A Boon to the Local Economy

A political party's convention
Brings money, acclaim and attention
To the local milieu,
Including a few
That the chamber of commerce won't mention.

The GOP's next convocation
In Tampa should bring stimulation
To the owners of clubs
Whose customers love
The artistry of denudation.

Though club owners rather not choose
Which party should win or should lose,
According to strippers
The more lib'ral tippers
Are those of conservative views.

In a revealing look at the economic impact of the upcoming Republican national convention, the New York Times lifts the veil on the notorious Tampa strip club industry. When the nation's GOP delegates descend on the city, club owners expect that their employees will be sitting in the lap of luxury, and with good reason: evidence from the 2008 convention cities suggests that, while the average Democrat spends $50 in a "gentleman's club," the average Republican drops $150 (much of it in singles). On a serious note, dancers assert the need for additional stimulus as, in this economy, it's not easy to grind out a living.

Acquirer's Remorse

A dealmaker second to none
Out of many firms, brought about one;
When it nearly collapsed,
He allowed that, perhaps,
What he did would be better undone.

Sandy Weill, former chairman of Citigroup, stunned the finance world when he opined during a CNBC interview that commercial and investment banks should be split up. Weill, of course, was the serial dealmaker whose entire career was dedicated to creating a bigger and more diversified "Financial Supermarket," culminating in the $70 billion merger of Travelers and Citicorp to form Citigroup in 1999. Not yet legal at the time it was agreed, this merger required a waiver from the Fed as well as the ultimate overturning of the Glass-Steagall Act through the Gramm-Leach-Bliley Act in order to be consummated. Weill retired before the financial crisis, in which his financial supermarket became the largest of the "too big to fail" banks to require a federal bailout. "I think the earlier model was right for that time," he said on CNBC. "I don't think it's right anymore."

A Call to Fed Action

An economy mired in stagnation
From a crisis of hypothecation
Then turned to the Fed
And fitfully said:
"Only you can provide our salvation!"

With a glance in its slim bag of tricks,
Said the Fed: "We can certainly fix
Your moribund state
By dropping the rate
From zero-point-two-five to nix."

In a story that inspired much scorn from the financial blogosphere, The Wall Street Journal's Jon Hilsenrath writes that "Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring." The only problem is that, even by the admission of a journalist well connected with the aforementioned Fed officials, the potential steps are not likely to have much effect. For example:

Determined to keep trying to get the economy going without causing inflation, the Fed is exploring other novel measures. One idea mentioned by Mr. Bernanke in his testimony would be to use a facility the Fed calls its discount window to provide cheap credit directly to banks that make new business or consumer loans. But it isn't clear such a program would do much good when banks already have ample access to cheap credit and this kind of program doesn't appear to be winning favor at the moment.

I'm afraid that the time for pushing on a string is past, and the hour for fiscal and structural changes is here, if only the Congress would grasp it.

Credit Watch on the Rhine

Said Moody's: "In pondering whether
We ought to rate Germany nether,
We considered the cost
If the euro is lost,
As well as to hold it together."

"In view of Berlin's liability
To backstop the euro's fragility,
We regard it as likely
Madrid really might be
Too much for their funding ability."

Moody's Investors Service has announced that it sees a negative outlook for its Aaa credit rating of Germany. Though the nation remains one of the strongest in Europe, its vast liability for potential bailouts of Spain and Italy, as well as the exposure of its banks to euro zone's weaker economies, would make for a severe test of Germany's financial resources. With negative outlooks also placed on the Netherlands and Luxembourg, this leaves only Finland - which has fewer foreign financial entanglements - as a solid triple-A, according to Moody's (S&P and Fitch have made no such changes). The critical issue now is to maintain the ability of the Spanish government to finance its deficits, without which a fresh round of public (primarily German) support will be required.

Day of LIBOR Reckoning

Though collusion on rate executions
Was the norm in finance institutions,
When the tide quickly turned
Many bank traders learned
They would naturally face prosecutions.

The trouble with a culture of open financial fraud is that it leaves behind quite a paper trail in the unlikely eventuality that the authorities ever decide to crack down. So it is with the London Interbank Offer Rate-setting process, in regard to which US federal prosecutors and European regulators now intend to arrest individual traders on both sides of the Atlantic. Accounts differ as to how long the manipulation of LIBOR and related interest rates has gone on - some say 15 years - but central banking authorities in the US and UK have known of it since at least 2008. That was when staff members of the Federal Reserve Bank of New York discussed LIBOR with one or more traders who told them that their submitted rates were fake. Alarmed, then-FRBNY president Timothy Geithner sent off a "best practices" memo to Bank of England governor Sir Mervyn King, outlining ways to curb the abuses. Four years later, the media attention and public outcry have seemingly forced the hand of officialdom; against whom, we will soon hear.

From Geithner to King re: LIBOR

Some traders disclosed to the Fed
That LIBOR deceit was widespread;
The news reached Tim Geithner,
Who responded by writin' a
Quite well-stated memo, 'tis said.

In verbiage clear and concise,
Mr. Geithner dispensed his advice
To follow the fundin'
Of bankers in London
To find the most accurate price.

But the memo to King, while persuasive,
Is fairly alleged as evasive,
In its glaring exclusion
That traders' collusion
On setting of rates was pervasive.

Simon Johnson writes in his Baseline Scenario blog that the Federal Reserve Bank of New York may have missed an opportunity to inform its counterparts at the Bank of England of the LIBOR manipulation occurring back in 2008. Interbank traders active in the LIBOR-setting process had plainly admitted to the New York Fed that they gave self-servingly false indications of the rates at which their banks could fund themselves. Understandably concerned, the FRBNY's then-president Timothy Geithner spoke with the English central bank governor Sir Mervyn King, and followed up with a memo outlining his staff's recommendations for improving the LIBOR process. The memo, a model of brevity and clarity, outlines six proposals to improve the accuracy of LIBOR, which is based on funding rates reported by US and other international banks in the London market. Among the proposals: "Eliminate the incentive to misreport" by randomly selecting quotes from a subset of reporting banks.

What the memo did not mention was that the Fed already had admissions of fraudulent reporting from some of those banks. How might things have turned out differently if it had?

Flat As All That

"The median wage compensation,"
Said Krugman, "Has lain in stagnation."
For those who mistrusted,
His charts are adjusted
For medical plans and vacation.

Paul Krugman takes umbrage at those who doubt his assertion that US wages have stagnated since the 1970's (see chart). Yes, Dr. Krugman has thought this through, and the stagnation even takes the cost of health benefits into account, as detailed in this analysis from the Economic Policy Institute. Alarmingly, during the generation-and-a-half in which wages have barely risen, household debt has skyrocketed from 45% of GDP to nearly 100%, culminating in the mortgage meltdown. (Recovery alert: it has since moderated to about 85% of GDP.) The bottom line politically is that this plays into the Presidential choice in November. Mitt Romney has profited greatly from some of the policies and developments that led to the middle class stagnation, and defends them robustly on the campaign trail. Barack Obama, to be fair, does not represent the dramatic reversal of such policies that either he or his critics would have you believe, but he at least acknowledges the problem and proposes some ameliorative steps.

Fed Chairman's Senate Testimony

Said Bernanke, in Congress to testify,
To the Senators: "Gents, it is best if I
Admonish this hearing
The fiscal cliff's nearing
Which brinksmanship must be arrested by."

Federal Reserve Chairman Ben Bernanke gave his semiannual testimony to the Senate Banking Committee yesterday, and painted a bleak picture of the economy's prospects. Among the familiar litany of economic ills are high unemployment, a weak housing market due to tight credit standards and poor creditworthiness, and a slow business investment outlook. Unfortunately, it appears that the additional tools at the disposal of the Fed are limited in scope and liable to cause unwanted side effects. The Chairman reminded the senators that another economic danger - the so-called "fiscal cliff" of expiring tax cuts and automatic federal spending reductions set for January - is outside of the Fed's purview and squarely in the hands of his Congressional interrogators. Alarmingly, they as yet show no signs of applying the brakes before the sputtering recovery is driven over the precipice.

Sales Slump

The heart of the market is rending
When retail is downwardly trending,
But is it a shock
When a nation in hock
Will at times prefer saving to spending?

The US government reported retail sales down 0.5% in June, making the first negative sales quarter since April 2008. These light sales figures will weigh on the reelection hopes of Pres. Barack Obama, confirming as they do the picture of a weak domestic economy. But: is it wise or realistic to expect an overly indebted, underemployed US consumer to reach out of his or her meager savings to jumpstart the economy? Better for Uncle Sam to use his still-first-class credit rating to fund the renewal of our national infrastructure, thereby picking up the economy and providing something useful at the same time.

The Long Goodbye

Of his tenure at Bain said Mitt Romney,
The presumptive Republican nom'nee:
"I was much too engrossed
To give up my post
While Olympian tasks were upon me."

In the American political world right now, the one question that obsesses the Presidential campaigns is: when did Mitt Romney leave Bain Capital, the private equity firm of which he was founder, sole owner and CEO? The answer appears not to be as simple as either Mr. Romney's campaign or that of President Barack Obama would have you believe. That is to say, Mr. Romney did not execute a clean break from his firm before it was involved in politically inconvenient outsourcing transactions, though he was clearly preoccupied with the turnaround of the Salt Lake City Winter Olympics from Febuary 1999 onwards. While the management of the firm was certainly left to his colleagues during the 3-year long winter of discontent, it remains an awkward task to disavow the actions of a firm of which one was the officially registered chief executive.

A Victimless Crime?

Said an interbank trader, at pains
To manipulate LIBOR for gains:
"Though perhaps this offense
Is at someone's expense,
It's alright unless someone complains."

After the scandal and outcry over the fraudulent LIBOR fixing at Barclays and other banks, and the large fines and executive dismissals imposed upon Barclays by British regulators, came the inevitable, what's-the-big-deal backlash from those arguing that this is old news, that everybody does it, and that it's a victimless crime. MIT economist Simon Johnson answers the naysayers in a New York Times column. First, the fact that the rate-rigging has long been an industry practice is more - not less - troubling, as it goes to the heart of the cultural encroachment of fraud and corruption in the financial industry. Likewise, if everybody is in fact doing it, how much more Herculean is the task of cleaning the financial Augean stables. Finally, the notion that the LIBOR fraud is a victimless crime is false on its face. If two parties enter into a transaction and one of them is secretly rigging the price to his benefit, then the other party loses. Though the complexity of the global financial system may make it conveniently difficult to identify the victims, they nevertheless do exist.

An Unshakable Arrogance

A firm of the banking nobility,
Whose investments displayed fallibility,
Lost more than they should have,
And would that they could have
Developed a sense of humility.

Tax Cut Extension

Said Obama: "My favorite motif
Is of middle-class tax-rate relief,
For the push that it prods
As well as my odds
Of remaining Commander-in-Chief."

A Banker Called To Account

Said Barclays' Bob Diamond quite bluntly:
"I roundly resent the effrontery
To be fired abroad
For a silly old fraud
We'd soon overlook in my country."

The LIBOR-setting scandal has caused heads to roll at Barclays Plc, the first bank to be investigated in the case. Among them is CEO Robert E. Diamond, Jr., a "hard-charging" American who has been relieved of his duties at the behest of the Bank of England and the Financial Services Authority.

As Gretchen Morgenson wrote in The New York Times, he may have "thought he’d be subject to American rules of engagement when confronted with evidence of wrongdoing at his bank. You know how it works on this side of the Atlantic: faced with a scandal, most chief executives jettison low-level employees, maybe give up a bonus or two — and then ride out the storm. Regulators, if they act, just extract fines from the shareholders."

In a refreshing change of pace, British regulators actually demand that bankers be called to account for their wrongdoing.

ECB Rate Announcement

Said Mario Draghi: "Please heed me:
Our 'zone isn't going agreeably;
The better to serve you
In line with our purview,
We'll pay you to borrow if need be."

In an acknowledgement that things are bad all over, the European Central Bank has dropped its benchmark interest rates to record lows. ECB President Mario Draghi admitted in a press conference that his fears of a general slowdown in the euro zone have come to pass. Even such notable ECB hawks as Germany's Jens Weidmann have grasped the olive branch and joined in the unanimously dovish rate decision.

After a 0.25% reduction, the central bank's refinancing rate is now 0.75% and the overnight deposit rate, 0.00%. As Mr. Draghi reminded his listeners, this means that real (inflation-adjusted) rates are negative. At the same time, Europe's central banker is aware that any expansion of credit must be driven by demand, and thus the efforts to get the continent's economy moving again may amount to "pushing on a string."

LIBOR Rate Upset

There's an interbank market in London
To set rates where one's fellows will fund one,
But if dubious sorts
Give phony reports,
Then faith in the market is undone.

Barclays PLC Chairman Marcus Agius has resigned to take responsibility for the LIBOR rate-setting scandal that resulted in a $453 million settlement paid by the bank. The significance of the scandal is that, by reporting artificially low rates to the British Bankers' Association in the months before the financial crisis unfolded, the bank (and other participants in the rate-setting scheme) made it appear as though the market for bank liquidity was more stable than was actually the case. Thus, what could have been a valuable warning sign was missed; the canary in the coal mine was kept on artificial life support.