The Mythology Of Economic 'Uncertainty'
Why can't America have some jobs? Lawmakers tell a story, which your Beltway media regurgitate, and it goes a little something like this.
We can't have jobs until banks start lending money to support the productive side of the American economy. Why won't they start lending? Oh, you know ... UNCERTAINTY! And it's caused by many things: the debt ceiling deal, the unknown future of the Bush-era tax cuts, the Affordable Care Act, the Dodd-Frank legislation, the long-term fate of entitlements. And all the onerous regulation the White House wants to add! You'd think the financial collapse occurred in some sort of loose regulatory environment, where Wall Street was permitted to police itself, or something!
Oh, dude, you remember that time President Barack Obama used the words "fat cat"! Sure, he used that term at a time when White House policies had led to a corporate profit bonanza, but how can anyone be sure of what the future will hold if the president is occasionally, mildly derogatory? Corporations are people, man.
At any rate, the bottom line is that stuff be all UNCERTAIN up in here! And so there will be no lending -- and thus, no job creation -- until these clouds of uncertainty are lifted. How can we go about doing that? Oh, dude, that's the thing ... that's uncertain too! How about we give the top one percent a few more hundreds of thousands of dollars worth of tax relief? No guarantee that will work, but we'd better try!
This story of "uncertainty" is already a deeply embedded piece of lore. It's also a great big lie -- one that Barry Ritholtz helps to take apart, with hammer and tongs:
There is a fundamental misunderstanding about the Wall Street bailouts amongst the public, and quite a few policy makers at Treasury and the Federal Reserve: Somehow, they "fixed" the banking system. All it took was few trillion dollars in liquidity and a few $100 billion dollars in recapitalization, and all is now fine (I suspect some people at the Fed know the Truth).
In fact, they did nothing of the sort. The banking system was not saved; The massive injection of liquidity temporarily salved the day-to-day operations of banks, but they did not repair what ailed our financial institutions.
This is why we routinely demolish "TARP triumphalism" here. Every bit of news that someone has repaid a piece of TARP is sold to the public as evidence of another "remarkable turnaround" in the saga of our dessicated financial institutions. The underreported story of the bailout remains the trillions of dollars that went out from the Federal Reserve to the same recipients, of which taxpayers are still owed in the area of $1.5 trillion.
In the bailout picture, TARP gets top billing for a lot of reasons. TARP recipients are slowly paying it off, with some paltry returns for taxpayers on top of the repaid aid to brag about. This happy story helps to obscure the larger bailout sum that remains outstanding. But the big reason we're constantly being fed the "TARP was successful (as long as you ignore the other bailouts)" story is simple -- TARP was sold as the mechanism that would restore lending and spur job growth.
So we don't dare question the bailouts! And "uncertainty" must therefore have some other root cause. Except, of course, that's a load of bull. Ritholtz retells the tale with four concise bullet points:
• Bank holdings: Remain stuffed with declining assets, primarily in Housing and Derivative holdings. Another leg down in Housing could be nearly fatal.
But if bank holdings are "stuffed with declining assets," that must mean these flaws are clearly evident on their balance sheets. That is Accounting 101! So what gives?
• Transparency: Balance sheets are unnecessarily Opaque; Eliminating Fair value accounting via FASB 157 did not fix balance sheet problems, but instead allowed banks to hide them.
Oh, that's right. The relaxation of traditional "mark-to-market" rules have allowed those balance sheets to remain in a state of grace, because those assets are marked to some future, hoped-for value. The clearest evidence that there is a lot of magical thinking at work on these balance sheets is to see whether the expectations of investors currently line up with the story that financial institutions are telling about themselves.
Let's take Bank of America as an example. In its most recent quarterly earnings report, Bank of America listed shareholders' equity at $222.1 billion. The shareholders themselves tell a different story: Wednesday's BofA market capitalization is $71.1 billion. Someone is way off, and I'd wager it's the institution that's treating billions of dollars in junk as an asset.
A reckoning could come at any time, and a return to marking those assets to their true value would require everyone to be adequately capitalized to avoid calamity. What is the state of capitalization at the moment?
• Capitalization: Remains too thin; leverage should be mandated back to the pre-2005 rule change of no more than 12 to 1; As we have learned, management does not keep adequate capital unless mandated to do so (sufficient capital reserves cuts into profits);
How is it possible that capitalization remains too thin when the bailout, which provided the capital to "save" the banking system, has been deemed a success? Banks were supposed to use taxpayer money to shore themselves up, and the episode was supposed to teach everyone a lesson about gambling on overleveraging.
• Misaligned Incentives: Compensation and bonus schemes were not significantly changed after bailouts, except during loan repayments. Thus, management and traders still have the same upside to roll the dice, but do not have the downside risks, which remains on shareholders and taxpayers
Folks, that's the story that deserves to be told here. Whatever virtue the bailouts had in staving off an immediate economic apocalypse has been offset by the fact that they've left our banking institutions as zombified husks, hoarding as much liquidity as they can, spending bailout bucks on lobbyists who influence regulation in such a way that the dark derivatives casino can continue to spin along. No one is prepared to weather a future day of reckoning, and they know it, and so there will be no lending to create jobs for America.
The bottom line is that it's not "uncertainty" that's causing these problems at all. Precisely the opposite: banks aren't lending because, while they don't dare admit it, they are quite certain that they are fucked.