatally flawed?
Before deregulation (which I think got started with the Reserve Fund MM revolution of 1971 and was mostly completed with the demise of Req Q in steps around 1980, though maybe we needed Glass Steagall repealed for absolute madness to rule), banks were more of a sleepy backwater without the fast money incentive to rock and roll. Maybe I’m deluding myself . . . .
March 14th, 2009 at 1:19 pm PDT
link
«keep financial firms small and well-compartmentalized — by that logic the pre New-Deal US, with numerous tiny banks tied to limited geographic areas, should have been an oasis of financial sector stability. Which of course, it wasn’t. It was less stable than what we have now.»
That was due to other factors, like lack of regulation etc. But the Republicans have managed to recreate wildcat banking, new-and-improved, at the size of a megabank like Lehman or Citi instead of a local bank. What an achievement! :-)
In practice bankers are herds that are largely subject to the same incentives, like the S&L crisis showed: all those thrift presidents chose the same strategies…
However the smaller each bank is, the less market and lobbying power they have. Sure, there are industry associations and cartels, but usually they are not as powerful as megainstitutions.
March 14th, 2009 at 5:35 pm PDT
link
Blissex – Aside from the other factors, a system based on fractional reserve banking and/or maturity transformation is inherently unstable. It requires ever increasing amounts of debt to sustain itself, as in a Ponzi scheme. At some point borrowers will be tapped out and, voila…
March 14th, 2009 at 6:11 pm PDT
link
Steve, I think the “madness of crowds” gives us far more information than the “wisdom of crowds”.
This crisis has its genesis at the start of the cold war.
Basically, we can blame it all on Churchill.
From Stettin in the Baltic to Trieste in the Adriatic, an Iron Curtain has descended across the continent. Behind that line lie all the capitals of the ancient states of Central and Eastern Europe. Warsaw, Berlin, Prague, Vienna, Budapest, Belgrade, Bucharest and Sofia, all these famous cities and the populations around them lie in what I must call the Soviet sphere.
As the cold war developed, propaganda(bullshitting) became a way of life for govt “leaders”( Goebbels copycats)
What is the long term cost to a country that practices deception as its Raison d’être? Gee, I wonder….Oh, the tangled webs we weave, when we practice to deceive.
When gaming the system(and actors and entities of the system)becomes “the game”; the crisis has begun. The fact that the Soviets blew up first is a footnote to history. The fact is bullshitters faced off against bullshitters and only those with political power(notice how Obama’s always smiling and laughing when ever you see him with Summers, Geithner and Bernanke)have persevered.
The dollar recycling game was a key development for the US in beating the Soviets(as well as oil price manipulation). Of course that game should have ended with the end of the cold war. But, instead has led directly to the current breakdown of the system because the game was mastered beautifully by China. Wall st with Paulson as their negotiator wanted in on the next big thing…Chinese Hi-Fi. They thought they could get in, so there was no reason to cry “mercantilist”. The “score” would be so big, who give’s a rats ass about “old US”. Movin’ on to bigger and better, they thought………..
THEY THOUGHT WRONG!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
March 15th, 2009 at 12:43 am PDT
link
Steve,
You’ve riffed on this theme before, but not in my reading of your blog have you set out carefully what your re-engineered financial system would look like and how it would be achieved from where we are now – could you please grace us with such a post.
March 15th, 2009 at 8:13 am PDT
link
The fundamental difference between my perspective and Surowiecki’s is that I don’t think those previous recoveries were real. My view is that the crisis that we’re in now is precisely the same crisis we’ve been in since at least the S&L crisis.
I would go further than that in disagreeing with Surowiecki’s ideas about the S&L crises.
In the original germination of the S&L crisis, the situation in Texas and Oklahoma was utterly ruinous, and all the banks there died. That crisis eventually provoked a general US systemwide crisis, which was an immense amount of trouble, but the systemwide crisis was nowhere near as bad as the one we have on our hands. Our systemwide situation now resembles the much more intense situation in Texas and OK. We have a nationwide housing bubble with falling housing prices (such as in Texas), all the banks are essentially dead (as in Texas), and the overall economy has in fail mode (just like the local situation in Texas). What was a regional banking and economic crisis has been taken up and replayed nationwide (and strangely enough the Bush family was involved in both instances).
I emphasize all that, because I was at ground zero in Texas watching the whole thing at the time, which was very educational. If you drew an imaginary border around the region and treated it as a country (which would be an area about the size of France), then what happened was is that the ‘IMF’ (actually the FDIC) came in and cleaned us up. The ‘national’ banks were completely liquidated, the busted were mortgages taken over by the ‘IMF’, and there was a ‘national’ depression lasting some years.
For ironic effect, I should also point out that the Texas Lege was forced by disaster to rewrite all the mortgage lending rules to make them much stiffer, and also much stricter banking regulation (at least as far as a state government can go towards stiff regulation of federally insured banks). So, during this crisis, all the Sunbelt states had hugely overblown real estate values and are consequently suffering as a result, EXCEPT for Texas, which is in the least trouble of all the largest states, and almost all the states taken together. The ‘free market’ has got nothing to do with it.
Given that the nation elected another Bush and he went out and replayed all the same stupid moves that happened earlier in Texas, it’s like a really bad case of ‘do as I say and not as I do’.
As I said, having lived through the natural experiment, I think everything went as well as could be expected given what they did. The big problem was, is that they wiped out the local banks, but they did not write down the surviving mortages, and they did not aggressively spend locally which meant lots of bankruptcies and a large migration out of the area. I don’t see how we can have a large migration of Americans out of the US, and I don’t see how the world can make it if we don’t get our economy back into growth mode. That’s in addition to needing to clean up the banks.
max
[‘So, we’re gonna have to spend money like water. No getting around it.’]
March 15th, 2009 at 10:29 am PDT
link
nicholas — there’s some of that “what is to be done” towards the end of the previous (way overlong) post, did you see that? as to the politics of how to get from here to something better, unfortunately i don’t know, except to say that the politically impossible may become plausible if the crisis becomes more severe. i hope to do more in that way of “constructive suggestions”. but combine the previous post with Rethinking subsidized finance (the bit about state-matched equity funds), Expand transfers not credit, and the very old How (not) to regulate investment funds (taking the latter to include all leveraged investment funds, including the things we’ve called commercial and investment banks) and you can get a pretty good (but only partial) idea of where i think we should end up. also Compete to give, give to compete. i’d like to say more about why equity is preferable to debt, and how we could move to more equity-like arrangements for small-to-midsize eneterprises that currently must rely on debt financing via banks.
as you can tell, i’m pretty sensitive to the criticism that it’s much easier to complain about what’s wrong than to suggest what would be right.
i’d give a different list of posts, by the way, on “what should be done” to get through the current crisis — the list i’ve given is for what kind of financial issue should we build from the ashes, although my views on managing the crisis have changed as enormous transfers already committed have made a principled bail-out-no-one, rule-of-law view unjust and arbitrary, “now that i’ve got mine, the victorian rules apply and the rest of you are deadbeats”. also i’ve thrown out a bunch of ideas that i have mixed feelings about but that i think should be on the table re crisis management, e.g. spinning off nationalized firms by giving shares to taxpayers and a retroactive tax on employees of systemically important bailed-out banks. still, my favorite how-to-deal-with-failed-banks post is the semi-swedish solution, but unfortunately the ad hoc bailouts have so confused things and Geithner’s Treasury has so little credibility in terms of generating very conservative asset valuations that i think it’s probably too late, for may banks solvency is now a political question, not an empirical one that can be addressed by impartial accountants. at this point, the only way i can see to evaluate bank solvency without picking winners and losers in a political process would be to slowly withdraw public support over a period of months, and then to put in receivership the banks that can’t meet obligations. unfortunately, while Fed support can be withdrawn this way, TARP capital, FDIC-guaranteed bond issues, and asset guarantees are contractually committed, so a let-the-tide-come-out scheme gives unfair advantage to banks that used these facilities most, probably the most troubled banks.
March 15th, 2009 at 12:08 pm PDT
link
«They were not nationalized or put into receivership. Instead, after the Fed slashed interest rates, the banks hunkered down, cut back on risky loans, and allowed the wider spreads to work their magic, and over time earned their way out of insolvency.»
What the author is saying here is that the way to bailout the banks stealthily is to create a new bubble whose profits are reserved to them, and the USA, via fed and treasury, has indeed created such a bubble (in underpriced government lending).
In other words the USA are fixing administratively bank profits to guarantee that they be large and steady, and Buffett has this figured out.
But not just Buffett — thus the rush to convert anything to a bank holding company (including the financial arms of GE and GM IIRC). Just a return of the “prime rate” scam (thanks for pointing that out), only on a much bigger scale.
Note also that Buffett is rather forgetful when he writes that the massive government-subsidized profits will go entirely to recapitalization:
«One reason is that since most of these banks have slashed their dividends to pennies, every dollar they earn essentially goes to recapitalization, instead of going out the door to shareholders.»
as he conveniently forgets that a large part of those earnings will go towards management compensation and bonuses, as they reward themselves for the returning to a strategy delivering robust, high earnings.
Now estimates of the size of bank net losses revolve around the 3-4 trillion mark. That’s about 30% of USA GDP, so bank profits need only to be around 10% of GDP for 3 years to deliver forbearance.
Of course it will take a bit longer, as 30-50% of those profits will be used to reward management for their financial acumen; let’s say that 3-5% of GDP will go to bank executive compensation (all for the best, of course, it will clearly trickle down), 5-7% of GDP will go to erasing the capital losses of the banks, and at the end of say 4-5 years, everything will be back to splendid. It’s the Paulson-Geithner plan for Real American prosperity!
Of course government guaranteed large profits to banks and large profit-related bonuses to their executives is entirely cost-free, and will just work perfectly :-).
March 15th, 2009 at 4:04 pm PDT
link
« [ … Texas banking collapse vs. USA one … ] The big problem was, is that they wiped out the local banks, but they did not write down the surviving mortages, and they did not aggressively spend locally»
That’s the Republican plan for the USA too. Except that almost 20 years later there is a lot less cheap oil in the USA or Arabia left, and that makes creating a cheap-energy fueled productivity boom a lot more difficult.
«which meant lots of bankruptcies and a large migration out of the area.»
Sure, to find better paying jobs somewhere else. But if there had been no better paying jobs, they would have stayed and learned how to cope.
«I don’t see how we can have a large migration of Americans out of the US,»
No problem — there will be instead and equivalently a large reduction in the standard of living of the “undeserving” bottom 80% of Americans, making them more competitive (lower pay, more docility) with the Chinese and Indians and Mexicans, much to the joy and benefit of USA business owners.
As someone pointed out there is not just Texas as a natural laboratory in recent times, Venezuela had a similar oil bust around the same time as Texas, and Argentina also had a deep crisis (both without the extreme URSS-style collapse that some people expect for the USA).
Quote:
«So… America will resemble Venezuela during the 1986-1999 oil depression. 60% of the middle class wiped out. Even in 1995, hunger through out society, the rich still partying in Miami, and the final election of a dictator to “fix stuff”?»
As to the strongman, isn’t Jeb Bush still available and raring to go? You ain’t seen anything yet :-).
March 15th, 2009 at 4:25 pm PDT
link
Now estimates of the size of bank net losses revolve around the 3-4 trillion mark. That’s about 30% of USA GDP, so bank profits need only to be around 10% of GDP for 3 years to deliver forbearance.
Of course it will take a bit longer, as 30-50% of those profits will be used to reward management for their financial acumen; let’s say that 3-5% of GDP will go to bank executive compensation (all for the best, of course, it will clearly trickle down), 5-7% of GDP will go to erasing the capital losses of the banks, and at the end of say 4-5 years, everything will be back to splendid.
None of the statements in these passages are true. No one is estimating U.S. bank losses at $3-4 trillion — that would be a rather amazing feat, given that total assets for the top 19 big banks are closer to $10 trillion, and not even these numbskulls can lose 40% on every loan they make. 30-50% of interest income at commercial banks does not go to management compensation, and never has. And the industry’s pre-tax, pre-provision earning power of $300 billion a year or so is after compensation expenses have been paid, which means all of that income is, in fact, going to be going to recapitalization, since banks aren’t paying dividends.
Now, it’s true that this is the product of low interest rates, but what else do you want the Fed to do when the economy falters, raise them? In any case, we can debate whether this constitutes a stealthy subsidy or not — I’d say it does — but there’s little argument that it will work, and at a relatively low cost (at least in economic terms) to taxpayers.
March 15th, 2009 at 5:12 pm PDT
link
«No one is estimating U.S. bank losses at $3-4 trillion — that would be a rather amazing feat, given that total assets for the top 19 big banks are closer to $10 trillion, and not even these numbskulls can lose 40% on every loan they make.»
Uhm, way more than $1 trillion has already been budgeted and nearly spent to save those banks, either via fed discounting or via treasure investments. One day the banks will have to theoretically repay at least that more than $1 trillion.
Also, all banks have trading on their own account, and they have been losing a lot of money on things other than their loans.
Losses on CDSes, and the credit card and Alt-A stories haven’t hit them yet. Perhaps the $3-4 trillions is a bit excessive, even if total losses, not just bank losses, after the bubble burst have been put at much higher than that. But it would not be surprising to see total bank losses of at least $2 trillions, simply on current data.
«30-50% of interest income at commercial banks does not go to management compensation, and never has.»
Well, I was not talking about commercial banks only; a lot of other financial intermediaries (e.g. investment banks — but they are all dressed as commercial banks) can borrow at 0% and use that to leverage up in proprietary trading or other investment and get a nice return, pay obscene amounts to their management.
I should have added “and hedge funds” (e.g. GE Capital, insurers :->), because it is pretty clear that the Fed and the Treasury want to recapitalize hedge funds too, especially those embedded in the proprietary trading divisions of all sorts of banks.
«And the industry’s pre-tax, pre-provision earning power of $300 billion a year or so is after compensation expenses have been paid, which means all of that income is, in fact, going to be going to recapitalization, since banks aren’t paying dividends.»
That “pre-provision” is quite amusing. Anyhow, $300b is going to be quite a slow recapitalization…
BTW, that $300b on $10t of assets sounds like banks are making around 3% on assets, a lot of which are non performing. Interesting.
That sounds like that they are sort of doing very well, borrowing at 0% and leveraging up.
However, what kind of numbers do you think are realistic, as to total losses in the USA financial system (mostly but not only banks, which anyhow do a lot more stuff than lending), how much net income it can generate per year with 0% borrowing, and how much of that will go to compensation.
It used to be that at major investment banks just bonuses were about 50% of earnings, or hundred of billions per year.
BTW out of curiosity looking just at depository institutions there are amusing stats at the FDIC.
Overall they have $13t assets, of which $7.7t in loans, of which $4.4t real estate, $1.5t commercial and $1.1t to individuals. Also $1.3t in equity. With 3.2% interest rate margin and a 0.16% net return on assets… Also around $0.4b of nonperforming assets.
Interesting graph of return on assets and equity:
http://www2.fdic.gov/qbp/2008dec/grbook/graphs/QROAL1.gif
http://www2.fdic.gov/qbp/2008dec/grbook/graphs/QROAL2.gif
And these just for depository institutions. Amusing.
March 15th, 2009 at 6:44 pm PDT
link
«No one is estimating U.S. bank losses at $3-4 trillion — that would be a rather amazing feat, given that total assets for the top 19 big banks are closer to $10 trillion, and not even these numbskulls can lose 40% on every loan they make.»
Oops, I forgot the money quote:
calculatedrisk
«Roubini Predicts U.S. Losses May Reach $3.6 Trillion
“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”»
«I think the U.S. residential credit losses will be in the $1 to $1.5 trillion range and additional credit losses from corporate loans and bonds, commercial real estate, credit cards, and other consumer loans will probably add close to another $1 trillion in losses. That is still well short of Roubini’s $3.6 trillion estimate – although give Roubini credit – he has definitely been right so far!»
takeitpersonally
«Chris Whalen (IRA): The bad news is that estimates that put aggregate charge-offs for all US banks over the next 12-18 months above $1 trillion are probably in the right neighborhood. The entire banking industry only has $1.5 trillion in capital, so new equity must obviously be provided by Washington and/or private investors.
* Other estimates: Goldman Sachs expects a further $1.1T in loan losses alone for a total of $1.6T.»
Note that just giving the banks free money to cover just the loan losses of $1.6T still leaves the banks overleveraged…
And at $300b/year of net income subsidized by the USA with 0% lending, it takes anyhow more than 5 years for the banks to cover those $1.6T in just loan losses.
And even a mere $300b/year is still 2-3% of USA GDP. It will have to a lot higher to make a dent in the problem.
March 15th, 2009 at 7:25 pm PDT
link
After the universe began, the various forces formed and then matter. Time to take a physics course. They have books for children on this stuff.
March 15th, 2009 at 8:53 pm PDT
link
Steve, great pair of posts (found via Felix).
You suggest that the crisis goes even farther back than the S&Ls. Is it possible that the issue is deeper than simply how the financial system is structured, and reaches into how social systems inculcate and transmit concepts of economic value, both consciously and subconsciously? (Consciously via the political and financial systems, and subconsciously via the non-verbally communicated attitudes about those systems).
If that is at all possible, is it also possible that the root of the cancer lies in the subconscious attitudes, rather than the consciously constructed systems?
Economics has always recognized incentives, but has always assumed that incentives are consciously recognized and acted on by rational actors.
This has neglected the role of what I would call subconscious incentives, which may not be recognized by the actor, however rational, unless they are willing and able to contemplate and explore their own motivations for acting – a trait that is not terribly common among business management.
just a thought…
March 17th, 2009 at 12:23 pm PDT
link
F. Blair
(in what sense is that just)????
March 23rd, 2009 at 6:25 am PDT
link
Oops
That shold be
In what sense is that only.
If bank profits having been running at that rate (and I know that the financialization of the economy has progressed pretty far) then it shows just how parasitic the sector has become.
March 23rd, 2009 at 6:32 am PDT
link