From the Institutional Risk Analyst. The results of their Q2 2009 stress test of the US banking industry are not pretty:
The second quarter FDIC data is online for consumer and professional users of The IRA Bank Monitor. The results of our Q2 2009 stress test of the US banking industry are pretty grim. Despite all of the talk and expenditure in Washington, the US banking industry is still sinking steadily and neither the Obama Administration nor the Federal Reserve seem to have any more bullets to fire at the deflation monster. With the dollar seemingly set for a rebound and the equity and debt markets looking exhausted, one veteran manager told The IRA that the finish of 2009 seems more problematic than is usual and customary for the end of year.
Plain fact is that the Fed and Treasury spent all the available liquidity propping up Wall Street’s toxic asset waste pile and the banks that created it, so now Main Street employers and private investors, and the relatively smaller banks that support them both, must go begging for capital and liquidity in a market where government is the only player left. The notion that the Fed can even contemplate reversing the massive bailout for the OTC markets, this to restore normalcy to the monetary models that supposedly inform the central bank’s deliberations, is ridiculous in view of the capital shortfall in the banking sector and the private sector economy more generally.
As with Q1 2009, the Q2 preliminary Stress Index calculated by IRA jumped to over 6.7 or more than half an order of magnitude above the 1995 base year of 1, but then subsided down to “only” 3.11 vs. 2.8 in Q1 2009. As in the previous period, the preliminary score reflects the tough reality facing smaller community and regional banks, while the final score of 3.11 reflects the huge subsidies flowing through the top institutions. Whereas in past years the inclusion of the larger money center banks would skew the risk profile of the banking industry to a more risky posture, today, as zombie GSEs, the top banks make the industry look more conservative.
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Paul Krugman wrote a lengthy piece in the New York Times Magazine today. It is a very hard critique and analysis of the failure of current macro and financial economic thought, which didn’t even come close to predicting the current financial malaise. I don’t agree with all of it, particularly his love affair with Keynesian economics. But it is still very worthy of your time and a recommended read. A point where I agree with Krugman: the failure of EMH.
Below is an excerpt:
As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.
Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.
It’s much harder to say where the economics profession goes from here. But what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems.
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Tags: ben bernanke, derivatives, economy, EMH, federal reserve, great depression, inflation, keynes, keynesian, paul krugman
economy, EMH, global economy | Graham | 
Saturday, September 5, 2009 11:51 am | 
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Mises.org has posted Chapter 2 of Ron Paul’s glorious new book End the Fed. Here’s a small excerpt:
Most Americans haven’t thought much about the strange entity that controls the nation’s money. They simply accept it as though it has always been there, which is far from the case. Visitors to Washington can see the Fed’s palatial headquarters in Washington, D.C., which opened its doors in 1937. Tourists observe its intimidating appearance and forbidding structure, the monetary parallel to the Supreme Court or the Capitol of the United States.
People know that this institution has an important job to do in managing the nation’s money supply, and they hear the head of the Fed testify to Congress, citing complex data, making predictions, and attempting to intimidate anyone who would take issue with them. One would never suspect from their words that there is any mismanagement taking place. The head of the Fed always postures as master of the universe, someone completely knowledgeable and completely in control.
Read the whole chapter here
From Lew Rockwell
Help give Ben Bernanke nightmares by pre-ordering Ron Paul’s next bestseller, End the Fed, for just $13.19, in a handsome hardback edition. This important work can strike a moral, economic, libertarian, and constitutional blow at the central government, the central bank, and their cartel of banksters and Wall Street crooks, if we help.
Step One is helping make sure that End the Fed debuts at #1 on Amazon.com on its publication date, September 16, 2009. This will light a firecracker underneath the establishment, and advance the cause of freedom and sound money by leaps and bounds.
Ever since it was schemed by the Rockefeller, Morgan, and Kuhn-Loeb banking families in 1913, and signed into law by the inflationist-warmonger Woodrow Wilson, the Fed has been instrumental in more than 100 wars, the giant welfare state, the American empire, recessions and depressions — including this one — the rip-off of middle-class living standards, and the subversion of American freedom.
If we want the peaceful, commercial republic of the Founders’ dream, prosperity and civilization, sound money and free markets, we must End the Fed.
From FT Alphaville
Pimco’s chief executive (Mohamed El-Erian) comments on Ben Bernanke’s reappointment for a second term at Chairman of the Federal Reserve.
President Obama’s announcement reappointing Fed Chairman Bernanke for a second four-year term does, and should, command broad based support.
Bernanke has played a major role in designing and implementing policies that averted an even larger global destruction of jobs and living standards around the world. Indeed, crisis management has defined Bernanke’s first term. His second term promises to be equally challenging as it will be defined by four major issues.
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