First of all, you really wreck things.
'This is the biggest fraud in the history of the capital markets'
Janet Tavakoli is the founder and president of Tavakoli Structured Finance Inc. She sounded some of the earliest warnings on the structured finance market, leading the University of Chicago to profile her as a "Structured Success," and Business Week to call her "The Cassandra of Credit Derivatives." We spoke this afternoon about the turmoil in the housing market, and an edited transcript of our conversation follows.
Ezra Klein: What’s happening here? Why are we suddenly faced with a crisis that wasn’t apparent two weeks ago?
Janet Tavakoli: This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back. But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security interest, and it’s not optional.
EK: And how much danger are the banks themselves in?
JT: When we had the financial crisis, the first thing the banks did was run to Congress and ask for accounting relief. They asked to be able to avoid pricing this stuff at the price where people would buy them. So no one can tell you the size of the hole in these balance sheets. We’ve thrown a lot of money at it. TARP was just the tip of the iceberg. We’ve given them guarantees on debts, low-cost funding from the Fed. But a lot of these mortgages just cannot be saved. Had we acknowledged this problem in 2005, we could’ve cleaned it up for a few hundred billion dollars. But we didn’t. Banks were lying and committing fraud, and our regulators were covering them and so a bad problem has become a hellacious one. more
The Great Transformation
America's Third World Economy
By PAUL CRAIG ROBERTS
For a number of years I reported on the monthly nonfarm payroll jobs data. The data did not support the praises economists were singing to the “New Economy.” The “New Economy” consisted, allegedly, of financial services, innovation, and high-tech services.
This economy was taking the place of the old “dirty fingernail” economy of industry and manufacturing. Education would retrain the workforce, and we would move on to a higher level of prosperity.
Time after time I reported that there was no sign of the “New Economy” jobs, but that the old economy jobs were disappearing. The only net new jobs were in lowly paid domestic services such as waitresses and bartenders, retail clerks, health care and social assistance (mainly ambulatory health care services), and, before the bubble burst, construction.
The facts, issued monthly by the US Bureau of Labor Statistics, had no impact on the ”New Economy” propaganda. Economists continued to wax eloquently about how globalism was a boon for our future.
The millions of unemployed today are blamed on the popped real estate bubble and the subprime derivative financial crisis. However, the US economy has been losing jobs for a decade. As manufacturing, information technology, software engineering, research, development, and tradable professional services have been moved offshore, the American middle class has shriveled. The ladders of upward mobility that made American an “opportunity society” have been dismantled. moreAnd of course, the dismantling of an advanced industrial society means there must be an open attack on scientific rationalism.
'Science as the Enemy'
The Traveling Salesmen of Climate Skepticism
By Cordula Meyer
A handful of US scientists have made names for themselves by casting doubt on global warming research. In the past, the same people have also downplayed the dangers of passive smoking, acid rain and the ozone hole. In all cases, the tactics are the same: Spread doubt and claim it's too soon to take action.
With his sonorous voice, Fred Singer, 86, sounded like a grandfather explaining the obvious to a dim-witted child. "Nature, not human activity, rules the climate," the American physicist told a discussion attended by members of the German parliament for the business-friendly Free Democratic Party (FDP) three weeks ago.
Marie-Luise Dött, the environmental policy spokeswoman for the parliamentary group of Angela Merkel's center-right Christian Democratic Union (CDU), also attended Singer's presentation. She said afterwards that it was "extremely illuminating." She later backpedaled, saying that her comments had been quoted out of context, and that of course she supports an ambitious climate protection policy -- just like Chancellor Merkel.
Merkel, as it happens, was precisely the person Singer was trying to reach. "Our problem is not the climate. Our problem is politicians, who want to save the climate. They are the real problem," he says. "My hope is that Merkel, who is not stupid, will see the light," says Singer, who has since left for Paris. Noting that he liked the results of his talks, he adds: "I think I achieved something."
Salesman of Skepticism
Singer is a traveling salesman of sorts for those who question climate change. On this year's summer tour, he gave speeches to politicians in Rome, Paris and the Israeli port city of Haifa. Paul Friedhoff, the economic policy spokesman of the FDP's parliamentary group, had invited him to Berlin. Singer and the FDP get along famously. The American scientist had already presented his contrary theories on the climate to FDP politicians at the Institute for Free Enterprise, a Berlin-based free-market think tank, last December. moreThen you must create politicians who have zero understanding for the need for infrastructure and actually go after projects that have been already started.
The End of the Tunnel
By PAUL KRUGMAN
Published: October 7, 2010
The Erie Canal. Hoover Dam. The Interstate Highway System. Visionary public projects are part of the American tradition, and have been a major driver of our economic development.
And right now, by any rational calculation, would be an especially good time to improve the nation’s infrastructure. We have the need: our roads, our rail lines, our water and sewer systems are antiquated and increasingly inadequate. We have the resources: a million-and-a-half construction workers are sitting idle, and putting them to work would help the economy as a whole recover from its slump. And the price is right: with interest rates on federal debt at near-record lows, there has never been a better time to borrow for long-term investment.
But American politics these days is anything but rational. Republicans bitterly opposed even the modest infrastructure spending contained in the Obama stimulus plan. And, on Thursday, Chris Christie, the governor of New Jersey, canceled America’s most important current public works project, the long-planned and much-needed second rail tunnel under the Hudson River.
It was a destructive and incredibly foolish decision on multiple levels. But it shouldn’t have been all that surprising. We are no longer the nation that used to amaze the world with its visionary projects. We have become, instead, a nation whose politicians seem to compete over who can show the least vision, the least concern about the future and the greatest willingness to pander to short-term, narrow-minded selfishness. moreOf course, when the real economy stumbles and the banksters who have fastened their claws on the real economy stumble as well, the folks that must be saved are the banksters. Rebuild the real economy--oh no, we can NEVER do that.
IMF Calls For A New Round Of Huge Bank Bailouts
The IMF is calling for a huge new round of bank bailouts.
As the Telegraph noted yesterday:
Lenders across Europe and the US are facing a $4 trillion refinancing hurdle in the coming 24 months and many still need to recapitalise, the Washington-based organisation said in its Global Financial Stability Report. Governments will have to inject fresh equity into banks – particularly in Spain, Germany and the US – as well as prop up their funding structures by extending emergency support.
Prop up their funding structures?
Virtually all leading independent economists have said that the too big to fails must be broken up, or the economy won't be able to recover, and that smaller banks actually lend more into the economy than the mega-banks (and see this).
And the leading monetary economist told the Wall Street Journal that this was not a liquidity crisis, but an insolvency crisis. She said that Bernanke is fighting the last war, and is taking the wrong approach. Nobel economist Paul Krugman and leading economist James Galbraith largely agree. moreThe important task was to create an intellectual apparatus to fund those clever folks who could transform fraud and naked greed into the very structure of finance capitalism. Here is an example what the Koch boys bought.
ANATOMY OF A LIBERTARD
By Mark Ames
Will Wilkinson: Libertard With Sadditude
Ever since Yasha and I first broke the story about the Koch brothers financing the Tea Party Campaign in February of 2009–a scoop that the New Yorker plagiarized from us a mere 18 months later, waytago fellas!–ever since then, I’ve been wondering: Have all those billions that the Brothers Koch invested into their libertarian brain-washing project paid off?
The answer: You betcha.
Let me demonstrate how the Kochs’ investment into libertarianism has paid off by way of a near-stroke experience I just had a couple of days ago. There I was, just wasting time on Reddit, when I came across one of those beyond-idiotic-and-evil headlines that bite you if you’re not careful: “Is rising inequality in America exaggerated?” The headline linked to an article in The Economist.
H’m, is inequality exaggerated? Gosh, let me get my ol’ chin-scratching machine out for this one…
Naturally, I did the exact wrong thing and clicked the headline, which brought me to an Economist article titled, “The Inequality Myth: Is Rising Inequality in America Exaggerated?” It was an oddly meat-headed headline for The Economist–usually that magazine’s formula is to zap the reader with somewhat more nuanced right-wing shock value, counteracted with elitist irony and know-it-all charm. Not this time:
SLATE’S Timothy Noah has just wrapped up a ten-part series on the rise of economic inequality in America. Most of Mr Noah’s instalments are devoted to examining the impact of one of the usual suspects—immigration, trade, de-unionisation, education, executive pay, etc—on the level of inequality in the United States. I found Mr Noah’s series disappointing from the start because he failed squarely to confront recent findings that challenge the premise of his exercise.
Many popular narratives about inequality are grounded on the alleged fact that wages and incomes at the middle and bottom of the distribution have been stagnant for decades. It appears that this, too, may be an artefact of insufficiently sophisticated methods for building the price indices used to calculate rates of inflation.
The author of this Economist blog post, identified as “W.W.”, sounded nothing like one of those sly Economist correspondents I’ve known in the past, and everything like a typical ham-fisted right-wing libertarian, the sort that are a dime a dozen in this country. So I wondered: Are the Kochs debasing even their own natural propaganda ally, The Economist, by dumbing it down with one of their own Koch-sponsored libertard meatheads? Who was this “W.W.”? moreAnd then there is the Nobel Memorial Prize in economics--the greatest reward for foolishness EVAH!
'Black Swan' Author Says Investors Should Sue Nobel for Crisis
By Stephanie Baker - Oct 8, 2010 1:56 PM CT
Nassim Nicholas Taleb, author of “The Black Swan,” said investors who lost money in the financial crisis should sue the Swedish Central Bank for awarding the Nobel Prize to economists whose theories he said brought down the global economy.
“I want to make the Nobel accountable,” Taleb said today in an interview in London. “Citizens should sue if they lost their job or business owing to the breakdown in the financial system.”
Taleb said that the Nobel Prize for Economics has conferred legitimacy on risk models that caused investors’ losses and taxpayer-funded bailouts. Sweden’s central bank will announce the winner of this year’s award on Oct. 11.
Taleb singled out the Nobel award to Harry Markowitz, Merton Miller and William Sharpe in 1990 for their work on portfolio theory and asset-pricing models.
“People are using Sharpe theory that vastly underestimates the risks they’re taking and overexposes them to equities,” Taleb said. “I’m not blaming them for coming up with the idea, but I’m blaming the Nobel for giving them legitimacy. No one would have taken Markowitz seriously without the Nobel stamp.” more