Tuesday, April 21, 2009

Why I Mock John Maynard Keynes

In case anyone has missed it, we are in a bit of a fix financially, on a global basis. The policy works and mandarins of assorted stripes generally responsible for keeping this sort of thing from happening are perplexed, and more than aggravated that a number of the formerly reliable levers that worked when employed now produce--when tugged--nothing. New techniques from the bottom of the toolbox are being taken out--quantitative easing--and much dark muttering of 'pushing on a string' can be heard in the distance, in the darkness.

So, if the macroeconomic tools of a lifetime and the institutional expertise of the worlds central banks and international monetary authorities has most its magic, it's time for something else. Because most of these guys were trained in the second half of the 20th century, and because John Maynard Keynes was the fellow whose approach had been most recently superceded, there is a group grope of the Keynesian canon, for something that, if not functional, at least sounds profound.

That's why I mock all the invocations of J.M. Keynes. If you actually go back and read the guy, he has some interesting observations that shed light on the current mess. For that matter, so does Ezra Pound. But the solution is no more to be found in Keynes' writings than in Pound's Cantos. And the aspects of Keynes that are being invoked are among the least interesting of his observations (to me, at least, I find his policy prescriptions pretty pedestrian, while his conjectures on how his world got in its fix quite intriguing in the application to the current fiasco).

So, my first alternative is Marxist economic analysis. Unfortunately, while the Marxists have some great one-liners, as I've tried to deploy what I remember of Marxist economics to the current situation, I find that it really doesn't work very well. It is destructively inspirational, rather than immediately applicable.

But more of that another time.

Monday, April 20, 2009

Bank Earnings

Okay, confession time.

I personally have been involve--not within any applicable statute of limitations, I hasten to add--in the preparation of quarterly and annual earnings reports for publicly held financial institutions. As a matter of fact, one of those institutions is, today, buried deep inside the AIG mess, and for my services to that predecessor entity I am entitled to a small pension which, a recent communication from AIG assures me, is safe. I happen to believe that communication because the pension is so small that it's guaranteed by the PGBIC so, while the dollars in which it is paid may be worth far less when I receive them than anyone would have anticipated, I would assume that when the times comes, I will receive my pittance in what script is then legal tender.

Based on personal experience, I can say that, with the most honorable of motives and the best of intentions, accurately reflecting the financial results of any financial institution in a quarterly or even annual time frame is an exercise in subjective judgement, and, to put it mildly, reasonable people can differ. Based on what I'm seeing as a member of the great unwashed, I cannot tell whether the motives are honorable and the intentions above reproach with the financial institutions currently reporting their earnings, but these are stressful times, and such times test the mettle of all involved, a certain number of whom always fall short.

So I can understand how some of the the banks are actually reporting earnings. What I can't understand is why.

Citicorp reports earnings. But those earnings are dwarfed by an item that reflects the impairment of the value of its own debt (which is only impaired because of doubts about the enterprise itself). In other words, they are making money by going broke. Or so they claim. Wells Fargo is reporting record earnings at the same time that it is adding to its loan loss reserves in amounts that are virtually certain, in hindsight, to seem laughable. Goldmans Sachs is reporting earning, but its CFO is essentially lying to the public about the benefits Goldman received from payments on AIG CDS and the firm orphaned the month of December.

Why? These guys are setting themselves up for serious trouble down the road. The phrase 'buying time' comes to mind, but buying time only makes sense if you expectd something to change. And the way the political classes and their technocrats are going to remember this will be truly ugly sometime between the World Series and Thanksgiving. The first quarter will be remembered as when the banks reported the government bailout of AIG as their own profits.

That may be simplistic. But there is enough truth to it that it will stick. Fooled me once, shame on you. Fooled me twice, shame on me.

Sunday, April 19, 2009

Fiasco 2.0 The Pension Funds are Broken, too.

Just who are the victims of the current mess?

It's easy enough to say that we all are, but that really isn't true.

Are homeowners who used their houses like ATMs to finance everything from their children's college educations to trips to Disneyworld? Are we really going to try to differentiate between those who borrowed for praiseworthy ends (presumably the former) and those who didn't (presumably the latter). Are the first time home buyers who bought into the American dream at absolutely the wrong time? Are the amateur real estate speculators who loaded up on liar loans because they'd attended one of those make a million dollars in real estate using other people's money seminars that used to advertised so profusely?

I suppose the first time home buyers are more sympathetic victims than the high school principals trying to get rich after taking the early retirement package. But, so what?

It's fun to bash the perps--but to what purpose?

I mean, I see the importance of enforcing fraud laws at the local and community levels, and pursuing exemplary justice not merely in the cases of appraisers, mortgage brokers and title companies, but straw borrowers and those who took out the liar loans, as well. I see even more importance and purpose in systematically destroying the financial elite that has grown up with a parasitic financial services sector that no longer serves the needs of the general economy but rather milks the general economy insatiably for its own gaming and profit.

Here is my concern for today--pension funds, endowments and other investment pools that exist to meet non-economic social needs. These things truly are victims of the current mess. Whether a foundation is going to have to curtail its funding of the programs it was created to pursue, a university is forced to reduce its research and educational activities to conform to its resources in a new environment, or a pension fund has become unable to meet its actuarially defined future obligations, a social problem has been created that may have a financial genesis, but doesn't have an economic solution.

Focus on the pension funds. A pension fund is a pool of assets that should be matched to a pool of liabilities. Historically, pension funds have made unrealistic projections of their managers' abilities to generate financial returns from those assets and when the managers actually had good couple of innings, the sponsors used the excuse of overfunding to reduce contributions or even capture the excess. Now, hit the present. The liabilities of pension funds are relatively unaffected by the current financial crisis. But the valuation of their assets most certain is.

Even if the general economy stumbles to some kind of recovery, there will be another round of crisis. Globally, financial assets are taking a hair cut. Globally, liabilities to current and future pensioners have not. That is going to create the mother of all asset-liability mismatches.

On one level, this is the problem of the so-called Social Security Trust Fund, and it is no big deal in terms of economic policy, because it is a demographic problem (a hairy demographic problem, but a demographic problem, nonetheless). But, unlike Social Security, a program of the federal government, private pension funds are, well, private. They have sponsors with limited legal obligations to make them whole, and they have the ability to become insolvent. There is a modest federal underpinning to the whole thing, of course, the Pension Benefit Guaranty Corporation, but it will be looking to its Treasury backstop long after the FDIC has pumped that well dry.

Perhaps, once again, poverty will be the companion of age.