A sign that the unemployment rate has peaked.

Geithner: 85% of the $205 billion in bank bailout money to be repaid by end of 2010.

Should the Fed buy an additional $2 trillion in Treasuries?

In my post yesterday about derivatives, I mentioned the importance of "clearing," which would help sever the interconnections between firms on either side of a derivatives trade. (The interconnections are what can put the whole financial system at risk when one firm, like Lehman, runs into trouble.)

Just when momentum was starting to build for increased capital requirements as the core element of an approach that will reign in reckless risk-taking, Morgan Stanley effectively demolishes the idea.

In “Banking – Large & Midcap Banks: Bid for Growth Caps Capital Ask,” (no public link available) Betsy Graseck, Ken Zorbo, Justin Kwon, and John Dunn of Morgan Stanley Research North America dissect the coming demands for more bank capital. 

“In short, we think the demand for growth and access to credit will trump desire for unprofitable capital levels…

For the large cap and midcap banks, we expect normalized median common tier-1 ratios to come in at 8.4% and 10.0% respectively.”

That’s less capital than Lehman had just before it failed--11 percent. (If you doubt this, read the transcript of the final Lehman conference call--link is in this NYT.com piece or try this direct link; see p.7, for example)

Something strange and a little disorienting is happening in the fight to reform Wall Street: It looks like the reformers are actually starting to win.

This is not something you could have said as recently as six weeks ago. Back then, House Financial Services Committee Chairman Barney Frank had just released a proposal to regulate derivatives, essentially bets on the movements of other assets (like stocks, bonds, commodities) or interest rates. Derivatives are in some respects the key battle in the broader regulatory campaign. They were at the center of last fall’s financial crisis--Lehman’s balance sheet was stacked with them, and they triggered AIG’s collapse. But because they’re so poorly understood by the general public, the fight has unfolded almost entirely in Congressional backrooms, where the banks and their lobbyists naturally have the upper hand.

Frank’s "discussion draft" seemed to reflect that. The proposal the Obama administration unveiled this summer would have forced banks and hedge funds to trade derivatives on exchanges and “centrally clear” them. Clearing means inserting a well-capitalized middleman between two parties on either side of a trade. When derivatives trades are cleared, the failure of one institution doesn’t threaten everyone else it has traded with, which is what happened with Lehman. The only downside is that clearing requires the trader to post margin--a kind of cash cushion--to the middleman, which they’re generally loath to do. Before long, dozens of companies were flocking to Congress to plead their case.

Regulators around the world, including our own SEC, succumbed to populist fervor following the Lehman collapse and banned short-selling "to protect the integrity and quality of the securities market and strengthen investor confidence."

Oftentimes when you debate a skeptic of structural reform on Wall Street, the skeptic will say something like: "Why are you so worked up about 'too big to fail'? Lehman was far from the biggest bank on Wall Street, but it caused plenty of damage." If anything, "too-interconnected-to-fail" is the real issue, they'll say--implying that this makes addressing the problem utterly futile, since severing interconnections is a lot harder than limiting bank size.

Judging from Jeopardy, economics needs a lot more popularizing.

Is America's long-term unemployment problem looking downright European?

The 'did Lehman cause the crisis?' debate continues.

Study: Calorie posting in NYC restaurants hasn't changed behaviors.

Krugman: Why does the Fed insist on reviving shadow banking?

Bill Clinton: Bush should have rescued Lehman.

It is easy to dismiss the G20 communique and all the associated spin as empty waffle. Ask people in a month what was accomplished in Pittsburgh and you’ll get the same blank stare that follows when you now ask: What was achieved at the G8 summit in Italy this year?

Perhaps just having emerging markets at the table will bring the world closer to stability and more inclined towards inclusive growth, but that seems unlikely. Should we just move on--back to our respective domestic policy struggles?

That’s tempting, but consider for a moment the key way in which the G20 summit has worsened our predicament.

Yes! 

Steve Weisman over at The Peterson Institute posted a nice riff yesterday about James Stewart's recent New Yorker piece reconstructing the week Lehman collapsed. His (and Stewart's) conclusion? Hank Paulson screwed up massively:

What recession? Wages are rising. (Or are they?)

First firm to participate in toxic loans progam is selected.

In his NYT mag piece, Paul Krugman blames macroeconomists for believing the world behaved as well as the math behind their models. His solution? To re-embrace Keynes.

But in a provocative counterpoint on VoxEU, Scott Sumner says looking back to Keynes won't solve the problem. Instead he claims that macroeconomists didn't trust their models enough, and that the latest developments in the field should have helped prevent the crisis.

Sumner's main argument is that the Fed didn't loosen monetary policy before and after Lehman's bankruptcy, as most of us believe, but in fact tightened it--this despite signs the economy was slowing rapidly. But how can that be, especially since Allan Meltzer and the like have been crying about the hyperinflationary risks of easy money?

It boils down to the Fed's ability to pay interest on excess reserves. Although the Fed has created a vast amount of extra cash, banks are happy to just hold on to it because the rate being paid on reserves (that is, the money they park at the Fed) is just as good as or better than what banks could get elsewhere.

A decade's worth of income gains for Americans has been wiped out.

Two top-notch accounts from Bloomberg on the global effects of Lehman's collapse.

The FT has one too.

For anyone interested in debating where the economy and financial system stand a year after the Lehman collapse, TNR is hosting a conference on the subject this coming Monday, September 14, at the Willard Hotel in Washington. We've got a real murderer's row of speakers and panelists lined up--Rep. Barney Frank, Commodity Futures Trading Commission Chairman Gary Gensler, The Wall Street Journal's David Wessel, hedge fund manager (and TNR investor) Bill Ackman, former New York Gov. Eliot Spitzer, among them.

As the Lehman anniversary approaches, defenders of the financial sector struggle into position--partly in response to your comments (also here). They offer three main points:

1. We need finance to make the economy work.
2. Financial innovation delivers value, although it’s not perfect (but what is?).
3. Don’t kill the goose that laid the golden egg.

Point #1 is correct, but this does not necessarily mean we need finance as currently organized. The financial sector worked fine in the past, with regard to supporting innovation and sustaining growth. Show me the evidence that changes in our financial structure over the past 30 years have helped anyone outside the financial sector.

On #2: Financial innovation has obviously benefited the people who run and operate large financial companies. Has it helped anyone else, including their own sharedholders? And if you can show broader social benefits (e.g., lower cost of capital, better ability to take nonfinancial risks that make sense, or anything else), do these outweigh the massive social/fiscal costs that are now apparent?

Which leads to point #3:

Ben Bernanke will be nominated for a second term as chairman of the Federal Reserve. But which Bernanke are we getting? There are at least three.

Hank Paulson's testimony yesterday was informative, if only because it illustrated that he himself still understands little about the origins and nature of the global crisis over which he presided. Perhaps his book, out this fall, will redeem his reputation.

Comes from Saturday's NYT: