Central Perk: 2 ian. 2016

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Mish's Global Economic Trend Analysis

Blaming Others: Reflections on "The Big Short"

Posted: 02 Jan 2016 05:50 PM PST

Reflections on "The Big Short"

I have not yet seen "The Big Short" movie. Everyone tells me it was excellent. I intend to see it, but I already know what happened in detail, how, and why.

The Fed has not yet admitted its role, nor have banks, nor have the rating agencies, nor has Congress with its ludicrous affordable housing programs, nor has Bush with the "Ownership Society".

I could go on and on and on. But I left off one key set of people: Individuals blaming everyone else but themselves.

Blaming Others

An article just came my way expressing that same viewpoint. It's a New York Magazine Interview With Michael Burry, Real-Life Market Genius From The Big Short, head of Scion Asset Management.

NY: Were you surprised no one went to jail?
Burry: I am shocked that executives at some of the worst lenders were not punished for what they did. But this is the nature of these things. The ones running the machine did not get punished after the dot-com bubble either.

NY: When I spoke to some of the other real-life characters from The Big Short, I was surprised to hear that they thought that financial reform was pretty effective and that the system was much safer. Michael Lewis disagreed. In your opinion, did the crash result in any positive changes?
Burry: Unfortunately, not many that I can see. The biggest hope I had was that we would enter a new era of personal responsibility. Instead, we doubled down on blaming others, and this is long-term tragic. Too, the crisis, incredibly, made the biggest banks bigger. And it made the Federal Reserve, an unelected body, even more powerful and therefore more relevant. The major reform legislation, Dodd-Frank, was named after two guys bought and sold by special interests, and one of them should be shouldering a good amount of blame for the crisis. Banks were forced, by the government, to save some of the worst lenders in the housing bubble, then the government turned around and pilloried the banks for the crimes of the companies they were forced to acquire. The zero interest-rate policy broke the social contract for generations of hardworking Americans who saved for retirement, only to find their savings are not nearly enough. And the interest the Federal Reserve pays on the excess reserves of lending institutions broke the money multiplier and handcuffed lending to small and midsized enterprises, where the majority of job creation and upward mobility in wages occurs. Government policies and regulations in the postcrisis era have aided the hollowing-out of middle America far more than anything the private sector has done. These changes even expanded the wealth gap by making asset owners richer at the expense of renters. Maybe there are some positive changes in there, but it seems I fail to see beyond the absurdity.

NY: How do you think all of this affected people's perception of the System, in general?
Burry: The postcrisis perception, at least in the media, appears to be one of Americans being held down by Wall Street, by big companies in the private sector, and by the wealthy. Capitalism is on trial. I see it a little differently. If a lender offers me free money, I do not have to take it. And if I take it, I better understand all the terms, because there is no such thing as free money. That is just basic personal responsibility and common sense. The enablers for this crisis were varied, and it starts not with the bank but with decisions by individuals to borrow to finance a better life, and that is one very loaded decision. Yet so few took responsibility for having any part in it, and the reason is simple: All these people found others to blame, and to that extent, an unhelpful narrative was created. Whether it's the one percent or hedge funds or Wall Street, I do not think society is well served by failing to encourage every last American to look within. This crisis truly took a village, and most of the villagers themselves are not without some personal responsibility for the circumstances in which they found themselves. We should be teaching our kids to be better citizens through personal responsibility, not by the example of blame.

NY: Where do we stand now, economically?
Burry: Well, we are right back at it: trying to stimulate growth through easy money. It hasn't worked, but it's the only tool the Fed's got. Meanwhile, the Fed's policies widen the wealth gap, which feeds political extremism, forcing gridlock in Washington. It seems the world is headed toward negative real interest rates on a global scale. This is toxic. Interest rates are used to price risk, and so in the current environment, the risk-pricing mechanism is broken. That is not healthy for an economy. We are building up terrific stresses in the system, and any fault lines there will certainly harm the outlook.

Glass-Steagall Scapegoat

I have seen so many people blaming mortgage companies, big banks, and especially the repeal of the Glass-Steagall act. All three were peripheral agents, at best.

Actually, I do not think the repeal of the Glass-Steagall act had anything to do with the crisis at all.

I commented on the Glass-Steagall Fallacy on January 21, 2010.

Merits of Glass-Steagall

The idea that Glass-Steagall would have done much, if anything to prevent this crisis is potty. Goldman Sachs, Bear Stearns, and Lehman would all have done what they did. Wells Fargo would have kept its pool of option arms, and the rest of the banks would have followed their lend to securitize model and the regional banks would still be losing their asses on silly commercial real estate deals.

That said, I am in favor of these initiatives for the simple reason they help prevent fraud. Many of the large institutions hand out advice and trade against it. Goldman Sachs is accused of front-running trades. Their disclosure documents even allow it.

Paul Volcker on Glass-Steagall

Unconvinced? Then please consider Please consider Volcker's Quest To Reinstate Glass-Steagall.

The loudest argument to bring back Glass-Steagall usually goes something like this: Depository institutions (commercial banks) need to be very safe and stable. If you allow investment banks to take big risks with those deposits, bad things can happen.

Now let's take a step back. What are these risky securities we're talking about? They're bonds backed by real estate -- originated by commercial banks. So really, it was the commercial banks that took the crazy risks that almost broke the economy. If there was never securitization, and the same subprime loans were made, then we'd have very, very sick depository institutions, but investment banks would have been largely unscathed.

Of course, there was securitization, and that was done by the investment banks. Where might Glass-Steagall have helped here? Well, it wouldn't have. Securitization existed before the Act was repealed, and it would exist if it's brought back. Commercial banks can still sell mortgages into giant pools for investment banks to make securities out of, with or without the mortgage originators and bankers living under the same umbrella. Commercial banks also still would have retained lots of their mortgage exposure, and still been quite sick. Just ask Countrywide.

Fed the Key Enabler

Few mention the Fed as the key enabler. Even fewer see the role of individual people all rushing like mad to get into housing "before it's too late".

Those hurt in the crisis all tend to point a finger at someone else. Too few admit personal responsibility.

That said, bailing out the banks was criminal. So were lies by the bank executives. So was the role of the rating agencies. But who is responsible for making the rating agencies the beasts they are?

Those who do not know the answer will be surprised: The answer is the SEC.

I wrote about the rating agency mess before the crisis, September 28, 2007 to be precise. If you have not yet done so, please consider Time To Break Up The Credit Rating Cartel.

Here We Are Again

Here we are again, back in one hell of a bubble that almost no one sees. Most of those who do see the bubbles are still content to play the greater fool's game in belief they can get out on time.

Mathematically it's impossible for the masses to escape bubbles.

When the next downturn hits, everyone will cry out for the Fed to do something. The Fed already did: It enabled bubbles in 2000, 2007, and now.

People like bubbles, until they pop, then they blame everyone but themselves for participating in them.

Mike "Mish" Shedlock

Even-Handed Beheadings in Saudi Arabia; Friends Must Be Friends

Posted: 02 Jan 2016 12:00 PM PST

Saudi Arabia executed 47 people today in the biggest mass execution since 1980. Those executed include Sheikh Nimr al-Nimr, a prominent Shi'ite Muslim cleric.

Some were beheaded, others shot. Don't worry, there's nothing to be concerned about, the executions were "even-handed".

Please consider Saudi Arabia Executes Prominent Shia Cleric Nimr al-Nimr.

The execution on Saturday morning of Sheikh Nimr al-Nimr, a staunch opponent of the ruling Al Saudi family, has further stirred sectarian tensions in the Gulf and triggered threats from regional rival Iran.

The Iranian foreign ministry accused Saudi Arabia of supporting terrorist movements and extremists abroad while confronting domestic critics with oppression and execution. "The Saudi government will pay a high price for following these policies," the Iranian foreign ministry said.

One activist said that 45 of those executed were al-Qaeda members and sympathisers, with the other two being Shia.

Many of the charges related to terrorist attacks that took place during the al-Qaeda insurgency that was put down a decade ago.

Shia activists have denied that Sheikh Nimr was involved in violent resistance, but many Saudis argue that his incitement against the government was tantamount to terrorism and often defend his death sentence.

The activist said the government probably executed Shia dissidents at the same time as al-Qaeda sympathisers to back its claim to be taking an even-handed approach in its crackdown down on terrorism. The Shia minority in the oil-rich eastern province has for years complained of discrimination.

The Saudi Press Agency report, citing the Koran, said: "The recompense of those who wage war against Allah and His Messenger and do mischief in the land is only that they shall be killed or crucified or their hands and their feet be cut off from opposite sides, or be exiled from the land."

"Even-Handed" Defined

Sheikh Nimr al-Nimr's crime was speaking out against the government.

In order to get rid of al-Nimr, Saudi Arabia had to get rid of 46 others, mostly Al Qaeda or alleged Al Qaeda sympathizers.

As further proof of even-handedness, al-Nimr was not crucified for his alleged "mischief in the land."

We would not want to crucify people for mischief would we? Beheadings are far more appropriate.

Iran Warns of High Price to Pay

The Telegraph reports Saudi 'will pay high price' for execution of top Shia cleric, warns Iran.

Saudi Arabia executed prominent Shia Muslim cleric Sheikh Nimr al-Nimr on Saturday, stirring a chorus of condemnation and sectarian anger across the region.

Nimr was a talismanic figure in protests that broke out in 2011 in the Sunni-ruled kingdom's east, where the Shia minority complains of marginalisation. His arrest in July 2012 sparked days of protest.

Hundreds of Shias marched through Nimr's home district of Qatif in protest at the execution, eyewitnesses told Reuters news agency, chanting "down with the Al Saud" in reference to the Saudi ruling family.

Describing the executions as acts of "mercy" to prisoners who might have committed crimes on their release, Saudi Arabia's leading cleric, Grand Mufti Sheikh Abdulaziz Al Sheikh, said they were carried out in line with Islamic law and the need to safeguard the kingdom's security.

Acts of Mercy

There you have it. Not only were the executions "even handed", they were also "acts of mercy".

Global Response

Iran: Iran's foreign ministry spokesman accused Riyadh of hypocrisy. "The Saudi government supports terrorist movements and extremists, but confronts domestic critics with oppression and execution," said Hossein Jaber Ansari.

Lebanon: Lebanon's Supreme Islamic Shia Council called the execution a "grave mistake"

Iraq: Iraqi Prime Minister Haider al-Abadi said it would have repercussions on regional security.

Germany: A German foreign ministry official said Nimr's execution strengthened "existing concerns about increasing tensions and deepening rifts in the region".

UK: From Guardian: Liberal Democrat leader, Tim Farron, responded to news of the executions by describing capital punishment as abhorrent, and called on the prime minister to do more to pressure foreign governments into abolishing the death penalty. Britain's shadow foreign secretary, Hilary Benn, described the execution as "profoundly wrong". However, "prime minister David Cameron insists UK must have close ties with Saudi Arabia".

Bahrain: Striking image from one of the protests in Bahrain. The banner reads "to hell with you".

Protester holds a banner saying "to hell with you" as she takes part in a protest against the execution of Saudi Shia cleric Nimr al-Nimr by Saudi authorities, in the village of Sanabis. Photograph: Hamad I Mohammed/Reuters

US Response

In the US, there was deafening silence from president Obama as well as our state department. And why not? After all, those executions were "even-handed acts of mercy" by our Saudi friends. What else can possibly be said?

When your friends sponsor terrorism and execute their own citizens simply for being dissidents, you just have to look away. Friends must be friends, otherwise they aren't friends. And in the drive for perpetual war, Saudi Arabia is the biggest friend we have.

Mike "Mish" Shedlock

Seth's Blog : When to charge by the hour

When to charge by the hour

Most professionals ought to charge by the project, because it's a project the customer wants, not an hour.

Surgery, for example. I don't want it to last a long time, I just want it to work. Same with a logo or website design.

Or house painting. The client is buying a painted house, not your time.

One exception: If the time is precisely what I'm buying, then charging by the time is the project. Freudian therapy, say, or a back massage.

Another exception: If the client has the ability to change the spec, again and again, and the hassle of requoting a project cost is just too high for both parties. A logo design, for example, probably starts with project pricing, but if the client keeps sending you back for revisions, at some point, they're buying your time, aren't they?