Bankers Without a Clue - Krugman

[groovedaddy]

The official Financial Crisis Inquiry Commission — the group that aims to hold a modern version of the Pecora hearings of the 1930s, whose investigations set the stage for New Deal bank regulation — began taking testimony on Wednesday. In its first panel, the commission grilled four major financial-industry honchos. What did we learn?

Well, if you were hoping for a Perry Mason moment — a scene in which the witness blurts out: “Yes! I admit it! I did it! And I’m glad!” — the hearing was disappointing. What you got, instead, was witnesses blurting out: “Yes! I admit it! I’m clueless!”

O.K., not in so many words. But the bankers’ testimony showed a stunning failure, even now, to grasp the nature and extent of the current crisis. And that’s important: It tells us that as Congress and the administration try to reform the financial system, they should ignore advice coming from the supposed wise men of Wall Street, who have no wisdom to offer.

Consider what has happened so far: The U.S. economy is still grappling with the consequences of the worst financial crisis since the Great Depression; trillions of dollars of potential income have been lost; the lives of millions have been damaged, in some cases irreparably, by mass unemployment; millions more have seen their savings wiped out; hundreds of thousands, perhaps millions, will lose essential health care because of the combination of job losses and draconian cutbacks by cash-strapped state governments.

http://www.nytimes.com/2010/01/15/opinion/15krugman.html?th&emc=th

[barb162]

1. This was a knockout article. n/t

[barb162]

2. K&R

[wuvuj]

3. 6-7 years of slow growth as the deleveraging process plays out?

http://www.frontlinethoughts.com/gateway.asp

It's the Deleveraging, Stupid!

The reason this recession is different is that it is a deleveraging recession. We borrowed too much (all over the developed world) and now are having to repair our balance sheets as the assets we bought have fallen in value (housing, bonds, securities, etc.). A new and very interesting (if somewhat long) study by the McKinsey Global Institute found that periods of overleveraging are often followed by 6-7 years of slow growth as the deleveraging process plays out. No quick fixes.

Let's look at some of their main conclusions (and they have a solid ten-page executive summary, worth reading.) This analysis adds new details to the picture of how leverage grew around the world before the crisis and how the process of reducing it could unfold. MGI finds that:

* Leverage levels are still very high in some sectors of several countries - and this is a global problem, not just a US one.

* To assess the sustainability of leverage, one must take a granular view using multiple sector-specific metrics. The analysis has identified ten sectors within five economies that have a high likelihood of deleveraging.

* Empirically, a long period of deleveraging nearly always follows a major financial crisis.

* Deleveraging episodes are painful, lasting six to seven years on average and reducing the ratio of debt to GDP by 25 percent. GDP typically contracts during the first several years and then recovers.

* If history is a guide, many years of debt reduction are expected in specific sectors of some of the world's largest economies, and this process will exert a significant drag on GDP growth.

* Coping with pockets of deleveraging is also a challenge for business executives. The process portends a prolonged period in which credit is less available and more costly, altering the viability of some of business models and changing the attractiveness of different types of investments. In historic episodes, private investment was often quite low for the duration of deleveraging. Today, the household sectors of several countries have a high likelihood of deleveraging. If this happens, consumption growth will likely be slower than the pre-crisis trend, and spending patterns will shift. Consumer-facing businesses have already seen a shift in spending toward value-oriented goods and away from luxury goods, and this new pattern may persist while households repair their balance sheets. Business leaders will need flexibility to respond to such shifts.

You can read the whole report at their web site. The ten-page summary is also there.

http://www.mckinsey.com/mgi/publications/debt_and_deleveraging/index.asp

[BridgeTheGap]

6. Thanks for sharing this! n.t

[snot]

4. K&R'd

[pokercat999]

5. He asks "what do they (the bankers) know?", the answer is

they know how to lie and they know how to steal. What we need to learn, is how to put them in jail.