Monday, July 26, 2010

The Illustrated Guide To Larry Summers' FinReg Hypocrisy And Hallucinations

A few days ago I posted a video of Larry Summers talking about FinReg on CNBC with Maria Bartiromo. At the time, I was content to simply post the video with some snide remarks about what a devilish doofus and utter cad the man was, leaving it up to the reader to watch the video and see how obviously arbitrary and self-serving his opinionating on the subject was.

Alas, it seems that with the clarity of retrospect I see now that I misjudged the psychic value I would derive from leaving the video up without specific comment. It turns out I misjudged my future value system (insert statist/interventionist guffaw here, along with requisite claim that this situation highlights the need for a monopolist regulator who could smooth out market inefficiencies, failures and information asymmetries) and I have no choice (!!, double guffaw) but to present to you now a series of nearly verbatim (I might have blown a preposition or tense here or there) transcripts of The Sleepy One's comments to the Money Hunny, along with my very own color commentary. Let us begin:
It's the most important Wall Street reform legislation in 75 years. It will substantially reduce the probability of another financial crisis. It will eliminate the prospect of large-scale federal bailouts of the kind we were forced into a year ago. And it will change the financial life of every American household by forcing the right kinds of protections and restrictions on egregious credit card practices, on mortgages that have exploding and unfair terms, on payday loans and other means in which consumers have been taken advantage of.
This one is just hilarious. Summers is going to be eating these words for the rest of his life.

We're on the verge of Re-Depression 2.0, so Summers' calculation that this will "substantially" reduce the probability of another financial crisis demonstrates that Summers either doesn't understand what the word substantially means, or else he doesn't understand what generates business cycles. Another option is that both of these are true.

The federal bailout "clause" in his defense is based on the premise that the federal tax-funded bailouts of the financial industry were "necessary and proper" (having fun with Constitutional/legal language here, if you can't tell). Of course, they were neither. They may have been politically necessary lest the criminal scumbag politicians be voted out for not "doing something" but they were not economically necessary. In fact, they were highly economically improper, as they prevented in large part the self-correcting mechanism of the market place from operating and cleaning out all this much bewailed and bemoaned toxicity still lying semi-dormant in the financial system.

The last bit is just political demagoguery. "Unfair" is a relative term and it leaves the door open for all kinds of bureaucratic intervention, all manner of which will be entirely arbitrary and entirely ruinous to the operation of free markets everywhere. Credit cards and payday loans had nothing to do with the cause of this crisis, that part of FinReg was simply a way to buy some votes of angry, entitled, tapped out voters. Similarly, the mortgage debacle was a symptom, not a cause, of the financial crisis. The crisis itself was caused by the Fed.

Curious, no mention of the Fed so far. Moving on:
You know if you look at the financial history of this country we had a catastrophe in the 1930s. We put in place a system of regulation that really set that right. We went a long period with almost no, major, financial incident, but in the last 20 years we've seen one almost every 3 years: the S&L debacle of Mexico, LTCM, the NASDAQ Bubble and so forth. And so we clearly had a major task to do, which was to put in place a regulatory system which was updated to keep pace with the pace of innovation in the markets. That's what the framework put in place today has done. It's a huge achievement for the country, it reflects enormous leadership and hard work of many people, the President, who was talking about this in a major way in campaign speeches, an unlikely subject in campaign speeches, long before the Lehman crisis happened.
Summers proves he is no student of US or even global financial market history with this one.

He also misinterprets his selection-bias riddled data set and draws "clear" conclusions that should, in fact, be highly controversial. Namely, all of these debacles he mentions (and MORE!) can be directly tied to a preceding government intervention or central bank policy action as the ultimate cause. Yet, what conclusion does Summers arrive at but that all of these situations "clearly" demonstrate a more urgent need for more of the same interventions and narrow-minded policy measures that got us all into the mess we find ourselves in today. Could his theorizing be any more self-justifying and self-serving?

But that self-serving takes a back seat to his disgusting political genuflecting for Master Obama. Good gracious, if we had only recognized the visionary leadership of that young, upstart senator and Marxist community organizer from the state of Illinois and elected him to the newly created position of Emperor For Life when we had had the chance, none of this would have ever happened! May we be a little wiser, next time... even though there PROBABLY won't be a "next time", financial debacle-wise, because as Mr. Summers has already pointed out this whizbang FinReg stuff really socks it to impending financial meltdown-causing bacteria and viruses.
My friends in the business community sometimes like to try to have it both ways. They're for standards, for clear standards, but then if they don't like the standards, they're for regulatory discretion in a lot of areas, the Volcker Rule for example. It was business that was working very hard to get regulatory discretion and to avoid detailed statutory mandates.

So, I think it's a little rich for them to complain that there is now a certain amount of regulatory discretion.

Look, there's things Congress should not do. Congress doesn't know the details of the circumstances of an individual financial institution, those are enormously technical areas. So there needs to be discretion; discretion circumscribed by a framework; a framework that rules out the prospect of a taxpayer bailout; a framework that provides for resolution authority; a framework that insists that things that can be put on clearinghouses and exchanges be put on clearinghouses and exchanges; a framework that insists that every systemic institution, if you're big enough to bring down the system, you're big enough for someone to regulate you comprehensively.
You're right Larry, that IS rich! But not for any of the reasons you just mentioned.

First, let's consider what kind of person in the business community would be a "friend" of Larry Summers', metaphorically or otherwise. This would probably be a person who has been sucking on the government's teat to ensure they are always pulling those big, bottom-line surprises out of their hat at the end of each quarter for SO long that when their parents bring them to social events and explain their child-raising lifestyle choices to other partygoers, the average Jane becomes pretty alarmed and has to slap her husband across the face a few times to remind him that it's not polite to stare, especially at a fifty-year-old woman breastfeeding a teenager.

In other words, these businessmen friends of Larry are not the kind of businessmen you and I are familiar with-- you know, the kind that have to manage consumer preferences and costs of doing business as they quest after profit, the whole time exposed to the possibility of loss and financial ruin. Instead, they are members of the political entrepreneurial class who are so dependent on their government mommy's tax-financed plastic surgery-enhanced breast-milk that they'd soon die without it. But not before throwing one hell of a noisy, pathetic tantrum, first.

Okay, now that we've got that out of the way, let's consider what else is rich about Larry's latest observation. How about... Larry Summers and all the other assorted politicians who helped put it together as well as the bureaucrats at the various agencies tasked with interpreting FinReg and "fleshing it out"?

Yeah, little Larry is going to be riding that revolving door between government "service" and political consultancy like a turbocharged merry-go-round, and you can bet there are more than a few booze-and-sex-filled Bermuda cruises for the agency task force personnel charged with interfacing with 202's greatest lobbyist minds being finalized in the government relations departments of major Wall Street firms as we speak.

Question to Larry: if Congress can't properly regulate an individual financial institution due to "enormous" technical difficulties, how in the eff are they supposed to figure out an entire industry, like finance, or an entire economy, like the United States'?

Don't bother getting back to me with an answer, by the time you figure it out more than a few years will have passed and in the land of ObamaCare I'll surely be dead.
If you're worried about uncertainty, the people who decided to make 10s, if not hundreds of billions of dollars of subprime loans, and they're saying the uncertainty is about what the government is going to do? People have off-balance sheet SIVs where they can't even calculate what the total extent of their liabilities are, their uncertainty wasn't caused by the government. Their uncertainty was protected by what the government did, by the fact that those institutions were facing, in many cases, catastrophe.

And the government, NOT to help them, but to protect the system, did what was necessary to take what was a tale, of literally a depression, out of the market. That's the important thing that's happened about uncertainty.
I fear I am echoing myself here but, if financial institutions can't know what they're holding and calculate what it's worth, what hope do regulators have?

'Course, that's not the point-- that was just a red herring lightfoot Larry came up with to distract from the real issue, that being that the government IS causing massive uncertainty in the financial markets and real economy. Will there be another stimulus bill or not? If so, how much and who gets the money? Will the Fed be accomodative or complacent? Will the government allow the market to deflate or try to fight it with occasional, hyperactive bouts of inflation along the way? Will Congress pass more, moronic laws aimed at micromanaging everybody else's business while their various and growing ethics violations multiply or will they all sleep-in one morning after a lobbyist-financed night of coke and hookers on K Street and leave everyone alone for a change? Etc. etc., ad infinitum ad absurdum.

Again, Larry tries on a bit of politicized, revisionist history, where in this version of the story the government was NOT, I repeat, and emphatically so, good sir, NOT, bailing out connected cronies on Wall Street, but was in fact the knight in shining armor of the good, honest people of Main Street USA. 'TWAS FOR YOUR OWN GOOD, I MIGHT ADD, PAL!
Look, Maria, what am I going to do, give you a number [for what bank capital ratios should be in the future]? It's a very complex subject.

I will say this: it's clear that there wasn't enough capital in the system and there was too much leverage before. And it's clear that whatever we do we're going to need to do in a way that recognizes that we've got a recession from which we have to recover and that's going to depend on a strong flow of credit. And so, assuring a strong flow of credit, but getting to healthier, better capitalized institutions, that's the tradeoff we're going to make on Basel.
Ha, Maria baby, please, what do you want me to do get my little calculator out and do some math for everybody? Please, ya wastin' my time!

Of course, yes, that is exactly what we'd like you to do, Larry. Do your little calculation and show it to us so we can all check your math and make sure there was nothing arbitrary or subjective about the process.

Like all pseudo-economists, Larry is all about the tradeoffs, but he's also all about the free lunches (which don't exist). And what he's REALLY all about is not disclosing how he arrives at the tradeoffs he ultimately decides to make.

Hmmmm, we need more credit which requires more leverage, but we also need more capital, hmmmm, hmmmm, how to solve this puzzle, how to "tradeoff" between these two, seemingly mutually exclusive needs. Methinks some money-printing might not be far off in mine future!
We're determined, the President has said it many times, to do what's necessary for growth. The fact that it happened too late, it happened too slowly, but the fact that Congress is at last extending unemployment insurance, looks like it is on the verge of providing new credit and tax incentives for small business, it's starting to move on a broader range of programs to support energy, remembering the needs of state and local governments.

All of this will contribute to supporting and extending the momentum of growth. This is an economy we're watching very closely and we'll do what's necessary.
Larry Summers apparently does not subscribe to Ben Bernanke's tweets. The man still thinks there are green shoots out there and that it's appropriate to talk about shepherding their growth and development into big, strong economic oak trees. Little does he realize that "momentum" is a term borrowed from physics and it is not necessarily positive in value. Consider: what is the momentum of a massive object with negative velocity?

Haha, idiot. (Sorry, couldn't help myself.)

The last bit about necessity is, as you can see, a recurring theme in Larry's Logic. It's also probably the most horrifying part of the plan. Remember, the way it should read, if Larry were a bit more into honesty than he actually is, would be:
We'll do what [we think] is necessary.
As for what Summers and Co. think is necessary, don't bother him with requests for specific details, like what bank capital requirements should be. Instead, let him sleep on it, and together we can all cross that bridge (with the help of a friendly, well-groomed, handsomely suited financial lobbyist) when we come to it:

One last question, before I go, but...

Is it just me, or does Larry Summers have a more-than-merely-striking resemblance to South Park's wunderkind mystery sleuths, the Hardly Boys?

Eh? Huh? No? Just me? Well, alright then.

With that, I bid you adieu in the immortal style of Larry Summers at the end of his nearly 10 minute long propagandizing, dissembling "interview" with Maria "Mouthpiece of the Markets" B, in what can best be described as the awful love child of an Eastern New England accent and the tone of a person who has zero respect for the annoying person they have just finished talking to:


  1. Summers should enlist the SP Hardy Boys to get his own giant, raging clue.

  2. BobE,

    As of now, Summers remains utterly "clue"-less.