Well, some of you may have missed it, others like Mr. Gasparino is all over it.  What might he be writing about?  AIG testimony?  Goldman Sachs testimony?

No, he’s more concerned with one missing actor in this drama, JP Morgan.  While writing for the Huffington Post, Mr. Gasparino explains to us (here):

Of all the events that led up the great financial collapse of 2008, in my mind, one truly stands out: The decision by super-bank JP Morgan to demand billions of dollars in collateral from the troubled Lehman Brothers in mid-September of that year….

Now… if you want to talk about some laser like focus, this is truly amazing.  Mr. Gasparino doesn’t remember anything about houses going up in value for double digits for a decade?  Doesn’t remember Fannie & Freddie with strong political help encouraging this?  Doesn’t remember all those warnings about just these things?

No, he tells us, the real villain here, is JP Morgan:

…The move, according to senior Wall Street executives, was akin to a death knell for the firm, which was just about on life support already. JP Morgan demanded some $8 billion, it said, for clients that traded with Lehman….

Because….

….Once word went out that JP Morgan was nervous about Lehman’s ability to survive, a bank run ensued. Lenders pulled lines of credit; Lehman couldn’t trade with its counter-parties. In less than a week, Lehman had declared bankruptcy and the entire financial system began to implode…

To translate this tripe he seems to be stating that by merely asking a company who owes you money, but can’t pay and then goes bankrupt because they can’t pay money they owe, is the entire reason for the financial collapse.

Oh, and least we forget… the company which borrowed all that money and couldn’t pay it back and went bankrupt – it wasn’t their fault at all – it was those greedy bastards who wanted what was rightfully theirs.

• It might not matter, the health care bill hated by all might be pushed through with various legal and procedural maneuvering.  here via Cato

• Interesting medical research showing correlation: As girth grows, risk of sudden cardiac death shrinks.  I question their use of BMI to identify normal/underweight as as 6’4” person can weight as little as 160 and still be normal (chart), but hopefully it will help them understand that stats are useful tools, but for things such as medicine…. due to the unique nature of us all, the future is individually built therapies, not government programs to change the BMI of an entire nation.

• John Stossel writing Reform Does Not Mean More Rules in response to Senator Chris Dodd’s proposed overhaul of financial regulation:

The New York Times headline says Dodd’s Bill “Adds Layers of Oversight”.

Just what we need: 1,336 pages of additional “layers.”  Senator Dodd is as ignorant as he is arrogant.

• Lending credence to Mr. Stossel’s position, How the Fed slept through Lehman via Rueters

• Cornell MBA student says bet against Warren Buffett (here via WSJ).  Not saying I agree, but I do agree with WSJ – always nice to see someone attempting to break conventional wisdom.

Exit polling with race showing high turnout @ Boston.com

Does a loss affect Obama or is it just Coakley’s problem? @ LA Times

Or is “all politics local” still true? @ US News

Healthcare Reform:

Reason Foundation: Beware Of The ObamaCare Revolution

TCS Daily: Medicare Rationing Begins in 2011

Taliban Attacks in Afghanistan – what does the coordinated attack show?

Rueters via Yahoo News: Taliban attack shows tactical skill, military limits

Stratfor: The Kabul Attack: A Postmortem

AFL-CIO & Democrats – a revolving door of money – Unions give to Dems, Dems give to Unions:

Detailed Abstractions: Unions – Unionized Against Freedom

Cato:  No Taxes, Please, We’re Democrats

Will we continue to try to fix government caused crises with more government (re: Finance Reform)?

Reuters: Watchdog’s fate in Senate key to financial reform

Cato: Reforming Previous Reforms, ad Infinitum

President Obama will unveil on Thursday a proposed levy on the nation’s biggest financial firms structured not just to repay taxpayers for the bank bailout, but to recoup some of the public subsidy that “too big to fail” banks have enjoyed on account of their implicit government backstop, a senior administration official tells the Huffington Post….

First, I honestly have a problem with senior administration officials lending their knowledge to such a highly partisan propaganda site as the Huffington Post.   They long ago stop pretending to care about being news or even being accurate and moved straight into MoveOn.org territory.

Now, I’m not saying the President or his staff must chose the outlets I would prefer, but they could definitely send out press statements or use seemingly “real” and more honest news organizations.  It’s not like the NY Times isn’t on the President’s side – why go to Huffington?

Either way – regardless of the merits (or lack thereof0) for this specific  marketing strategy – it seems quite obvious that Mr. Obama and his team lacks a fundamental understanding of economics.  Their continued reliance on government solutions to all economic problems, demonstrates a misunderstanding of the dynamics needed to keep this economic engine and society moving forward.

It seems they have an idea that they can model the economic behavior of institutions they define as “Too big to fail” as if this equilibrium is: A) possible to spot & B) static enough to allow the slow moving government the ability to legislate in a helpful way.

Indeed the current economic crisis itself lends credibility to the idea that the government is in no position to grasp the complexities that exist when dealing with so many interconnected businesses (here):

…”We are here to examine what happened in the public sector, what happened in regulatory agencies, what happened in enforcement agencies,” said Phil Angelides, the chairman of the Financial Crisis Inquiry Commission….

While investigating the public portion of the failure:

…Questions focused on failures around regulatory decisions to loosen bank leverage and capital limits, faulty credit rating agencies, a warning about epidemic of mortgage fraud and a decision by Congress and the FDIC to stop collecting vital insurance fees from ‘well capitalized” banks between 1996 and 2006….

They grilled DOJ:

…Panel members asked Attorney General Eric Holder to conduct an investigation into what, if anything the agency did after the Federal Bureau of Investigation in 2004 warned that mortgage fraud was so rampant that it was a potential “epidemic.”…

& the SEC:

…SEC Chairwoman Mary Schapiro was inundated with questions about the agency’s failure to oversee credit rating agencies, which provided overly rosy debt ratings for problematic mortgage securities….

The FDIC & Congress:

…Meanwhile, the FDIC and Congress were criticized for its decision not to collect deposit insurance premiums from well capitalized banks for roughly a decade between 1996 and 2006….

But it’s ok, because the FDIC agrees with them:

…Both Schapiro and FDIC Chairwoman Sheila Bair agreed that an SEC decision in 2004, under its chairman at the time, William Donaldson, to allow banks to identify how much capital and leverage they must have on hand, based on their own model-based formula, was a mistake that allowed banks to expand their leverage to problematic levels….

Where the lead to the obvious conclusion they were searching for the entire time – government help:

…Bair said. “I think the only place to tackle that on a system-wide basis for both banks and non-banks was through consumer protection rules that gave the Fed the authority to apply rules against abusive lending across the board to both banks and non-banks.”…

Now it might just be me, but thinking federal regulators with new powers over banks and abusive lending standards will get it right next time seems a tad optimistic…. you know, especially considering their massive failure with the current crisis.

Which is of course only a portion of the story.  The government, through various GSE’s, exacerbated the problems with global capital flows, by giving banks incentives to make riskier and riskier loans (here):

…The actual causes of our financial troubles were unusual monetary policy moves and novel federal regulatory interventions. Regulatory distortions intensified in the 1990s. Poorly chosen public policies distorted interest rates and asset prices, diverted loanable funds into the wrong investments, and twisted normally robust financial institutions into unsustainable positions.

We can group most of the unfortunate policies under two main headings: (1) Federal Reserve credit expansion that provided the means for unsustainable mortgage financing, and (2) mandates and subsidies to write riskier mortgages….

Please don’t misunderstand me – just because someone leaves their keys in their car doesn’t mean you should take it – so immoral actions on behalf of lenders, home buyers, and an inaccurate understanding of the true risks were also present in the prelude to this tragedy:

…There is no doubt that private miscalculation and imprudence made matters worse for more than a few lending institutions and individual borrowers….

& therein lies the true rub.  This imprudence is something for which the market should bear the price of their mistakes.  Only through bearing the true cost will their incentives ever line up with true moral behavior.  If you think a local bank or lender wasn’t able to sell every single loan to a GSE, they would’ve continued to allow bad loans to be made which they knew would sink themselves… well, that’s just not very likely and not very rational.

But don’t worry – I’m sure with these new and smarter people, this time they’ll figure out which banks are too big to fail, do it right, and only tax them in the amount they need to insure against the risk.

You can read the full text @ the Blog Calculated risk (here).  Among other things in the statement, the main changes in thinking since November are encapsulated in the opening paragraph:

Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months….

Of course it has!  With the FHA pushing home loans like Fannie & Freddie have (here @ DetailedAbstractions) & continuing to pay people to buy houses (8K dollar tax credit extended @ LA Times) and property prices declining as the market corrects prior bad incentives (here @ DetailedAbstractions), the result is obvious .  Given non-market, but economic incentives to purchase property, property prices in real terms decrease, therefore demand increases.

What this does not say however is whether this is sustained.  Lots of individuals for instance took advantage of the Cash for Clunkers program (here @ DetailedAbstractions) mainly resulted in a short-term boost in car sales, but at the expense of lower future sales.

This of course doesn’t mean the housing market isn’t on the rebound, but I see no evidence that really allows this conclusion at this time.

It continues:

…Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.  Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth.

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

& there’s the rub…  The Federal Reserve is supposed to be an independent branch of the government outside of any specific administration, but when publishing statements which disagree with basic economic thought one might start to wonder.

In fairness, it could also be just simple self-interest in that they need to justify spending billions on bailing out bad companies., but to use the words, “policy actions stabilized the market” makes this seem unlikely, but I digress.

The main issue with this portion of the statement is that’s its simply untrue.  New policies such as “too big to fail” which the Federal Reserve admitted can’t continue (here @ Business & Media),  have seemingly become official  government policy (here @ Reason Foundation).

Additionally, there is widespread agreement that the new financial regulations the administration is pursuing will result in higher costs of doing business (here @ The Economist, here @ Cato, here @ Reason Foundation, among others).   These new barriers to entry will stifle new business creation, creating less incentive for economic activity.  Additionally, just as “too big to fail” was supposed to fix large interconnected companies, but instead ended up cementing that status for certain corporations, the new regulations are highly unlikely to prevent a  recession for similar reasons from happening again (here @ DetailedAbstractions).

All in all, it seems the Federal Reserve has taken a very short-sighted approach and produced a political paper, not an economic one.