This page has been archived and commenting is disabled.
Richard Koo's Views On The Macroeconomy, On Volcker's Plan, And Why "Extend And Pretend" Will Be With Us For A Long, Long Time
Richard Koo, whose expansive interview with Kate Welling we presented earlier, is not only well-versed on topics of broader economic consequence, but on the proposed regulatory overhaul and the Volcker plan. Koo is particularly well suited to provide his insights due to his employment at the NY Fed under Volcker's chairmanship.
Mr. Volcker’s plan is based on the principle that the government must protect those banks—commercial banks—responsible for the settlement system. In fact, all of his ideas start from the idea of protecting the settlement system.
When I worked at the New York Fed during Mr. Volcker’s time as chairman, there were a number of events—including the Latin American debt crisis and the failure of Continental Illinois National Bank and Trust Company—that could easily have caused a financial system shock similar to that of the Lehman bankruptcy in 2008. But the problems were addressed with almost no damage to the real economy because of Mr. Volker’s efforts to maintain the settlement system using every means at his disposal....I think Mr. Volcker believes that if we can change the behavior and culture of the banks at the center of the credit-creation mechanism, the financial capitalism resting on top of that structure can also be reined in.
Also, taking a hint from the Japanese deflationary experiment, Koo provides some advice to the Obama administration:
Mr. Obama’s $787bn fiscal stimulus actually owes much to Japan, including the strong warnings and advice offered by former prime minister Taro Aso to President Obama. Unfortunately, Messrs. Obama, Summers, and Geithner have yet to explain to the public how this recession differs from ordinary recessions and why fiscal stimulus is needed. Japan’s experience shows that it is extremely difficult in a democracy for the government to persist in providing fiscal stimulus without explaining why it is necessary. It is like trying to give a patient an expensive treatment for pneumonia without first explaining to her that she is suffering from pneumonia and not merely a bad cold. It was perhaps because of the lack of sufficient explanation that the Democrats experienced an unexpected loss in last week’s special Senate
election in Massachusetts. It may be difficult for Mr. Obama to tell voters one year after he was elected that, in fact, we are dealing with a different kind of economic sickness. But the longer the Administration waits, the further its approval ratings will fall.
If you have been wondering why bad loans are still carried at par (or close to) on banks' book, Koo has the answer to that as well:
While announcing what would appear to be tough new regulations for the banks, the US authorities have substantially eased the rules on bad loan write-offs and are moving to prevent the recent plunge in commercial real estate prices from causing further damage at US banks. Nationwide commercial real estate prices have fallen 43% from the 2007 peak on average. Many properties are now worth less than the outstanding balance on the loans secured by them, preventing banks from rolling over the loans. The sharp drop in property values also means that the loan-to-value (LTV) ratio on all real estate-related loans has probably exceeded an appropriate level. If US banks start refusing to roll over existing loans or tighten the criteria for extending new loans because LTVs are too high, they could trigger a wave of commercial real estate-related defaults. That, in turn, could inflict fatal damage on a banking sector already weakened by problems in residential mortgages. Many of the loans issued during the bubble are due for refinancing between late-2009 and 2011. Consequently, there is no time to waste for either the authorities or the banks themselves. If lenders refuse to roll over these loans, the US could experience another Lehman shock.
On explaining the regulators' fascination with ignoring reality as long as possible:
If the bank can make a case that the price of a given property has fallen excessively, the authorities will not intervene if the bank decides to roll over the loan. In other words, they will not treat it as a nonperforming loan. Even if the outstanding loan balance exceeds recent estimates of the property’s market value, the bank may be allowed to roll over the loan if, for example, the owner has long-term contracts with good tenants and rents do not appear likely to fall substantially from current levels. This implies a major shift from the traditional stance of US authorities, which was to demand that banks write off impaired loans as quickly as possible. It also represents a change in the stance of Treasury secretary Geithner, who originally argued that the US would not experience the kind of drawn-out recession seen in Japan did because it would deal with its banking problems quickly. The pronounced weakness in the commercial real estate market has forced US authorities to abandon their traditional preference for quick write-offs. Instead, they will encourage US banks to roll over loans (even effectively nonperforming loans) and thereby prevent the crisis from surfacing. This suggests that the banks will be allowed to clean up their problems over time by funding write-offs with earnings.
Lastly, some amusing observations on why the "hyenas" will not see real mark-to-market for many years:
The authorities’ change in stance has also largely eliminated the possibility of a sudden selling climax that would bring a true bottom in prices. It appears that a handful of “hyenas” were awaiting just such an event. But with financing extremely difficult to obtain in the current environment, it is difficult to anticipate just how far prices might fall. Such a decline would further weaken bank balance sheets, making it impossible for many people wanting to purchase real estate to obtain financing.
The implications of a selling climax are utterly different when (1) potential buyers are able to obtain financing, as was the case during the cleanup of the savings and loan crisis of 1989, and when (2) most banks are experiencing severe bad debt problems and there is a severe nationwide credit crunch. In the former case, a selling climax can mark the beginning of a new bull market, but in the latter case it represents a one-way ticket to a depression. It would appear that the US authorities have finally recognized this.
I have previously argued that two policies must be implemented to leave the US economy on a firm footing: (1) sustained fiscal stimulus until the private sector completes the deleveraging process; and (2) a gradual, pragmatic program for the disposal of banks’ bad loans. The recent changes to the guidelines for commercial real estate loans (often dubbed “pretend and extend”) suggest that the second may actually be implemented, and to that extent I think are a positive development.
Recent moves by the US authorities—the use of strict new regulatory proposals to reduce moral hazard complemented by the flexible application of bad loan disposal rules in light of actual conditions—are something straight out of Mr. Volcker’s playbook and suggest that the Obama administration is finally beginning to utilize his experience.
Full Richard Koo note:
»
- 9057 reads
- Printer-friendly version
- Send to friend
- advertisements -
I like the dry factual posts and all. But the idea that the US is fucked, well that fucking sucks.
Doesn't Koo's thesis really just boil down to the following strategy:
"We should print more money."
Like Hazlitt said (paraphrased): The challenge of good economists is to analyze the long-term effects to all people and groups, and not merely focus on the short-term effects to a particular group.
Mr. Koo needs to explore beyond first-order side effects before he whips out the prescription pad. The failure to do so is why the Federales are having a difficult time with fiscal and monetary stimulus right now, politically speaking.
The all stimulus all the time trick that has been playing out for a long time in the United States has created a resistant economic system that is possibly unable to handle either remedy: (1) withdrawal to an increasingly free market, or (2) overdose due to excessive stimulus.
dry witty posts great. the idea that the US is fucked, well that just fuckin sucks
So my Armageddon puts won't ever pay off now??
well if my puts dont pay off, I am going to wage war on the Treasury !!
You mean the hyenas are not circling the treasury already. The movement in 30 & 10 year yields looks fishy already. I suspect something is up and about in the dark woods of the Treasury !!
The problem with extend and pretend is that it assumes there is a rebound in the future at some point that allows for the resolution of the underwater value and I have news for these guys, the consumption glut that existed during the past 2 decades is gone...kaput, not coming back, so it matters little how long you wait, we have a vast wasteland of mall space that will serve no purpose and have few shoppers...the shopping spree is done I think and it's about time.
It's a good idea in theory, wait until we've hit bottom and come back up the other side, but there is no other side to come up on this and so I say it's all for nothing.
Kick the can, that's all it is.
+10000
"IT" truly is that simple.
I wonder how long it will take them to pull out the bulldozers and make residential/commercial structures more scarce?
Oh no! If the banks go under people won't be able to get loans for new houses that they can't afford!
If house prices severely correct then it will make housing more affordable for the next generation. I don't care if people are underwater on their mortgages--in our current system, the banks own the houses not the people. When you have LTV levels this high, all the "owner" has is a call option. Extending the expiration date of the call option does very little for the option owner if it isn't worth the premium, which is the mortgage payment.
People need to get a grip on their fascination with home ownership. Pouring capital into homes in unproductive, it's not investment it's consumption. If we piled up debt while investing in R&D or other efficiency enhancing measures, it might make sense to try and postpone the day of reckoning. But all we have are depreciating houses, which do nothing to enhance the debt servicing capacity of the occupants. The game is over.
oops. Wrong post. Mea Culpa.
I am constantly amazed that high housing prices brought about the collapse and yet all the effort is to keep them up. If we built cars like we build houses we'd still have a 1000 car companies that you'd never heard of. I predict a repeat of what was done in Peru in the recent past. Ignore the current broken market and find a new way to provide housing at a lower price. Smart people are not going to participate in a broken system.
So here's the twenty-$BIGNUM-dollar question: can it be done? Never mind whether it should be done - is it actually possible for the US and EU economies to limp on like a crippled bomber through one or more lost decades? Or will something fall through or blow up? (Sovereign debt? Political forebearance? Monetary stability?)
cf.
Koo can come up with all the factual information regarding the Japanese parallel to the U.S's current situation, however the people of the U.S. (albeit extremely ignorant) will not allow for deficits to continue to grow to record levels. Koo knows this, thats why he's going loud, however it is a lose lose battle. Grow deficits and people immediately disapprove and politicans are removed from office, shrink deficits and people approve - until unemployment hits 20%.
Either way, I like Koo's analysis however I think a "failed" auction (whether it be public discovery that the Fed is the direct bidder or a literal failure) is in the works and we won't have to worry about Koo's two options, because the third, instant austerity via a worthless currency, is coming.
Lets just hope Ben and the boys can keep the spotlight on Europe for as long as possible.
>Either way, I like Koo's analysis however I think a "failed" auction (whether it be public discovery that the Fed is the direct bidder or a literal failure) is in the works and we won't have to worry about Koo's two options, because the third, instant austerity via a worthless currency, is coming.<
If you like Koo's analysis and are still waiting for
a "failed auction", you're missing a key
part of his thesis, aren't you?
While I appreciate Koo's candor with the issues ahead, I see major problems with the solutions he presents. IMO, these are patterned steps that Japan has taken-- of which its so-called "success" is very much up for debate.
One of the problems with extend and pretend is that it delays a true market clearing price in favor of artificial ones. The private sector may find the process of delveraging a difficult one if they don't know the true underlying value of the asset that collateralizes the debt. As we've already seen in the residential and parts of commercial real estate, non-payment of P&I and strategic defaults are likely to be a more common occurence, if banks are incented to pretend. It make one wonder whether most of the real estate loans in Japan were recourse whrn the bubble popped there.
Another difficult issue is the prospect of higher fiscal spending during what is likely to be a long deleveraging process. Unfortunately, the US had been running on significant fiscal deficits even before the recession hit. Now, we are competing against a growing number of nations for financing a growing hole. With liabilites running over 500% of GDP, we are exposed to the prospect of much higher interest costs through higher global interest rates.
I would highly expect the fiscal spending programs to be inefficiently used, as has been the case though most of our recent history. But it may be preferable to allowing the Fed to use freshly printed money narrowly help out the banking system.
The Massachusetts didn't go the way it did because Obama didn't adequately explain things to the American public. The people had a pretty good sense on what was happening-- they just didn't like where the money was going. Perhaps the Obama administration's and the Fed's penchant for opaqueness compounded the problem.
While I'm uneasy about the solution paths Koo suggests, I'm resigned to believe this is what we may attempt, though (I think a lot could go "very wrong"). Our only consolation presently is that there are other economic blocs in even worse shape, and there is no reserve currency for them to follow. Crude austerity may be the only answer in such as situation.
I agree the sooner "true market clearing price" is determined the amount of de-leveraging necessary can be determined. The government is artificially inflating the price of real estate (via home buyers credit and low interest financing) hoping to provide the banks some time to get toxic assets off their balance sheets. Once they have sufficiently fleeced the flock then they will remove their stimulus and allow the true market prices to return. At which time they will all get together drink some scotch, smoke their Cuban cigars and have Timmy dance a little jig for them.
You hit the nail on the head also that the country's lack of fiscal responsibility has already placed us in a precarious position to deal with the problems at hand and has left the American people with little hope that stimulus will be spent wisely. We are destined for a new normal and any delusions that we will ever return to anything close to the last 30 years is insanity.
Maybe I'll drink a little scotch, hire me a midget, dress them up as a leprecaun and have them dance a little jig for me. Not that I'm weird like that.
The problem is that the "true market clearing price" is most likely at pre-1980 levels. The credit markets are gearing for a long term deflationary collapse of the private economy. An adjustment to pre-1980 wipes out all the banks, a lot of businesses, and most families.
But you're right - we're going to get to that adjustment one way or another. I'd rather see it sooner than later, so i might have a chance to recover.
The problem I see with the Volker plan is that it is focused entirely on the banks - and not the devastated population of the United States. People are realizing that all the stimulus, the bailouts, and emergency credit lines, etc., are for bankers not for people. It doesn't take a master's degree in political science to know where that leads ...
There needs to be a massive price correction. There also needs to be some mechanism for allowing people (and not just banks) to survive the price correction. Could people write off their RE losses against income? Could they get a tax refund (adjustment) from prior years' property taxes? Could they accelerate their mortgage interest tax reductions?
I realize that negatively impacts the budget deficit - but consider the alternative. A massive asset wipe-out, combined with falling incomes and employment, and aggravated by rising taxes is a recipe for long term deflationary collapse and economic stagnation.
The money supply is vaporizing, and the public recognizes that the Gov't is only interested in saving the banks and corporations - and not the people. That is the road to Weimar, not Japan.
Or pick a date, and anyone with a residential mortgage on that date has it forgiven. Would be fine with me.
With the Federal Reserve Note having lost 95%+ of its value I would say prices will drop until on par with value in gold. Remember gold at $35? Go lower.
But because we do not eat, drink, and sleep in an economic vacuum throats will be slit long before we have price stabilization.
Assetman,
What I am finally getting through my thick skull is there is no "true value" to the asset. The liquid in the system will hydralically lift or lower where the ball in the liquid balances. A buyer, knowing the market is being "managed" (ain't I nice) is judging Fed/Treasury psychology against the reaction of the rest of the world and the flight of black swans. Once you have considered all that, then make your buying/selling decision!
There will be no "true value" of an asset, maybe for the rest of our lives. This is no man/woman's land.
We are going to have to come up against physical limits for extend and pretend to fail. Shortages. This could be lack of liquidity in the system at a key place that shuts down financing and production, this could be running out of physical materials like phosphorous resulting in food shortage. But a shortage is going to be what it will take.
Koo sounds true but I don't know what to do!
They really want to inflate, baaaad. After reading this I can taste it with them. But there are no jobs to get money into people's hands to make them buy or loan worthy.
What a mess.
Everyone's talking about printing money as being the solution, but the problem is that interest rates will adjust immediately, bankrupting any institution that requires a rollover of debt. This would be before any printed money could get transmitted through the system. The weight of private debt is so high that some sort of widespread bankruptcy is inevitable. If the Fed prints, it just accelerates this collapse. I'd be looking for a spike in bond yields, then a spate of private bankruptcies with the banking sector once again under siege. The market will eventually get the deflation it needs but only after a bond crisis and a crash in all asset markets. The hyperinflationists never explain how the printed money actually gets to the people who need to pay the debt. In countries where hyperinflation develops, public sector debt is far higher than private sector debt, which is why a politically controlled central bank tries to print its way out of trouble and simply starts paying all of its government employees in depreciated currency. The private sector then adopts its own means of exchange (some perceived credible currency like dollarization) and can continue functioning. If the Fed's balance sheet goes to $25 trillion, I'd then start to worry about hyperinflation.
Nice post. If the US government (inc. the Fed) really is committed to the Koo strategy of no-surrender-to-deflation, though, does it make much of a difference? Instead of going from money printing to hyperinflation, they'll go from vast public spending (stimuli, welfare, banker welfare, helicopter drops etc.) to vast public debt to monetisation of the public debt and thence to hyperinflation.
<the use of strict new regulatory proposals to reduce moral hazard complemented by the flexible application of bad loan disposal rules in light of actual conditions>
What this really says is:
...in response to populist outrage, the rouse of "strict new regulatory proposals" will facilitate the continued flexible application of bad loan disposal rules in light of actual conditions indefinitely...moral hazard is now the unofficial-official policy of the Obama/Volcker team...
His solution is effectively "extend and pretend" as well. Fiscal stimulus until the economy can grow out of it? And controlled mark-to-pretend until we reach a phase when the money lending machine becomes unjammed? Sounds like someone who was intimately involved in the Japanese clusterf**k for the better part of 2 decades.
The problem (if one assumes the Fed is not just going to monetize all this debt anyway) is that because the government is running a deficit, fiscal stimulus must necessarily be funded with treasury bond issuance, effectively crowding out the capital used for lending to the CRE sector. Consider that the CRE collapse is occurring even with the largest stimulus the world has ever seen with the lowest rates the world has ever seen, and this situation is hopeless. There's never going to be a second phase where the economy just grows out of this.
Allowing banks to carry these bonds at whatever value they want is preventing full price discovery. But if they're preventing the price of CRE from collapsing, what they're doing is holding resources hostage. They overpaid, overleveraged, overextended themselves. They should lose control of these assets. They're only preventing a true recovery from occurring. But don't worry, it'll be a "pragmatic" resource hostage situation.
I think a key point is:
"the banks will be allowed to clean up their problems over
time by funding write-offs with earnings."
What Koo doesnt mention, and some posters have pointed out, is that with an economic malaise, where will the earnings come from?
The answer lies in the FED 0.0% rate to preferred entities, they will be allowed to 'earn' their way back to solvency through borrowing from the Fed and buying treasuries. The Fed hopes they buy long. This works for both sides of the trade, in that the banks earn a few % to stack against the hole left by devalued assets, and the Fed has buyers of UST willing to accept low yields, as long as the 0.0% rate remains.
The exact matching of magnitude of the two requirements is unknown to me, perhaps someone with better analytical skills could answer the question as to how much UST need to be bought and how much earnings need to be given to the banks.
Who will tire of the deal first? Given the essentially unlimited requirement of the Govt for defict cash, I think its safe to say the Banks balance sheets will be rebuilt first. Although if LTV continues to climb, perhaps they will have to play along for longer.
Given that the fed publish their auctions, we can possibly even predict when the 0.0% rate wont be required by the banks anymore, i.e. when will they have enough 'earnings' to be solvent again? There is 0 chance of the rate being lifted before this date.
I think this might be an important question.
As to the 'real economy', forget about it, its screwed. The Banksters only look at lines on a spreadsheet, and financial companies are the most efficient way to get those lines where the textbooks say they should be.
The US economy might end up with NY and Washington DC being the only first world cities left in the USA, with an identical nominal GDP thanks to the finance industry. (Because to triple earnings at GM or FORD takes 3 times the factories, 3 times the workers and 3 times the raw materials, tripling earnings in finance doesnt require anything but paperwork, no new hires, no new buildings, no new computers even - people seem to forget that GDP measures paperwork as equal to productive work).
A possible flaw in their plan is that they fail to recognise that real estate values are linked to the 'real economy' at some points, and if unemployment continues to depress retail, those malls wont have "good tenants" anymore and it will be increasingly difficult to argue that the asset value has fallen 'excessively'. Will the 'authorities' step in and demand write downs, I doubt it.
The banks/Fed are biggest hope is that inflation will close the gap between loan value (fixed) and asset value (infated) before things get too crazy.
Also the banks are like cowboys in a Mexican standoff, and as soon as one 'draws' by refusing to roll over loans, the shooting will start.
To recapitulate, the banks solvency has been maintained by redfining solvency, and will be backfilled by free Fed money. This will fix the balance sheets.
The proposed solution to LTV issues is inflation of asset values against fixed loan amounts.
For these guys the 'real economy' doesnt even register, its all just getting the right numbers on a spreadsheet, by any means. They are 'economic fundementalists' who take the textbook as the literal truth.
It amazes me when I see individuals advocate Japan's "solution" to a balance sheet recession. It has been twenty years, and Japan is still in a funk. The Japanese consumer and corporate segments have finished deleveraging. The debt to income (or GDP) levels are in the healthy range, yet economy is mired in deflation and slow growth.
The Japanese government now faces some serious headwinds as its debt is twice its GDP. With demographics changing its savers into spenders due to retirement, Japan will face more competition to fund its debt. If Japan faces default, will people like Koo admit the Japanese experiment didn't work?
If a property owner has taken a commerical RE loan, and knows that the bank will never foreclose due to "extend and pretend," why exactly would he ever make any payments? The property owner's incentive is to collect rents and never pay back the loan.
Furthermore, how does the solvent CRE borrower compete with the non-performer? Under "extend and pretend," the latter has every incentive to charge sub-market rents, a behavior which will eventually make the solvent borrower insolvent.
Everything will eventually circle back to the same unavoidable fact : CASHFLOW !!
That's the intersection at which Artificiality always collides with Reality.
So we enter Dante's first circle of hell...Limbo.
suteibu,
That just about covers it.....What we are facing is unprecedented in human history, therefore no known model of recovery exists....Please..Japan?? As we vortex, just keep in mind,,,BE MOBILE Dante's second circle is on the horizon...
x=y,(a-b)~f2[2345],bzx=er2.
Koo displays zero understanding of anything
Japan went through two lost decades because of the stimulus. HOW much more evidence do we need to leave the economy alone
let the depression run its course and in two years we can start again
add more stimulus, delay the recovery
and risk the collpase of the currency in the meantime
brilliant
give me a deflationary depression anytime thanks
Koo's theories have some merit, but they won't transpire
in the ways he has envisioned. The Fed's incessant
propping can't continue if China uses the nuclear Dollar
option, which appears to be underway in a limited fashion.
Also, the COMEX and LBMA have no gold left, so they
will soon be shut down due to contract fraud. They will
simply not be able to sell contracts for metals that they
don't possess.
Lastly, the U.S. is on a military collision course with
Iran and, by extension, China and Russia.
I strongly believe that after taxes are filed in the U.S.
on April 15th, anything can happen.
This is not Paul Volcker's first rodeo. He is pulling in the slack before the new voltage is applied.
The nation/states gave up their sovereignty by choice, in return for short-term protection from evolutionary pressure, but the planet requires a portfolio of independent economies. Those economies are being built in virtual space.
If you do not see them, you are not in one. You will only see the leading edge of development if you are working on it, because finance has a habit of pre-selling the future, in an attempt to control it, which is the force that creates slingshot development.
As you know, to maximize return, you want to bet on the new horses with money earned by liquidating the old horses. If old capital gives you any trouble, drive that price of oil below $65 and keep it there (force = negative spread x time x variability). You know all about the volume price mechanism on the margin, and have the required information to move it.
At the last cycle point, the horse and buggy was replaced by the automobile, with considerable energy of activation, of the amplitude you are currently observing. Short anything less than quantum improvement. As you know, buy as they start moving the herd in and before the slaughter, using calculus and watching the exit gates. Build your own exit gate so they cannot filter you in with computer algorithms.
Ultimately, DARPA is an incremental approach, and you require a quantum solution. You need to make a market. In a too-big-to-fail system, dislodging a current market-maker brings down the entire system. The old system is hard, but brittle, which is why they have to discharge the economy to protect it.
Investing is about being more patient with intelligent risk exposure than other investors, ultimately psychological endurance to pain. Warren Buffet has had enough. Set yourself up to be patient. If you are naturally impatient, make many consistent bets across the spectrum, which appear random to the computer algorithms, which will trigger cascading action, to keep you busy.
You are not going to out-patience small labor. It has seen many capital regimes across the demographic acceleration half-cycle. From the perspective of small labor, that old pod will open in due course and release the seeds. That’s what happens when capital manufactures a weaker countervailing power; evolution moves forward, and leaves the shell behind, for recycling, in this case the closely held holding pyramids between producers and consumers.
Small labor does not need money. You can go to virtually any home in America, and the people there will need something done and have some kind of surplus that you can employ. Capital is clay; fashion it to meet the need at hand accordingly.
(They said it couldn’t be done last time too, and every time before that.)
Good luck.
This is not Paul Volcker's first rodeo. He is pulling in the slack before the new voltage is applied.
The nation/states gave up their sovereignty by choice, in return for short-term protection from evolutionary pressure, but the planet requires a portfolio of independent economies. Those economies are being built in virtual space.
If you do not see them, you are not in one. You will only see the leading edge of development if you are working on it, because finance has a habit of pre-selling the future, in an attempt to control it, which is the force that creates slingshot development.
As you know, to maximize return, you want to bet on the new horses with money earned by liquidating the old horses. If old capital gives you any trouble, drive that price of oil below $65 and keep it there (force = negative spread x time x variability). You know all about the volume price mechanism on the margin, and have the required information to move it.
At the last cycle point, the horse and buggy was replaced by the automobile, with considerable energy of activation, of the amplitude you are currently observing. Short anything less than quantum improvement. As you know, buy as they start moving the herd in and before the slaughter, using calculus and watching the exit gates. Build your own exit gate so they cannot filter you in with computer algorithms.
Ultimately, DARPA is an incremental approach, and you require a quantum solution. You need to make a market. In a too-big-to-fail system, dislodging a current market-maker brings down the entire system. The old system is hard, but brittle, which is why they have to discharge the economy to protect it.
Investing is about being more patient with intelligent risk exposure than other investors, ultimately psychological endurance to pain. Warren Buffet has had enough. Set yourself up to be patient. If you are naturally impatient, make many consistent bets across the spectrum, which appear random to the computer algorithms, which will trigger cascading action, to keep you busy.
You are not going to out-patience small labor. It has seen many capital regimes across the demographic acceleration half-cycle. From the perspective of small labor, that old pod will open in due course and release the seeds. That’s what happens when capital manufactures a weaker countervailing power; evolution moves forward, and leaves the shell behind, for recycling, in this case the closely held holding pyramids between producers and consumers.
Small labor does not need money. You can go to virtually any home in America, and the people there will need something done and have some kind of surplus that you can employ. Capital is clay; fashion it to meet the need at hand accordingly.
(They said it couldn’t be done last time too, and every time before that.)
Good luck.
This is an excellent example of comparitive historic Macroeconomics, or if you will, a solution applied to an "academic" systemic economic view. This man was bred at the FED, and it shows in his words. His premise is built upon a system that no longer exists. We see similar types of handwaving from other economists, as these experts peer at their crystal ball, conjuring up remidies which do not recognize our "new" realities.
Fundamentally, solutions require that the problem be understood.
Let me explain:
Koo's solutions do not even address the particular problems of one bank holding company let alone the whole system. What he should be saying, is that before committing Trillions of dollars to a possible solution, perhaps we should try a corporate test case first. A dry run based on a real undercapitalized institution. Because if your underlying assumptions are wrong, you have just sold the farm. I put the upcoming CRE price correction to be about $850B in losses. Exactly how are you going to roll over this loss without being insolvent?
Just some phrases;
"Encourage US banks to roll over loans", "Clean up their problems over time", "Difficult to anticipate just how far prices might fall", "Disposal of bank's bad loans".
I would like to ask Mr. Koo, who will be paying for all of this bad debt, to prop up the price on an overpriced asset, in order to keep a failed bank solvent?
Is he proposing the repair of an insolvent banking system at all costs? Yes, yes and yes.
Only a banker would view this as worth while, and an effective use of the peoples capital for generations to come. At times you can see the attitudes and division between the classes in remarks made to perpetuate the status quo. Koo seems to be giving his honest opinion, but through his eyes we get a glimspe of how he really views his fellow Americans.
Is the US tax payer viewed as just so much economic cannon fodder to the experimenting banking elite? If so, then the people are indeed without effective representation in Government.
I fear, all reason has been cast adrift.
Mark Beck
"It was perhaps because of the lack of sufficient explanation that the Democrats experienced an unexpected loss in last week’s special Senate
election in Massachusetts."
This was enought for me to realize Koo is a fool. Extend and pretend will not work because we do not have the savings Japan had, thus cash flow will dry up and BK will come. Look for implosion, not two decade long deflation.
I think the sophistication of the US markets, combined with the Internet (and all these chattering traders and armchair economists) will force the issue more quickly than Western governments have in mind.
"Japan" pioneered a new road. No one could look into the future and know what would happen in a long term government-corporate zombie deflation ... Well, now we know. So, with all the newfangled derivatives, options, ETFs, etc etc, 30 years of "Japan" in the US shows up pretty much immediately in price action.
They can outlaw short selling techniques and instruments, and they can tax certain kinds of gains made in particular circumstances into oblivion, but they can stop the markets from pricing in 30 years of down - one way or another, the price adjustment will come. Fast.
Extend and pretend also worked because Japan makes a lot of stuff that it sells to other countries. We sell Treasuries and other financial gizmo's to others. We will be ok as long as there is a market for our debt. When debt demand dries up we dry up.
Major Selloff Coming?
FO Cetin!
"Recent moves by the US authorities—the use of strict new regulatory proposals to reduce moral hazard complemented by the flexible application of bad loan disposal rules in light of actual conditions—are something straight out of Mr. Volcker’s playbook and suggest that the Obama administration is finally beginning to utilize his experience."
Thank-you ! The operative word here is "disposal".
Koo is rightfully throwing dirt in the face of all the hyperinflation and deficit terrorists such as Peter Schiff, Ron Paul and Marc Faber.
Their timing is just off. If the debt
deleveraging and excess savings recycles
back to Treasuries, the US can borrow at
low rates for five, ten or fifteen years,
keep the Keynesians happy with constant
stimuli (a la Japan) until the debt to
GDP gets so high, it all goes kerblooey.
Sounds like fun, don't it?
Their timing is just off. If the debt
deleveraging and excess savings recycles
back to Treasuries, the US can borrow at
low rates for five, ten or fifteen years,
keep the Keynesians happy with constant
stimuli (a la Japan) until the debt to
GDP gets so high, it all goes kerblooey.
Sounds like fun, don't it?
@Mark Beck
what Khoo fails to mention is that while the Japanese government used the extend and pretend approach from the end of their bubble in 1990/1, the failure of that approach became apparent in 1998/1999 with the collapse of Hokkaido Takushoku and Yamaichi Securities. So finally the government forced banks to sell NPLs in bulk and merge with other banks. The banks are in much better shape now and Japan experienced an expansion from 2003 through 2007. The current economic downturn is contagion from the US collapse.
ucvhost is a leading web site hosting service provider that is known to provide reliable and affordable hosting packages to customers. The company believes in providing absolute and superior control to the customer as well as complete security and flexibility through its many packages. cheap vps Moreover, the company provides technical support as well as customer service 24x7, in order to enable its customers to easily upgrade their software, install it or even solve their problems. ucvhost offers the following different packages to its customers