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Lords of Finance, 2009

In Economy on January 1, 2010 at 12:15 AM

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The Roaring 00’s are now ended!  A decade of decadence arguably for many and a decade of pursuit of happyness arguably for few, culminated, spoken for and ending in a jobless recovery for the United States economy as we progress into 2010. To be sure, the Subprime Recession is technically ended — in fact, it ended back in September according to Federal Reserve Chair Ben Bernanke. 

Yet while previously volatile stock markets are recovering as of March-to-present, 140 FDIC-insured banks have failed as of this year, the official estimate as of last check on the FDIC Failures and Assistances Transactions database. No explicitly coherent Pujo Committee or Pecora Commission has been undertaken by Congress, though one financial regulatory reform bill has passed through the House by a partisan vote of 223-202 — read House Financial Regulatory Reform Bill Passes

Many people still have not watched The Crash of 1929. There is still no broader public conception of what it means exactly to participate in “trading on margin.” Or why exactly a “credit default swap” is not regulated like other types of insurance — watch The Bet that Blew Up the World and The Warning.

The official unemployment rate nationally represents 1 and every 10 job-seekers, but the real under-employment level is closer to 1 and 5.  “Hoovervilles” have given way to “Bushvilles” that have, in turn, given way to “Obamavilles,” also known as makeshift “Tent Cities” in California — read Inside California’s Tent Cities.

How much longer will the unemployed be content with calling on Randstad for part-time employment opportunities?

The Labor Force Spectation Rate inches upward, and nobody ought seriously believe that Primerica and its all-voluntary, all-commissioned job force should lead us into recovery. 

Many people are concerned about many things —

Approximately 1 in 4 mortgagors are underwater according to at least one WSJ article — read In Deep: Underwater Borrowers. Reporters like Gillian Tett are concerned about sovereign debt — read Could sovereign debt be the new subprime?. Central bankers, past and present, whom Liaquat Ahamed calls the Lords of Finance, are ambivalent about CoCo Bonds and Too Big To Fail institutions. Others are more concerned about the bundling of life insurance policies into tradeable, “innovative” securities.

In hindsight, the real term of the year ought to be Large Complex Banking Organizations, or so-called “LCBOs,” with the corollary story being the tale of their “boom-bust-bailout” cycle of moral hazard that embodied 2007, 2008 and 2009. That story has thus far been best articulated by bloggers at The Baseline Scenario and U.S. PIRG.

The entire instability of “The World is Flat”-style economic systems has highlighted the importance of what Stanford economics professor John Taylor refers to as “the 24-hour news cycle” and real-time business cycle analysis, hinging on counterfactuals and the need for alternative monetary/fiscal policy paths — watch Inaugural Martin Feldstein Lecture, Empirically Evaluating Economic Policy in Real Time.

Abroad, Niall Ferguson, the economics historian, paints the 00’s period as a portrait-piece of shifting empire and Hegelian change on center stage, what he calls “Western Ascendancy” ended, with the power center of high finance and global economics re-calibrating, this time re-centering in Shanghai, China.

As he calls it, “Chimerica” is breaking down — read The Decade the World Tilted East.

Thankfully there is good news as well.

Enter, the Lords of Finance, 2009 — 

For one, Lord Brad Setser, formerly of Follow the Money at the Council on Foreign Relations, has joined the Obama administration, hopefully inspecting the sovereign debt issue.  Additionally, Lords Paul Volcker and Robert Reich, also Obama advisors, are being listened to by at least some regarding repeal of Gramm-Leach-Bliley and the restoration of a more sustainable U.S. Gini co-efficient. 

Lord Andrew Lo, M.I.T. renowned professor of financial engineering, is on the case advising Congress on the importance of accounting for counterparty insurancing holistically — read Systemic Risk, Hedge Funds, and Financial Regulation.

And perhaps most importantly, Lord John Geanakoplos, the Yale economics professor, has a proposition for saving the world from itself as 8 billion mortgages move into foreclosure as projected over the next several years — read Matters of Principal by John Geanakoplos and Susan Koniak.

One Bloomberg article from June had warned us all along — Option ARMs Threaten Housing Rebound as Resets Peak.  Remember, August 2011 will be the peak of option-ARM resets.

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