Sunday, October 16, 2011

Ritholtz Interviews with Jonathan Miller: An Uncompromised View of Contemporary American Politics and Economics

Below are selected points from two of the Ritholtz interviews with Jonathan Miller. The original podcasts are linked below.

October 6, 2011 Interview:

On High-Frequency trading: It's a zero sum game. They are skimming. Mom and pop's pension fund is being ripped off a little bit on every trade. Only shameless whores, that are the publicly traded exchanges, would steal from the public. If the exchanges were not-for-profits no one would ever think of doing this. It is this kind of behavior that makes the public wary of investing in stock markets.

On Real Estate: Fannnie Mae's stated goal of homeownership was 75%. Now we are 66%. The long-term average is slightly lower. The National Association of Realtors reported one single month at the height of the bubble as being not a good time to buy. The water cooler there is filled with hallucinogenics.


On Rogue Bankers: There is no such thing as rogue traders. There are only rogue banks. If you are that grossly negligent that you have to be rescued by the government, then I guarantee you they are doing lots of other things wrong. If you have an entity that messed up so badly that it can't survive... how are you going to go out and run a marathon? Jamie Dimon is the next CEO who needs a humbling.

On Deleveraging: Consumers today are coming off a massive credit binge. Following a binge, according to Rogoff and Reinhart, consumers will go through deleveraging that will last 5 to 10 years. They are only buying what they can afford right now.

On Normal Recessions vs. Credit Crisis Recessions: In normal times, people are trading up, buying more stuff, bigger houses... then things begin to overheat, the fed raises rates, financing becomes more expensive, people spend less, home and car prices start declining, people not overleveradged find value and start spending. A moving-to-good-hands takes place. This time is different because it is a credit crisis recovery. If you don't want to say this time is different, say that you are using the wrong data set. The post world war II recession recoveries are a different animal. What you should be looking at are credit crisis recoveries - Sweden, Mexico, Argentina, Japan. Those are all decade-long recovery periods. A doctor can't look at every patient and treat them the same. This guy has the hiccups, this guy has a gunshot wound.

On This Time is Different and Lending Standards: This time it was different. Lending standards disappeared. Risk was being offloaded and hidden. They stopped using historic ratios and metrics like p/e for stocks or median home price to median incomes for houses. Normal lending standards went away. Fog this mirror, you can have a loan. The pendulum has now swung the other way on lending standards. It's hard to get a loan.

On Fed policy of keeping rates low and promising to keep them there: Fed and Congress can't write checks to banks anymore. So they will give them money to recapitalize them by allowing them to borrow at 0% from Fed and lend to the Treasury at 2%. It will take a decade.

On Larry Summers: We now find out that the single biggest asshole in America is Larry Summers, who browbeat Obama into bailing out Citibank. Larry Summers oversaw the repeal of Glass Steagall as Treasury Secretary in the Clinton Whitehouse, and oversaw the Commodities Futures Modernization Act which took the entire universe of derivatives and hid them from federal regulators. The Treasury Secretary should have advised Clinton that it was garbage. Then, when he went back to the White House, he wasn't done fucking the country. He gave us one last bend over and grab your ankles.

On Robert Rubin: Another giant asshole - he gave us Geithner and Summers. You don't send the same surgeon in after a botched surgery because the first surgeon is more interested in covering up his work.

On Obama: Putting Rubin, Summers and Geithner in power was the tragedy of the Obama administration. Obama and Bush were both given an opportunity to be transformational - a Churchill, a Roosevelt. Obama's problem was that he sought out the biggest asshole in America - Robert Rubin.

On Credit Rating Agencies: To me, if you give up your virtue for money, you are a prostitute. Credit rating agencies are prostitutes.

To listen to the interview, visit The Big Picture Blog


January 21, 2011 Inteview:

On Lending Criteria: From 1,000,000 BC to 2002, all commercial credit was based upon the buyer's ability to service that loan. From 2002 to 2007 that no longer mattered. We brought in millions and millions of people who would not have qualified if there were standards. Prices dropped from demand going away. Those people then had to get out of those homes somehow.

On Programs Designed to Prop Up Housing Prices: All the programs designed to prop up house prices are counter-productive. We don't have the demand to take care of the supply. Either we open up the borders to people with money, or let housing prices settle back to a healthy level. The latter will take a decade. One solution is bringing in engineers, mathematicians, etc.

On the Financialization of the US Economy: From a macro perspective, the US economy has been financialized. Wall Street is supposed to bring capital to companies working on new products. And, in theory, they also manage retirement accounts and assets - but they don't do a good job of that. Everything else - moving paper around, structuring finance, all that other bullshit - is just a waste of energy. It doesn't do anything for society. And, even worse, it pulls people - mathematicians, engineers, etc. - into the industry who would otherwise have gone into the Googles, the Apples, etc.

On Bailouts: The worst part of the bailouts is that the normal post-recession collapse in this sector was stopped in its tracks. The normal definancialization of the economy was stopped. Finance should support business - like lawyers or accountants do. Nationwide, the industry should be about 7% to 9% of profits (historically). At its peak it was 24%. Now it is 18% so it's not nearly where it should be.

[note: different figures presented in this Washington Post piece: From 1973 through 1985, as Simon Johnson, former chief economist of the International Monetary Fund, documented in 2009, American banks never earned more than 16 percent of domestic corporate profits. By the mid-2000s, that figure rose to 41 percent.]

On Lobbying: I have libertarian friends who are always bitching about government. I always say to them, when a dog bites you in the ass... that's what dogs do - don't blame the dog. Look up the leash and see who is holding the handle. When you look at Congress - Congress is the snapping dog. But they are somebody's bitch. You have to see who is holding the leash. Very often it is banks and Wall Street and the financial sector having Congress do its bidding. Most of the things that got us into trouble have been done at the bequest of the banks. For example, the 2004 change in leverage ratios... ironically known as the Bear Stearns Act - as in banks larger than Bear Stearns had lower ratio requirements. First of all, why do you change a law for just 5 banks and not for all of them? That shows you how corrupt the system is.

On Congress: I don't want to say Congress are whores, that go to these corporate executives with knee pads and lip-gloss... Congress is corrupt. Politicians in both parties are worthless. Every day I have to get up and prevent myself from releasing my ninja assassins to go pick out some people who are undercutting the Republic here. They don't even hide how corrupt they are anymore. It just came out that one of the new guys had sent out a note to CFO's asking them what legislation they would like to see changed. They will do anything for any kind of campaign contribution.

On a Real Estate Bottom: Ritholtz uses 3 measures: median income to median home price, value of housing as % of GDP, and cost of owning vs. cost of renting. The first 2 are still showing 7.5% to 15% overvalue. The third metric makes cost of owning look reasonable. The problem is that it is skewed by 3 things: 1. unusually low rates with the Fed at 0%, 2. people are reluctant to buy assets that are falling in value, and 3. people are piling into rentals so rents are going up. That's only if you take the snapshot. But if you look at the moving picture, it may get even more reasonable to buy.

On Fair Value: Things are rarely at fair value. It is something you momentarily enjoy as you careen from one extreme to the other.

On What Prevented a Manhattan Real Estate Implosion: In New York, co-ops prevented Manhattan real estate from imploding. Banks had their heads up their asses, but co-op boards were heroes. They said it's 30% down, we will climb up your ass with a microscope, we want 10 years of tax documents... and if you want a no-doc loan, move to Idaho. Foreclosure rates on co-ops are tiny. If you have to be in Manhattan, with co-op charges and other charges, payments will be about the same as renting.

On Anecdotal Views of the Economy: Depending on who you are and what your circle of friends is, you will experience very different Americas in terms of the economy. If you are a college grad, the unemployment rate is 4.8%. If you are a computer programmer/engineer, the unemployment rate is 0%. The greater the skill set you have, the less employment issues you will see. I always tell people the plural of anecdote is not data. That's why it's so important not to just rely on your own experience.

On Greenspan: Greenspan has to go down in history as the worst Fed Chairman.

On Bankers and Risk: I look at bankers like 5 year olds - if you give a 5 year old a bowl of chocolate bars and say they can have one... As soon as you leave the room they will eat until they are sick. Bankers are no different. As soon as you say, "You're a big boy... we trust you not to blow up the economy and send the world to the precipice..." They are so short-term focused, they will do whatever is necessary to get that bonus, and then will let the world go to hell and let it be someone else's problem. The whole run-up from 2003-2007 was make-believe, based on risk not mattering. If risk doesn't matter, you mash your foot to the carpet and let the speedometer go up to 250. When the driver hits the wall he kills himself. The difference is the driver kills himself, but the bankers take everyone with them.

On Mark Zandi: He's a great guy. Horrific economist. He has been wrong about everything.

On the Unemployment Rate: Keep in mind the way the unemployment rate is calculated. It is a percentage based on the size of the labor pool. When the economy gets better, it causes people outside the labor pool to jump back in. So you have more people hiring but perversely the unemployment rate goes up. It is important not to just look at the headline. In the early years of the Bush administration, for example, the unemployment rate went way down. Either more people were getting jobs, or people were leaving the labor force. It took 47 months to get back to the pre-Bush-recession levels of employment. Now we have not yet experienced the dynamic where people come back into the labor pool. That is yet to come.

To listen to the January 21, 2011 podcast, visit Jonathan Miller's Housing Helix Blog

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