Tag Archives: Financialism

Clinton on Quarterly Capitalism

Clinton “We need an economy where companies plan for the long run and invest in their workers through increased wages and better training—leading to higher productivity, better service, and larger profits. Hillary will revamp the capital gains tax to reward farsighted investments that create jobs. She’ll address the rising influence of the kinds of so-called “activist” shareholders that focus on short-term profits at the expense of long-term growth, and she’ll reform executive compensation to better align the interests of executives with long-term value.” [Clinton]

I could happily live with this.  She had me at “… where companies plan for the long run.”  Let me start here, and then move forward into a familiar topic on this digital soap box.  I, too, have had enough of “quarterly capitalism,” and it is high time someone offered a cogent proposal to deal with the specter.

First, no one should try to argue that all short term equity and bond purchases are necessarily bad – there are some valid reasons for such trading. However, as in most other things in life it is possible to have too much “of a good thing.”  Let’s face it, high frequency traders aren’t investors – they’re traders, and shouldn’t be confused with those who are putting capital into the distribution system.    Too much short term investing (trading) in the mix and we’re asking for problems, three of which from the investment side are summarized by PragCap:

    1. A short-term view tends to result in account churning, higher fees, higher taxes and lower real, real returns.
    2. A short-term view often results in reacting to events AFTER the fact rather than knowing that  a well diversified portfolio is always going to experience some positions that perform poorly in the short-term.
    3. Short-term views are generally consistent with attempts to “beat the market” which is a goal that most people have no business trying to achieve when they allocate their savings.

If short term investing isn’t good on the investor’s side of the ledger, it’s not good on the corporate side either.  Generation Investment Management (UK) issued a report in 2012 on “Sustainable Capitalism,” [pdf] that emphasizes this point:

“The dominance of short-termism in the market, often facilitated and exacerbated by algorithmic trading, is correlated with stock price volatility, fosters general market instability as opposed to useful liquidity and undermines the efforts of executives seeking long-term value creation. Companies can take a proactive stance against this growing trend of short-termism by attracting long-term investors with patient capital through the issuance of loyalty-driven securities. Loyalty-driven securities offer investors financial rewards for holding a company’s shares for a certain number of years. This practice encourages long-term investment horizons among investors and facilitates stability in financial markets, therefore playing an important role in mainstreaming Sustainable Capitalism.”

Or, put more succinctly, short-term vision creates market volatility (big peaks and drops) which makes our stock markets more unstable, and undermines executives who are trying to create companies with staying power.  Instability and volatility improve the prospects for traders but not for investors, and not for the corporations and their management.

If we agree that “quarterly capitalism,” or “short-termism” isn’t a good foundational concept for our economy – from either the investors’ or the company’s perspective, then what tools are available to make long term investing more attractive, and to help corporations seeking “patient capital?”

rats rear end One tool in the box is the Capital Gains Tax. If only about 14% of Americans have individual investments in “The Market” [cnbc] why should anyone give one small rodent’s rear end about the Capital Gains Tax structure? 

Because:  The present capital gains tax structure  rewards investment transaction income more than on earned income. If we are going to allow this lop-sided approach, then there has to be some economic benefit in it for everyone?  The current system:  

“Capital gains and losses are classified as long term if the asset was held for more than one year, and short term if held for a year or less. Taxpayers in the 10 and 15 percent tax brackets pay no tax on long-term gains on most assets; taxpayers in the 25-, 28-, 33-, or 35- percent income tax brackets face a 15 percent rate on long-term capital gains. For those in the top 39.6 percent bracket for ordinary income, the rate is 20 percent.” [TPC]

Thus, if one’s income is “earned” by trading assets then the tax rate is 20% at the top of the income scale, but if the income is earned the old fashioned way – working for it – the rate could be 39.6%.  This is supposed to incentivize investment.  But note the definition of a “long term asset,” as one held for more than 12 months… that’s right: 12 months. 

Contrast that definition of a long term investment with the Clinton proposal:

Clinton Cap Gains Tax ChartNotice that in Secretary Clinton’s structure the combined rate on capital gains moves from 47.4% for those “short term” investments, down to 27.8% if the investor holds the assets for more than six years.  Five and six years fits my definition of “long term” much better than a “little over 12 months.”

Thus we have an incentive for longer term investments, which means less instability and less volatility.  This seems a much better plan to practice “Sustainable Capitalism.”

rats rear end

But, what of the executive compensation packages that are tied to short term stock prices?   Yes.  That’s a problem. [NYT] And yes, President Bill Clinton’s attempt to rein in executive pay back-fired. However, Secretary Clinton has proposed legislation to provide shareholders a vote on executive compensation, especially on benefit packages for executives when companies merge or are bought out. Her proposal would have created a three year “claw back” period during which the SEC could require CEOs and CFOs to repay bonuses, profits, or other compensation if they were found to have overseen – or been intentionally involved in misconduct or illicit activity.  Granted that doesn’t cover the entire landscape of corporate misadventure, but this could be combined with the following excellent suggestion for amending the tax code:

“Instead, Section 162(m) could be rewritten to allow a deduction for compensation paid to any employee in excess of $1 million only if the compensation is paid in cash, deferred for at least five years and unsecured (meaning that if the company goes bankrupt, the executive would not have a priority over other creditors). This approach would encourage corporate executives to act more like long-term bondholders and obsess less about short-term stock price movements.” [NYT]

Every bit of “encouragement” might help.  I’d be very happy to see CEOs thinking like long term bond holders (if long term means more than 13 months) and less like the traders/gamblers in the Wall Street Casino.

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Filed under Clinton, Economy, financial regulation, Hillary Clinton, Politics, Taxation

Wall Street May Not Be The Enemy: It’s the friends we need to watch

“Wall Street” is an extremely elastic catch phrase, useful for politicians of all stripes.  For example, we have Senator Dean Heller (R-NV) reminding us at every possible moment that he “voted against the bail out.” And, we have politicians from the other side of the aisle excoriating the traders for all the ills of modern America.  Both are off the mark.

Wall Street sign

First, beware the thinly veneered populism of Senator Heller.  Yes, he did vote against the bailout – an extremely safe vote at the time – but, NO he hasn’t stopped being the Bankers’ Boy he’s always been.  Let’s remember that while he was offering himself as the Little Guy’s Candidate he was voting on June 30, 2010 to recommit the Dodd-Frank Act to instruct conferees to expand the exemption for commercial businesses using financial derivatives to hedge their risks from the margin requirements in the bill.  Then, on June 30, 2010, he voted against the conference report of the Dodd-Frank Act.  Heller wasn’t finished.

In 2011 he and then Senator Jim DeMint (R-SC) introduced S. 712 – a bill to repeal the Dodd-Frank Act.

“What S. 712 does is to (1) repeal measures which require banks to have a plan for orderly liquidation (another word for bankruptcy), (2) repeal requirements that banks keep records of transactions which would need to be transparent in case an “orderly liquidation” is in order, (3) repeal the establishment of an oversight committee to determine when a bank is becoming “too big to fail,” and is endangering the financial system — an early warning system if you will.  The new requirements governing (4) Swaps would also be repealed, along with the (5) Consumer Protection bureau.” [DB 2011]

Few could have been more obviously promoting the interests of Wall Street traders than Heller and DeMint. [DB 2012]  Few could have been more readily apparent in their enthusiasm to protect the financialists from the provisions of the Dodd-Frank Act including the Volcker Rule.

Volcker Rule

A word about the Volcker Rule:

“The Volcker Rule included in the Dodd-Frank Act prohibits banks from proprietary trading and restricts investment in hedge funds and private equity by commercial banks and their affiliates. Further, the Act directed the Federal Reserve to impose enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities. Congress did exempt certain permitted activities of banks, their affiliates, and non-bank institutions identified as systemically important, such as market making, hedging, securitization, and underwriting. The Rule also capped bank ownership in hedge funds and private equity funds at three percent. Institutions were given a seven year timeframe to become compliant with the final regulations.” [SIFMA]

Yes, Senator Heller et. al., if the Dodd-Frank Act is repealed then the financialists on Wall Street may go back to gleefully trading all manner of junk in all kinds of packaging with no limits on bank ownership of hedge and private equity funds.  Let’s remind ourselves at this point that capitalism works.  It’s financialism that’s the problem.  Under a capitalist form of finance resources (investments) are moved from areas (funds) with a surplus to areas (businesses) with a scarcity of funds.  Under a financialist system capital (money) is traded for complex financial instruments (paper contracts) the value of which is open to question.  Not to put too fine a point to it, but the “instruments” seems to have whatever value the buyer and seller agree to whether the deal makes any sense or not.  The Dodd-Frank Act doesn’t forbid “financialism” but it does put the brakes on.

Notice, it puts the brakes on, but doesn’t eliminate the old CDOs.  Nor does it prevent the CDO with a new name: The Bespoke Tranche Opportunity.  It works like this:

“The new “bespoke” version of the idea flips that business dynamic around. An investor tells a bank what specific mixture of derivatives bets it wants to make, and the bank builds a customized product with just one tranche that meets the investor’s needs. Like a bespoke suit, the products are tailored to fit precisely, and only one copy is ever produced. The new products are a symptom of the larger phenomenon of banks taking complex risks in pursuit of higher investment returns, Americans for Financial Reform’s Marcus Stanley said in an email, and BTOs “could be automatically exempt” from some Dodd-Frank rules.” [TP]

Zero Hedge summed this up: “This is the synthetic CDO equivalent of a Build-A-Bear Workshop.” We’re told not to worry our pretty little heads about this because, gee whiz, CDOs got a bad reputation during the Big Recession of 2007-2008, when they were just “hedging credit exposure.”  Yes, and ARMs got a bad reputation when they were just putting people in houses… Spare me.

And, we’d think that after the CDO debacle of 2007-2008, some one might have learned something somehow, but instead we get the Bespoke Tranche Opportunity and a big bubble in really really junky bonds.   That would be really really really junky bonds:

“Junk bonds are living up to their name right now. As we have noted in the past, the lowest-rated junk bonds may have inflated a $1 trillion bubble at the bottom of the debt market. The thing is, it never should have gotten that way.” [BusInsider]

Indeed, back in the bad old days no one could issue CCC bonds.  Now, we have Central Banks supporting Zombie Companies, low yield Treasuries making investors look to more “speculative” debt, and more demand for high yields meant that purveyors of Junk found a market for their garbage. [BusInsider] And, of course, someone out there is hedging all this mess.

Lemmings Here we meet the second problem with financial regulation in this great country.  Not only would the Bankers’ Boys like Senator Heller like to go back to the days of Deregulation, but the Financialists are hell bent on Yield! High Yield!  Even if this means supporting Zombie Companies which should probably just die already; even if this means allowing the sale of Bespoke Tranche Opportunities; and, even if this means selling bonds no one would touch only a few years ago.  The quarterly earnings report demands higher yields (As in: What Have You Done For Me In 90 Days Or Less) and investors jump like lemmings off the cliff.

We’ll probably keep doing this until someone figures out that in these schemes the chances are pretty good that “getting rich fast” more often means going broke even faster.  Thus the financialists package Bespoke Opportunities and C (for Crappy) Bonds.

Said it before, and will say it again:’  What needs to be done is —

  • Continuing to restrict the activity of bankers who want to securitize mortgages, under the terms of existing banking laws and regulations.
  • Continued implementation of the Dodd-Frank Act.

To which we should add, “restrict the creation and sale of artificial “investment” paper products which add nothing to the real economy of this country, and instead soaks up investment funds, and creates Bubbles rather than growth.

 

Read more atSIFMA, “Volcker Rule Resource Center, Overview.” Desert Beacon, “Deregulation Debacle,” 2012.  Desert Beacon, “Full Tilt Boogie,” 2011.  Think Progress, “High Risk Investments,” 2015.  Zero Hedge, “The Bubble is Complete,” 2015.  Bustle, “Is the ‘Big Short’ Right?, 2016.  Bloomberg News, “Goldman Sachs Hawks CDOs,” 2015.  Huffington Post, “Big Short, Big Wake Up Call,” 2016.  Market Mogul, “BTO, Deja Vu” 2016.  Business Insider, “Trillion Dollar Bubble,” 2016.  Business Insider, “Bubble Ready to Burst,” 2016.  Seeking Alpha, “OK, I get it, the junk bond miracle rally is doomed,” 2016.  Wolfstreet, “CCC rated junk bonds blow past Lehman moment,” 2016.

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Filed under Economy, financial regulation, Nevada politics, Politics

Break Up The Bank Bandwagon, or how to be unhelpful?

Break Up Big Banks bandwagon  Much of the debate on the Democratic Party side of the primary silly season is related to Wall Street – easy to demonize, more difficult to understand, and altogether more complicated than  sound-byte sized portions of political coverage will allow.  In other words, H.L. Mencken was probably right: “For every complex problem there is an answer that is clear, simple, and wrong.”  Let’s start with the proposition that our economic issues can be resolved by breaking up the large banks.

Yes, 2007-2008 still stings. The Wall Street Casino that created financial market chaos was especially harmful in Nevada, one of the “sand states” in which the real estate bubble was augmented by avarice and the Wall Street appetite for securitization of highly questionable mortgage lending products, and practices.  Certainly, the call to break up the big banks resonates with a significant portion of the national as well as the Nevada population.   However, this “clear and simple” solution may not be the panacea on anybody’s  horizon.  Here’s why:

From a consumer’s prospective, big is not always “badder.”  I, for one, like the idea that my debit card is accepted in convenient locations throughout the country.  I’m technologically challenged so I don’t avail myself of many advances in remote deposits, and other mobile banking services, but I sympathize with those who do.  I also like making my primary banking decisions for myself, and I’m not – as a consumer/customer – particularly happy about the prospect of being dropped by my bank because it is “too big”, i.e. it has too many customers.   And, here we come to a second issue.

How do we define “big” and “too big?”  If we are defining “big” in terms of the amount of deposits then JPMorganChase, Bank of America, Citigroup, Wells Fargo, and USBankcorp  (the top five in total deposits) are targets for the break up.  Thus, if we “break up” any or all of these five based on the “size” – either the total assets or the total value of deposits – then how many customers must deal with the transition costs of moving their bank accounts?

Do we mean breaking up as in reinstituting the old Glass Steagall Act, and separating commercial and investment banking?  This action wouldn’t limit the banks based on assets or deposit values, but instead would constrict their banking activities.  This has some appeal, perhaps more so than just whacking up banks based on the size of their assets and deposits, but this, too, opens some questions.

One set of questions revolve around what we mean by “banking services?”  For example, if a person has an account with Fidelity investments, and one of the services associated with that account is a debit card or a credit card, then does this constitute a “bank-like” service?   There are banks offering brokerage accounts, and insurance services – reinstating the provisions of Glass Steagall would mean a customer would have to give up some services to retain others – or perhaps be dropped as the financial institution made its decision as to the camp it was joining – the commercial or the investment one.  If a person likes the idea of consolidating investment and commercial services, and doesn’t – for one example – have much if any need for things like certified checks, then an investment account with some “bank like” services could be the best option. For others, who like the idea of a “life-line” bank and the notion that some other ancillary services may come with it, then the traditional route would be more enticing.  However much a person may like the sound of “bring back Glass Steagall” there are situations in which this would mean some significant inconvenience and costs for customers and clients.

Another point which ought to be made is that all too often Glass Steagall and the Volcker Rule get mashed together as if they meant the same thing, or something close to it.   Let’s assume for the sake of this piece that what we all really want is a banking system which does not turn deceptive practices into major revenue streams, and which doesn’t allow banks to use deposits to play in the Wall Street Casino.

If this is the case, then it might well do to let the Dodd Frank Act have a chance at more success.  For all the political palaver about this 2010 act, it has been successful.  As Seeking Alpha explains:

“Dodd-Frank did several things that promoted the culture change and reduced the likelihood that a large American bank will fail: (1) annual stress tests that forced a focus on risk management not only among risk managers but at every level of the bank; (2) establishment of the Consumer Finance Protection Board (CFPB), which has primary responsibility for consumer protection in the financial field without the conflicts of interests naturally experience by the banking regulators; (3) the Volcker Rule that removed proprietary trading from bank holding companies, thereby facilitating the cultural reform that I referred to above, and reducing the level of risk in banks’ assets; (4) enhanced capital requirements for large banks, which addressed the major weakness that permitted mortgage losses to turn into a financial debacle in 2008; and (5) living will requirements for large banks, which while perhaps unnecessary, are having the salutary effects of increasing liquidity in stressful situations and decreasing organizational complexity and thereby making big banks more possible to manage.”

In short, if the object is to make banks safer, better managed, and less likely to get themselves into the liquidity swamps of the pre-Dodd Frank era, then the act does, in fact, make the grade.   Those who would like a return to the bad old days, when banks could wheel, deal, and deceive, will find solace in the slogans of many Republican politicians calling for the repeal of the Dodd Frank Act.

Yet another set of questions relate to what breaking up the banks is supposed to accomplish; or to accomplish beyond Dodd Frank.  It’s easy to say that if a bank is too big to fail it is too big to exist. However, we still haven’t dealt with exactly what it means to be “too big.”  Like it or not, we do have a global economy.   Let’s take one example: “Global businesses want global banks. This makes intuitive sense for companies that manufacture, distribute, and sell products globally. 3M, for example, derives a majority of its sales from outside the United States, operates in more than 70 different countries, and sells products in over 200 countries.” [Brookings]

What does 3M do? Operate through a system of regional banks? (and increase costs)  Or, does 3m start using a foreign bank?  What does this do to American market share in global banking? And, we’re not just talking about 3m, what about Intel (82.4% sales overseas), Apple (62.3% sales overseas), General Electric (about 52% sales overseas in Africa, Asia, and Europe), Boeing (58.3% sales overseas), and Johnson & Johnson (53.2% sales in Europe)?  [AmMUSAToday]

At the risk of sounding too nuanced for blog posts of a political bent, I’d offer that the Break Up The Banks bandwagon has been on the road long enough, and has been a distraction from issues that have cost the American middle class (and those trying to achieve that level of financial security) dearly in the last 40 years.

Breaking up the big banks will not assist in the organization of American workers so that the power of the owners is balanced by the power of the workers.   What we DO need are government policies which support the unionization of employees. Policies which increase the minimum wage. Policies which improve wages and working conditions. And, policies which make education and training affordable.

Breaking up the big banks will not assist in establishing fair trade with the rest of the world. What we DO need are policies which promote the interests of American manufacturing, by American workers, in American plants.  We need policies which affirm our support for environmental responsibility.  We need policies implemented which promote modern technology and modern energy sources; with American ingenuity and labor.

Breaking up the big banks will not reform a financial system which too often rewards its components for short term gambling as contrasted with long term financial vision.  It will not replace the transformed and corrupted Shareholder Theory of Value among managers.  What we DO need is a system which rewards investment and replaces the fantasy of “Trickle Down” economics.

Perhaps it’s time to find a new bandwagon?  One that’s going in the desired direction, and not merely headed toward a successful election day performance?

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Filed under banking, Economy, financial regulation

No Free Lunch No Free Market

“The market is a human creation. It is based on rules that humans devise. The central question is who shapes those rules and for what purpose,” Reich concludes. “The coming challenge is not to technology or to economics. It is a challenge to democracy. The critical debate for the future is not about he size of government; it is about whom government is for.” [Robert Reich]

Bingo!  Adam Smith, in Wealth of Nations, offered the Invisible Hand – and economists have been grabbing it ever since. IF, they mused, if all buyers and sellers were truly free then markets would achieve equilibrium and all will be well.  Everyone will act in their own self-interest, and the competition induced will benefit all.  There will be an equilibrium price – for anything – when the demand and the supply are equal.  However, there’s always been a flaw in this argument.

The cracks begin showing when it’s noted that “price” and “value” are not the same thing.  Truly, there is a “market value,” i.e. the price at which an asset would trade in a competitive auction setting, but this isn’t a definition of value.  Value is a qualifier we assign to things that are beneficial, significant, advantageous, or useful. Let’s digress a moment and review why this differentiation between price (even market price) and value is important.

Finance works best when it acts as the conduit for moving capital from places of surplus to places of scarcity.  In the simplest possible terms, finance allows the money in someone’s savings account to be invested in someone else’s business enterprise.   The owner of the savings account benefits from the earnings; the owner of the business enterprise benefits from the extra cash to expand his operations.   Not to put too fine a point to it, but when finance doesn’t move capital from surplus to scarcity then it’s not finance – all too often it’s merely gambling.

Additionally we should note that the the system itself is a gamble.  If I put in a $1000 investment in Widgets International Inc. then I’m betting my shares will either pay dividends, gain in price, or preferably both.  And now to return to “value.”  I’m taking a risk with my money, but I’m also hoping to invest in something of value – perhaps WI Inc. manufactures the best product on offer which helps nurses prevent bed sores from afflicting their patients.  I have $1000 on hand (surplus), Widgets International Inc. needs to expand to meet the demand for its product (scarcity) and finance allows the conduit to work toward mutual benefit.

However, what if I behave as though my $1000 really isn’t surplus? What if I make a side bet that the price of Widget International will go down?  In this instance I am buying a “financial product” which has precious little to do with the product the company is manufacturing, a bit more to do with how the company is managed, and a great deal to do with how a hedge fund can be used to “manage wealth.”   Or, to put it another way – to reduce risk.  Money (capital) slathered about in an effort to reduce risk isn’t part of that conduit for moving capital from surplus to scarcity, and it (as we’ve seen) is fraught with consequences.  The word “behave” is the key term.

If the concepts of price and value are problematic in a discussion of American economics, then our Economic Man as described by Adam Smith is also at issue:

“Economic Man makes logical, rational, self-interested decisions that weigh costs against benefits and maximize value and profit to himself. Economic Man is an intelligent, analytic, selfish creature who has perfect self-regulation in pursuit of his future goals and is unswayed by bodily states and feelings. And Economic Man is a marvelously convenient pawn for building academic theories. But Economic Man has one fatal flaw: he does not exist.” [Harvard]

The “convenient pawn” became the cornerstone of neoclassical economic theory.  The theory elevated the pawn, and the pawn returned the compliment by rationalizing everything from child labor to global out-sourcing.   The Magic Market would “equalize” everything, and all would be well.  In fact, there is no such thing as a free lunch, and there is no such thing as a free market.

In fact, if we skip the jargon (such as a trader saying “I make markets”) what we understand is that traders in the financial sector are sales personnel who have products to sell to prospective buyers.   Last time we looked those sales personnel, the buyers, and the sellers were all human beings – or human beings managing various and sundry enterprises.  Even if  trading is  computerized, someone – some human being – had to program those computers, which still have no innate capacity to count beyond 0 to 1.  There are some benighted souls who believe that if we have just enough “self monitoring,” and more elegant algorithms those messy, inconsistent human beings will no longer screw up the financial markets.  Again, we’d have to ask, “Who is writing those algorithms?” And,  how much “self-monitoring” is good enough?   There are markets, but they are certainly not free of human beings – humans being the brokers, the agents, the buyers, and the sellers.

“Who shapes the rules, and for what purpose?”

We have rules for all manner of human transactions.   When sharing a meal we don’t eat the mashed potatoes with our hands. When getting an invitation with an “RSVP” we don’t wait until after the event to respond.  A soccer match is played with only 11 on each side.  The FAA has rules for take offs and landings to minimize the risk of collisions.   And we have rules for financial markets.   Why? Because a market is simply a transaction between two human agents – buyer and seller – no matter how computerized.

One thing we did learn during the debacle of 2007-2008 was that some investment houses were selling products on which they could calculate a price but they were incapable of determining the product’s value. In some instances the artificiality of the product and its distance from anything tangible, such as a home mortgage, made it impossible to determine what the product was actually worth.  All too much of the Stuff had a “market price” but turned out to have no value in the last analysis.  Thus the demise of Lehman Brothers.

There are some questions at the intersection of economics and politics in 2016:

  • Do we want an unfettered market for financial products? Do we want rules advantageous to the sellers of products in the financial markets? Do we want rules advantageous to the buyers in financial markets? Do we want rules which protect the general public from irresponsible or anti-social behavior on the part of the buyers and sellers?
  • Do we want those who write the rules for the transactions in the financial markets to have the interests of the general public in mind?
  • Do we support agencies which enforce rules designed to restrain the behavior of buyers and sellers in the financial markets?
  • Do we encourage investment or speculation?
  • Should our system of taxation reward work or wealth?

We can focus down on a single issue illustrative of the general regulatory environment – this past July a Senate Committee was taking testimony on a proposed rule that investment advisers place the client’s interest first when deciding upon investments in retirement accounts. One member of the panel offered that the rule would “cost” the investors some $80 billion because financial firms would simply raise fees to make up the profit differential if they couldn’t put their own interests before the interests of their retirement account clients. [Litan pdf]  However, what didn’t go unchallenged was that the study cited by the panel member was financed by the Capital Group, a corporation which definitely stands to benefit if the proposed rule from the Department of Labor is not implemented. [BostonGlobe]

The question highlights the element of freedom:  Is the investment adviser free to purchase elements in a portfolio which enhance the profitability of his firm, or must the adviser give first priority to those investments which will best serve the clients’ interests?  Is the client free to assume his agent (investment adviser) is acting in his or her best interests?  Is the client free to know how investment portfolio decisions are made?  It isn’t a question of whether or not the “market” is “free,” it’s a question of who is free to do what.

Consider for a moment a situation in which a large employer has selected a financial advisor to manage its retirement program.  There are three human agencies at play: the employer, the employees, and the financial advisors.  And, because there are human beings involved we should assume that these relationships are contractual. If the financial advisors are placing their own interests above those of the retirees, then must the employer seek to break the contract? Under what conditions and at what expense?  Are the employees free to take their contribution elsewhere? But, what of the employer’s contributions?   In the rarefied theoretical academic version of a Free Market this would never happen – all the pawn would march neatly across the board. However, this isn’t a theoretical academic version – this is real life – and if the financial advisor is “free” to act in his or her firm’s interest, what happens to the contributions of the employer and the employee? If they act in their self interest then they must cut ties with the advisors.  If the adviser is “free” to act in his or her self interest the employer and the employees lose value in their retirement investments; if the employer and employees are “free” to act in their own self interest the adviser loses the account.   We are left asking: Who is going to write the rules of our economic game? Or to put it in economic-political terms:

“The most important political competition over the next decades will not be between the right and left, or between Republicans and Democrats. It will be between a majority of Americans who have been losing ground, and an economic elite that refuses to recognize or respond to its growing distress.”  [Reich]

References/Recommended Reading:  John Lanchester, “Money Talks: Learning the Language of Finance,” New Yorker, 8/4/2014.  Craig Lambert, “The Marketplace of Perceptions.” Harvard Magazine, March-April 2006.  Michael Blanding, “The Business of Behavioral Economics,” Forbes, August 2014.  Adam Ozimek, “The Future  Irrelevancy of Behavioral Economics,” Forbes, September 2015.  Dan Ariely, “The End of Rational Economics,” Harvard Business Review, July-August 2009.  Paul Krugman, “How did economists get it so wrong?” New York Times Magazine, September 2009.  Noah Smith, “Finance has caught on to behavioral economics, Bloomberg View, June 2015.  Robert Litan, Senate Subcommittee on Employment and Workplace Safety, Senate HELP, July 21, 2015. (pdf) Annie Linsky, “Warren…Brookings Institution,” Boston Globe, September 29, 2015.  Robert Reich, “How the pro-corporate elite has rigged the system against the rest of us,” Alternet, September 29, 2015.

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Filed under Economy, financial regulation

The Big Catch: Pay Us and We’ll Do The Right Thing

Banker Sorry A small group of ultra-wealthy individuals are getting alarmed by the widening income gap in America. [NYT]  Their cries hit some major news outlets and were analyzed in others. [Salon] [NationalMemo] And, as we might expect there’s a catch:  Corporate Welfare.

“There is a way to start. Government can provide tax incentives to business to pay more to employees making $80,000 or less. The program would exist for three to five years and then be evaluated for effectiveness.

The benefits would be huge. People would have more money to spend, and many would no longer need government help. That would mean a reduction in entitlements.” Peter Georgescu, CEO Young & Rubicam

Yes, you and many others read this correctly – CEO’s like Ken Langone (Home Depot founder) and Georgescu and Paul Tudor Jones are worried about the possibilities of either peasants with pitch forks or declining sales.  And, no, there is nothing new here. Nothing that ventures too far from the business model calling for tax breaks, cuts, incentives, etc. for corporations to locate in beautiful downtown West Buffalo Fart. 

If the suggestion weren’t so demonstrably callous it would be ludicrous and risible.  First, there’s nothing preventing companies from doing this without benefit of yet more tax cuts for the already wealthy corporations – or, is there.  Welcome back to the world of Shareholder Value!

Wal-Mart recently announced plans to increase company-wide minimum wage to $9 per hour, and to increase pay to $10 per hour for many employees by February.  And, then it bowed to the First Law of Staffing:

The company has also increased store staffing at peak hours so shoppers move quickly through checkout lines and see stocked shelves, said executives during the company’s quarterly earnings call earlier in August. [MarketWatch]

The old First Law is that you have enough employees if you can satisfy customer demand and maintain acceptable levels of client or customer service.  This should have been good news all around – except it wasn’t.

Those efforts contributed to a 15% drop in second-quarter net income compared with a year earlier, said executives. [MarketWatch]

What did Wall Street do?  The Street didn’t like that drop and punished Wal-Mart accordingly.

walmart stock

That’s right… it didn’t matter to investors if there were happier employees at the giant retailer; it didn’t matter that customers didn’t have to wait in the cashier’s line so long.  It mattered that the second quarter net income report was down on a YOY basis.

This is one of the more egregious contemporary examples of the Shareholder Value Monster trampling on any corporate plans to do what businesses should do best – meet customer demand with an acceptable level of customer/client service.

As long as the Financialists continue to steer the corporate ships details like customer service and employee retention – which used to inform management policy – will take a back seat to the quarterly earnings reports. So, Wal-Mart caved to the financial side and announced to its +/- 4,600 store managers that it would return to “pre-determined” staffing levels (back to the old levels), and cut employee hours to trim expenses.

CEO’s, of such organizations like Wal-Mart, are now trapped in a device of their own creation. If they attempt to offer higher wages (or improve the quality of customer service), both of which have long term benefits;  they are punished by the Shareholder Value oriented short term investors and their stock prices drop. If the stock prices drop so does executive compensation.  Should the stock prices drop too far in the estimation of investors the CEO can be gliding off on his or her Golden Parachute into the corporate sunset.

Thus, it isn’t surprising that the CEOs are anxious to have some taxpayer assistance “doing the right thing” (increasing wages) in the long term because the short-sightedness of the Shareholder Value Theory of Management has translated into a situation in which long term benefits are sacrificed on the altar of short term profitability.

The paycheck pinch: One of the CEO’s angling for government (read: taxpayer) assistance in decreasing the widening income gap is Ken Langone (Home Depot founder). Sales and revenue for Home Depot in 2011 was $68 billion, increasing to $83.1 billion in 2015. 2011 gross income was reported as $21.69 billion, increasing to $27.3 billion in 2015. Its current domestic income tax liability is $3.26 billion, it has a deferred domestic tax liability of $116 million. [Marketwatch]  And, Mr. Langone agrees that corporations should be given tax breaks in order to pay more to the employees of concerns like Home Depot.

There are some 20 Home Depot stores in Nevada, most in the Las Vegas area, some in Reno/Sparks, and a couple in what is understood as rural Nevada, Elko and Pahrump.  There are plenty earning less than $80,000 per year in these operations.  The wages for a sales associate range from $8.67 to $13.95; cashiers earn from $7.93 to $10.83; department supervisors earn between $12.01 to $18.91; and, retail sales associations can make from $8.68 to $17.16.  (See Payscale.com as information updates)

These salaries have tax implications in Nevada as a result of 2015 legislation:

The Modified Business Tax (MBT) is currently imposed on businesses other than financial institutions in the amount of 1.17 percent of wages paid above an exemption level of $85,000 per quarter. Financial institutions pay a higher rate of 2 percent. The MBT rate had been scheduled to decline to 0.63 percent for nonfinancial institutions beginning July 1, 2015. The MBT base has been narrowed significantly since the tax’s introduction in 2003, with exemption level increases in 2011 and 2013.

After significant debate over whether to expand the MBT or adopt a new gross receipts tax, the final plan includes elements of both options. The MBT will increase from 1.17 percent to 1.475 percent for most businesses, effective July 1, 2015. Mining companies will join financial institutions in paying the higher 2 percent tax rate. The MBT base is broadened by reducing the exemption to $50,000 per quarter, increasing the estimated number of MBT taxpayers to 18,607, up from the 13,492 paying the tax at present.[2] An earlier proposal to remove the MBT exemption for employer-provided health care costs was dropped.

After the first year, taxpayers may deduct up to 50 percent of their Commerce Tax payments over the previous four quarters from their MBT liability. Moreover, should total revenue from all business taxes exceed projections by more than four percent, the MBT rate will be adjusted downward, though to a rate no lower than 1.17 percent. [TaxFoundation]

Note the last paragraph, even with a compromise between larger and smaller corporations in Nevada, there’s still a bit of a tax break allowed on the Commerce Tax depending on the “previous four quarters.”  We’re probably not looking at any massive tax breaks in the 2015 legislation, but we need to add these to the $88 million in breaks given to Apple [MJ]  and the state’s generosity to Tesla in the form of $1.25 billion. [RGJ] In the latter deal the understanding was that Tesla would pay an average of $25/hr.

Not to put too fine a point to it, but corporations are quite used to having government entities, be they Apple in Nevada and North Carolina, Tesla in Nevada, or the bargaining in the 2015 Nevada legislature over how to maintain tax revenues, engage in tax-payer subsidies for corporate operations.  Thus, it’s not the least bit surprising the CEOs would ask for tax-payer subsidization for payroll increases.

It would be a reasonable conjecture to conclude that Home Depot and other Big Box firms like Wal-Mart might be willing to adopt staffing policies which increase employee wages and provide for better customer service –IF and ONLY IF there are further tax breaks associated with those policies which will please the short-term oriented Shareholder Value financialists who pull on the purse strings.

Hanging the Wash? Consider what the CEOs are proposing – it’s all good: “The benefits would be huge. People would have more money to spend, and many would no longer need government help. That would mean a reduction in entitlements.”  But wait, there’s some loaded language herein.  Programs like SNAP, and subsidized housing, or similar assistance to low wage earners are NOT entitlements. These are situational support programs for people in need.  Social Security/Medicare, into which people have paid for decades are entitlements – you get what you paid for.

Loaded language aside,  What happens when the corporations raise wages, projected to reduce the number of people receiving social assistance, but the revenues for that social assistance are reduced by the tax breaks given to the corporations in order to support those very same wage increases? The tax payers are on the hook either way – they either pay for the social assistance programs which subsidize low wages,  or they subsidize the tax breaks to corporations to reduce the need for the social programs?  It’s a win-win for the corporations, and a lose-lose for the average American.

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Filed under Economy, Nevada economy, Nevada legislature, Nevada politics, nevada taxation, Politics

SLABS: How to make money off someone else’s private student loan

SLABS

SLABs, and no we aren’t talking about the stuff of which patios are made, or the tiles that can be laid on kitchen floors. Nor, are we talking about some Silicon Valley laboratory firm.  Let’s focus on Student Loan Asset Based securities.  Yep, “securitized” assets – like mortgages, auto loans, credit card receivables, etc.  We do remember the mortgage thing? Right?

SLABs were hot in 2013. [WSJ]  In fact, see if you can make sense of the following description:

“Student loans are souring at a growing rate—and investors can’t seem to get enough. SLM Corp., the largest U.S. student lender, last week sold $1.1 billion of securities backed by private student loans. Demand for the riskiest bunch—those that will lose money first if the loans go bad—was 15 times greater than the supply, people familiar with the deal said.” [WSJ]

Why would investors be banging on the doors for those loans which are the most likely to go into default?  I think we’ve seen this movie before, and the ending (2007 – 2008) wasn’t pleasant for anyone.

The Basic Materials

Once upon a time Sallie Mae or SLM, was a government sponsored lending firm specializing in student or educational loans.  That was the case until 2004 when Sallie Mae went private and it’s now a publicly traded private sector corporation. SLM securitizes private education loan by selling them to the SMB Private Education Loan Trusts. The Loan Trusts (2014 and 2015) show “issuance details” online (here’s 2014-A)  There was $382 million in the August 7, 2014 records; divided into five categories with varying rates of return. Scrolling down we find the ‘master servicer’ as Sallie Mae Bank, the sub-servicer as Navient Solutions, Inc., the indentured trustee being Deutsche Bank National Trust Company, and the underwriters Credit Suisse and the Royal Bank of Scotland. [SLM]   Navient Solutions, Inc. is simply the name adopted in 2014 for Sallie Mae’s loan management, servicing, and asset recovery operation. [Bloomberg]  An ‘indentured trustee’ is:

“A financial institution with trust powers, such as a commercial bank or trust company, that is given fiduciary powers by a bond issuer to enforce the terms of a bond indenture. An indenture is a contract between a bond issuer and a bond holder. A trustee sees that bond interest payments are made as scheduled, and protects the interests of the bondholders if the issuer defaults.” [Investopedia]

The underwriters, in this instance Credit Suisse and RBS, are the firms which act as sales personnel for the bonds bases on securitized private student loans.  So, we have SLM issuing the bonds, Deutsche Bank National Trust acting as the agency responsible for bond registration, transfer, and payment of bonds, while Credit Suisse and RBS are the ones selling the bonds.   Sounds impressive, however those private loans comprise only about 8% of the total student loan market – the remaining 92% are Federal Stafford and PLUS program loans.  But – the numbers are still sufficiently high to interest SLM, Deutsche Bank, Credit Suisse and RBS, because there’s about $92 billion involved in the private student loan market. [PSL]

Slabs without much mortar

Recall for the moment what got Wall Street in major trouble during the Housing Bubble.  Investment firms issued bonds, and then played with derivatives based on those mortgage based bonds, without being all that sure the loans were going to be paid off.  Thus, it was extremely difficult, and in some instances impossible, to calculate what the bonds were actually worth. Enter the credit rating agencies who (for a nice fee) stamped AAA+++ on what should have been recognized as piles of garbage; the investors couldn’t get enough of these, so even more garbage piled up as the investment houses bet on whether or not the assets were worth anything.  Enough garbage was included in the piles of paper that the whole pillar of paper crashed.

What’s saving us from the prospect of another bubble of epic proportions is that the market in private student loans is very small – that $92 million is a drop in a very large bucket of corporate and commercial debt. [Atlantic]  Another bit of good news is that because of the Dodd-Frank Act there is more transparency required in dealings in asset based securities.  [SEC]  [WSJ] The bad news is that Republicans in Congress have been wailing for the repeal of the Dodd-Frank Act as “burdensome regulation” of the banking industry.  Or, “make the SEC back off and let us get back to trading asset based securities like we used to in the Good Old Days.”

Who’s holding up the scaffolding?

Another bit of bad news is that while lenders are looking for new customers (students willing to take on private loans) we’re not tracking some important information about those loans.  For example, the default rate for Harvard is less than 2%, while the default rate for the Arizona Automotive Institute is nearly 42%.  [Bloomberg] Interestingly enough, there’s a long list of for-profit educational institutions with default rates higher than 28%. What we don’t need to see are more for-profit training schools encouraging more private student loan debt, debt which someone somewhere hopes will be hedged with private loans more likely to be paid off – because at bottom the funds to pay investors have to come from students paying off the loans.

Don’t panic yet, yes – there’s a hungry market for student loan asset based securities (perhaps in part because some old Federally backed loans were in the pipeline originally) and the market is relatively small albeit subject to some of the valuation mistakes of the Old Investment Houses – the ones who went bust in 2007-2008.   There’s another reason for hope: The Consumer Financial Protection Bureau – the agency the Republicans can’t seem to wait to dismantle. [DB 7/30/14]

One of the provisions of the Dodd-Frank Act was the creation of an ombudsman for student loans which is part of the CFPB.  In the 2014 annual report (pdf)  it’s of interest to note that the biggest problem area was NOT repaying student loans but in getting financial institutions to cooperate with repayment programs and dealing with servicers and lenders (57%). If this sounds like a reprise from the Mortgage Meltdown Days it might be because some of the same actors are involved, at least in terms of complaint volume: JPMorganChase up 56% from 2013; Sallie Mae Navient up 48%; Wells Fargo up 8%.  The annual report indicates problems in the following areas: (1) There is no clear path to avoid default. (2) Proactive outreach from borrowers was too often unsuccessful. (3) When repayment options are made available they are too often too little too late. (4) In some cases repayment options were allowed only after the loan went into default. (5) Short term forbearance options were often associated with processing delays, unclear requirements, and unaffordable fees. (6) Many lenders force a choice between staying in school and repaying the loans.   There is a reason for the Ombudsman’s concern. The Sallie Mae Settlement.

The FDIC announced a settlement with Sallie Mae on May 13, 2014 in which Sallie Mae was charged with (1) inadequately disclosing its payment allocation methodologies to borrowers while allocating borrower payments across multiple loans in a manner that maximizes late fees; (2) misrepresenting and inadequately disclosing in its billing statements how borrowers could avoid late fees; (3) unfairly conditioning receipt of benefits under the SCRA upon requirements not found in the act; (4) improperly advising servicemembers that they must be deployed to receive benefits under the SCRA; and (5) failing to provide complete SCRA relief to servicemembers after having been put on notice of the borrowers’ active duty status.

The Structure

As long as the private student loan market remains a small part of the total structure we can breathe a bit easier about its effect on capital markets. Secondly, the private student loan market has relatively low yields and thus doesn’t get included in most structured derivatives.  Third, the old ‘recourse loans’ (for those with really low credit scores) are a thing of the past, most private loans now take higher scores into consideration. [QuoraWhat will continue to keep investors whole?

  • Continued monitoring of the private student loan market by the CFPB so that loans taken out will continue to be loans paid off, even if this means some reduction in the revenue streams for the bankers.
  • Continued oversight by the SEC and FDIC under the terms of the Dodd-Frank Act so that we don’t return to the Wall Street Casino of old should there be changes in the private student loan market.
  • Improvement in the servicing of private student loans such that there are clear pathways to avoid default; effective and efficient communication between borrower and lender regarding repayment options; and, that this communication happens in a timely manner.
  • Requiring lenders to make all the term of the private student loan clear at the outset including forbearance conditions, and any and all fees associated with deference, late payments or defaults.

The Foundation

From a Wall Street perspective private student loan asset based securities are a niche market, with some revenue potential – enough to keep the big banks interested – however, not with enough total clout to cause major financial displacement should the Quake happen.  And yes, there are some institutions making nice fees for making student loans, selling student loans, securitizing student loans, servicing student loans, and collecting payments on student loans.  Capitalism works, the trick is to keep free market capitalism from becoming casino capitalism and/or financialism.

A more existential question is how to maintain a system in which students are burdened with so much debt (Federal program/Private loan program) that they are deferring consumer purchases which would contribute to the growth of the overall economy.  Deferred student loans can impact mortgage qualifications. [credit.com]  We know this because the  rate of homeownership among those with student debt is 36% below that of unencumbered home buyers, and we’re losing about $6 billion annually in new car buying capacity.  [Forbes]  And, this is not an inconsequential problem:

“Student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008. Balances of student loans have eclipsed both auto loans and credit cards, making student loan debt the largest form of consumer debt outside of mortgages.” [NYFed]

Given some of the trends reported by the NY Federal Reserve’s study of educational loans, how do we make sense of an economic system in which wages and salaries are stagnant while it is taking those from lower and middle income backgrounds longer to repay student loans?  How do we sustain an economy when 29% of borrowers are paying off their loans, while 34% are making regular payments but the balance is increasing, and 20% have reported credit related problems, with another 6% delinquent and 11% in default?

These are not simply economic issues, they are also political as well. Is there the political will to make post secondary education more affordable for more people?  Are we headed toward the privatization of our public institutions of higher education and post secondary training, and is this trend combined with the rising level of student indebtedness creating cracks in our economic foundations?

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Filed under consumers, Economy, education, financial regulation, privatization

Our Thirty Five Years of Mythological Economics

trickle down economics

The only problem with this cartoon version of  Trickle Down economics is that the bird at the top should be getting larger as the years extend.  Likewise, the birds in the middle range should be getting more stressed as they attempt to stay on their middle income perches.  It’s a nice touch that the background is in blue, suggesting we’re about to be washed up in a tide which only serves those who are perched high enough to avoid drowning.

Meanwhile, the  best response to the sentence “A rising tide lifts all boats,” is “Where Are The Customers’ Yachts?”  For those who have not yet read this 75 year old classic – it’s still available, and still germane to American economics.  It was true then, and true now.  The problem is that the financial sector has hijacked significant portions of our economic thinking, in ways that have left us prone to being bedazzled by BS.   Thus, we’d prefer to rail against the Wall Street Casino rather than believe we’ve been following some very foolish advice offered, in turn, by some very foolish, and very self serving,  people. And, there are people challenging the BS rendition of American capitalism.

Those who missed Mrs. Clinton’s speech at the New School (NYC) on our economic challenges can view the C-SPAN broadcast here. (55 minutes)

The initial response from journalists was “Hillary’s bashing Wall Street.” [Reuters] This makes for a convenient headline – Beltway Shorthand for her support for regulation of Wall Street investment bankers’ transactions – however, it doesn’t come close to adequately summarizing what both candidates Clinton and Sanders have been saying about financialism in American economics. The Beltway Media is missing the point, perhaps because it doesn’t fit neatly into a template predetermined by editorial policy, or a simplistic code for easy lead paragraphs.

The point is that we have had 35 years of what President George H.W. Bush called Voodoo Economics (although bless his heart he promoted it like any good Republican), and it doesn’t work in the real world. Why? Because the mythology violates the simple principles of American capitalism:

”So here’s an idea worth spreading. In a capitalist economy, the true job creators are consumers, the middle class. And taxing the rich to make investments that grow the middle class is the single smartest thing we can do for the middle class, the poor and the rich.” [LAT]

With this basis in mind, let’s tackle some of the mythology and deal with a bit more economic reality.  We might as well start with the “job creators” sound bite.

#Job transference is not necessarily job creation.  Yes, Home Depot has about 340,000 employees. [USAT]  However, in order to achieve those numbers, how many local hardware stores went out of business, or had to shave employment numbers, because they were hard pressed to compete with the Big Box Stores?  Of the 340,000 Home Depot employees only 21,000 were salaried, the rest were working on a temporary basis or for hourly wages.  The average hourly wages for employees in the retail sector are $14.36 per hour. [Monster] Further, we know that about 1/3rd of all retail sector employees are working part time. If we take a closer look we find that the median wages for retail employees (full time) in building materials and garden equipment were about $12.21 per hour. [BLS]

So, we have to ask ourselves, if a Big Box Store moves in an puts a local supermarket or hardware store out of business, does that translate into “job creation” or simply the transference of personnel from one job into another – possibly lower paying – job?

#Low wages make stocks attractive and the overall economy weaker.    The largest fast food chain in the U.S. has approximately 440,000 employees. [USAT]  And, what do food service preparation employees earn?  About $19,300 per year, or approximately $9.28 per hour. [BLS]  The average weekly hours for all employees are currently estimated as 25.8 per week, and for nonsupervisory employees at about 24.6 hours per week. [BLS] Significantly, before we fall into the hype-vat argument about the “kid’s first job,” only about 30% of fast food workers are teenagers, another 30% are between the ages of 20 and 24, and the remaining 40% are 25 years of age and older. [CEPR]

From the shareholder perspective it makes perfect sense to keep wages low, employee turnover high, and continue to appeal to those who have a “quarterly value” vision of America.   From the perspective of other business owners in the area, those low wages translate to minimal disposable income, which means fewer customers for their products and services.  In short, the yacht at the top is sailing along while the little boats bounce around the rocks.

#Wealth created from indebtedness doesn’t trickle anywhere.  Median household earnings are slowly, very slowly, emerging from the last Recession.

real median household income If we find more jobs transferred from, say, smaller local firms to larger national ones, or more jobs are being created in sectors like food and beverage service with notoriously low wages, then we might expect to find household incurring debts to maintain a middle income life style.

Consumer indebtedness, which was down to 4.88% of disposable income in the fourth quarter of 2012, is now back up to 5.30%. [Fed]  There are a couple of ways to see this, first as an indication that people are feeling better about assuming credit card or personal debt because their incomes are more stable, or secondly that while they’re feeling a bit better, the credit card has become a way to keep afloat.  However, those debts are the basis for altogether too much of what constitutes Wall Street wealth accumulation.

Household debt Whatever amounts of these debts are securitized means that they’ve gone into the Wall Street Casino to be used as the basis for hybrid financial products.  So, what’s been happening to the securitization of auto loans?  It’s “coming back strong” but not at “pre-crisis levels.” Translation: It’s not a bubble. [FRB ATL]  It’s lovely to know the Federal Reserve doesn’t consider the securitization of auto loans at the Bubble Level, but it’s also a bit worrisome to note that what is gained from that securitization isn’t trickling down anywhere near the automobile product consumer.

Nor is there much happy news about securitization and the student loan business.  ZeroHedge offers this gloomy prospect:

“So just as we have been warning about for sometime now: an underestimation of the impact of deferral and forbearance and weakness in the job market is likely to trigger defaults on billions in student loans and because these loans comprise the collateral pool backing ABS sold to investors, the ripple effect is magnified and we wonder if the July 2007 moment for the student loan-backed ABS market may come sooner rather than later.”

The ‘wealth’ produced on Wall Street is based on the loan the students took out to pay for educational expenses, securitized, tranched, sliced, diced, and repackaged for the ‘benefit’ of the investors – those who may very well get burned in this round of Securitization Bingo.

Evidently lost on the Sultans of Securitization is the simple fact that an asset based security requires someone to be able to afford the purchase of educational services or automobiles, or the other stuff on the credit card – the original assets.

It’s one thing to announce that “middle class incomes” are back where they were in 1995 – and another thing entirely to notice that the costs of college tuition are up 61% since ‘95; that home prices are up 13%; that the price of gasoline is up 94%; and that Big Mac is up 28%. [moneyCNN] These numbers aren’t the sort to make anyone comfortable who’s taking out the student loan or buying the house. Eventually, even Wall Street may have to take notice of the fact that no matter how much revenue it can generate in terms of ABS and the hybrids related thereto, if American consumers can’t generate sales – and jobs – then investors are caught trying to ride the bubbles.  Bubbles always pop, that’s why they’re bubbles.

The ‘wealth’ from the sales, and hedges, and bets, on asset based securities, again, trickles down nowhere near the average home owner or car buyer.  However, no one is arguing that ABSs don’t have value.  They are a way to spread the risk around, and that’s positive.  They are negative when we see them mask intrinsic cracks in American capitalism, and negative when we see that the revenue generated never quite manages to trickle back down to the local economies perhaps in the form  of better roads, better schools, better parks, better libraries, and better public services like broadband.

Candidates Clinton and Sanders aren’t “bashing Wall Street,” they are simply trying to point out that the lurch from one bubble to the next isn’t a productive way to run an economy, and lunging from one volatile market to the next isn’t the way to insure that the capacity of the average consumer to purchase the assets on which the securities are based remains steady and profitable for everyone.  If Wall Street can’t divest itself of its 35 Year Investment in imaginary economics, and can’t restrain itself from short term financialist thinking, then someone has to be the adult in the room.  The adult is called reasonable regulation, and that’s all they are asking.

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