In this issue

Jonathan Tobin: Defending the Right to a Jewish State

Heather Hale: Compliment your kids without giving them big heads

Megan Shauri: 10 ways you are ruining your own happiness

Carolyn Bigda: 8 Best Dividend Stocks for 2015

Kiplinger's Personal Finance editors: 7 Things You Didn't Know About Paying Off Student Loans

Samantha Olson: The Crucial Mistake 55% Of Parents Are Making At Their Baby's Bedtime

Densie Well, Ph.D., R.D. Open your eyes to yellow vegetables

The Kosher Gourmet by Megan Gordon With its colorful cache of purples and oranges and reds, COLLARD GREEN SLAW is a marvelous mood booster --- not to mention just downright delish
April 18, 2014

Rabbi Yonason Goldson: Clarifying one of the greatest philosophical conundrums in theology

Caroline B. Glick: The disappearance of US will

Megan Wallgren: 10 things I've learned from my teenagers

Lizette Borreli: Green Tea Boosts Brain Power, May Help Treat Dementia

John Ericson: Trying hard to be 'positive' but never succeeding? Blame Your Brain

The Kosher Gourmet by Julie Rothman Almondy, flourless torta del re (Italian king's cake), has royal roots, is simple to make, . . . but devour it because it's simply delicious

April 14, 2014

Rabbi Dr Naftali Brawer: Passover frees us from the tyranny of time

Greg Crosby: Passing Over Religion

Eric Schulzke: First degree: How America really recovered from a murder epidemic

Georgia Lee: When love is not enough: Teaching your kids about the realities of adult relationships

Cameron Huddleston: Freebies for Your Lawn and Garden

Gordon Pape: How you can tell if your financial adviser is setting you up for potential ruin

Dana Dovey: Up to 500,000 people die each year from hepatitis C-related liver disease. New Treatment Has Over 90% Success Rate

Justin Caba: Eating Watermelon Can Help Control High Blood Pressure

The Kosher Gourmet by Joshua E. London and Lou Marmon Don't dare pass over these Pesach picks for Manischewitz!

April 11, 2014

Rabbi Hillel Goldberg: Silence is much more than golden

Caroline B. Glick: Forgetting freedom at Passover

Susan Swann: How to value a child for who he is, not just what he does

Cameron Huddleston: 7 Financial Tasks You Should Tackle Right Now

Sandra Block and Lisa Gerstner: How to Profit From Your Passion

Susan Scutti: A Simple Blood Test Might Soon Diagnose Cancer

Chris Weller: Have A Slow Metabolism? Let Science Speed It Up For You

The Kosher Gourmet by Diane Rossen Worthington Whitefish Terrine: A French take on gefilte fish

April 9, 2014

Jonathan Tobin: Why Did Kerry Lie About Israeli Blame?

Samuel G. Freedman: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Jessica Ivins: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Kim Giles: Asking for help is not weakness

Kathy Kristof and Barbara Hoch Marcus: 7 Great Growth Israeli Stocks

Matthew Mientka: How Beans, Peas, And Chickpeas Cleanse Bad Cholesterol and Lowers Risk of Heart Disease

Sabrina Bachai: 5 At-Home Treatments For Headaches

The Kosher Gourmet by Daniel Neman Have yourself a matzo ball: The secrets bubby never told you and recipes she could have never imagined

April 8, 2014

Lori Nawyn: At Your Wit's End and Back: Finding Peace

Susan B. Garland and Rachel L. Sheedy: Strategies Married Couples Can Use to Boost Benefits

David Muhlbaum: Smart Tax Deductions Non-Itemizers Can Claim

Jill Weisenberger, M.S., R.D.N., C.D.E : Before You Lose Your Mental Edge

Dana Dovey: Coffee Drinkers Rejoice! Your Cup Of Joe Can Prevent Death From Liver Disease

Chris Weller: Electric 'Thinking Cap' Puts Your Brain Power Into High Gear

The Kosher Gourmet by Marlene Parrish A gift of hazelnuts keeps giving --- for a variety of nutty recipes: Entree, side, soup, dessert

April 4, 2014

Rabbi David Gutterman: The Word for Nothing Means Everything

Charles Krauthammer: Kerry's folly, Chapter 3

Amy Peterson: A life of love: How to build lasting relationships with your children

John Ericson: Older Women: Save Your Heart, Prevent Stroke Don't Drink Diet

John Ericson: Why 50 million Americans will still have spring allergies after taking meds

Cameron Huddleston: Best and Worst Buys of April 2014

Stacy Rapacon: Great Mutual Funds for Young Investors

Sarah Boesveld: Teacher keeps promise to mail thousands of former students letters written by their past selves

The Kosher Gourmet by Sharon Thompson Anyone can make a salad, you say. But can they make a great salad? (SECRETS, TESTED TECHNIQUES + 4 RECIPES, INCLUDING DRESSINGS)

April 2, 2014

Paul Greenberg: Death and joy in the spring

Dan Barry: Should South Carolina Jews be forced to maintain this chimney built by Germans serving the Nazis?

Mayra Bitsko: Save me! An alien took over my child's personality

Frank Clayton: Get happy: 20 scientifically proven happiness activities

Susan Scutti: It's Genetic! Obesity and the 'Carb Breakdown' Gene

Lecia Bushak: Why Hand Sanitizer May Actually Harm Your Health

Stacy Rapacon: Great Funds You Can Own for $500 or Less

Cameron Huddleston: 7 Ways to Save on Home Decor

The Kosher Gourmet by Steve Petusevsky Exploring ingredients as edible-stuffed containers (TWO RECIPES + TIPS & TECHINQUES)

Jewish World Review June 2, 2008 / 28 Iyar 5768

7 Fixes for a Market Failure

By Mort Zuckerman

Mort Zuckerman
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http://www.JewishWorldReview.com | Only when the tide goes out do we find out who has been swimming without a bathing suit. The turmoil in the financial world reveals that almost everybody has been skinny-dipping. Even the greatest names have been exposed to humiliation — and a number of them have made an ignominious exit.

I have written about this financial crisis — using the word advisedly — often in the past months because it is so serious and misunderstood. Even now, when we haven't touched bottom, we hear that "the market" will solve all — meaning that tougher regulation by the government should be rejected. But the market won't and can't solve this problem on its own. To appreciate just why, and what must be done, we have to re-enter the casino and see what the key players have been doing with the money.

A casino, yes, because they've been gambling — but gambling with borrowed money. The financial world came to believe that cheap short-term money would always be available, so players could borrow short and make huge profits by buying higher-yielding long-term securities. One trouble was that almost no one understood just what assets anchored these long-term securities. Long-term mortgages sold as "securitized" bundles represented anything but security. They represented unknown degrees of risk between sound borrowers and unsound borrowers. Many of these bundles were ranked by rating agencies with an AAA imprimatur, which in turn attracted major investors from around the world. They all under-priced the risk. The shattering of the illusion that house prices would always rise burst that balloon.

Euphoria of leverage. How could it be that very sophisticated, clever people in finance should be so dumb? The answer is that they were caught in the euphoria of leverage. They borrowed more and more relative to the amount of equity. This was fine when values increased. Earnings boomed. The financial system became a great game of fees and speculation. The total assets of the 10 top banks in the United States and Europe nearly doubled from mid-2004 to mid-2007, mainly through leverage, at a time when the banks' capital to meet their obligations increased by only 20 percent. In 2007, 40 percent of all of America's corporate profits went to the financial services industries, whose debt, as a percentage of the nonfinancial sector, had quintupled in the last 25 years.

Just a year ago, markets were euphoric. But the lending bubbles inflated to such proportions that they burst, causing a disaster in the credit markets and revealing astonishing amounts of credit extended to even the weakest borrowers. As former Deputy Treasury Secretary Roger Altman pointed out, "Historically, C-rated borrowers have been unable to borrow much from public debt markets because over decades more than 30 percent of such low-rated debt defaulted before maturity. In 2006, more than $25 billion of these securities were sold; the previous 10 years, the average was $2 billion." Simultaneously, the bubble in home prices burst.

The decline in values meant the leverage became a noose. Lenders worried about shrinking equity pressed borrowers to sell assets, placing further downward pressure on prices — the beginnings of a vicious circle. If a firm's portfolio is leveraged 33 to 1, it takes a drop of a mere 3 percent to wipe out its entire capital.

The result was credit defaults that hit lenders all around the world. By the time they turned off the spigot, it was, as always, too late. Hundreds of billions of dollars in credit losses have been realized; the International Monetary Fund estimates losses will approach $1 trillion. The Fed has been pouring emergency liquidity into the financial system to avert a collapse.

Much of the credit was extended to finance complex asset portfolios held in a vast array of financial vehicles in a so-called shadow banking system of structured investment vehicles and conduits. Many of these were unregulated, trading in markets beyond the reach of effective oversight and supervision. This meant the firms could take on all the risks they wanted without the government saying boo, as it would have had to do with banks. The shadow banking system depended on unknown trillions of derivatives and other highly engineered financial securities. The volume of derivatives increased globally to $500 trillion by 2008. Warren Buffett described these derivatives as "weapons of mass financial destruction."

They have blown up the trust on which business depends. In the financial world, once you have to prove you are worthy of credit, it's virtually gone. Creditors no longer trust borrowers, but if creditors don't roll over their short-term loans, the borrowing businesses will collapse. The problem is that the Federal Reserve's role as the lender of last resort is limited to commercial banks and doesn't cover other entities involved in banklike activities. And in this shadow world that has evaded regulation created during the 20th century, we just don't know who owes what to whom or whom to bail out.

The result is a contagion of credit exposure and a massive hoarding of liquidity as banks restrict credit to each other and to nonbank financial institutions, threatening a downward spiral. Banks are not lending because the mood is one of fear and uncertainty, aggravated by bad loans accumulating faster than the amounts the banks have reserved for the contingency. For the first time since 1993, the value of loans past due exceeds the reserves for bad debt.

Normally, the economy goes bad first, and that leads to financial problems. This time it is financial problems that are dragging down the economy. Defaults are increasing in other areas of unsecured consumer debt — credit cards, auto loans, and student loans. The risk of corporate defaults is rising from minuscule levels, under 1 percent, but in a typical recession, default rates can rise to many times that.

The risk is of a chain reaction. People rush for safety, pushing stocks and bonds lower, further weakening financial institutions by devaluating their assets, as banks pull back on their capital at risk. That, in turn, intensifies the credit crunch and aggravates the economic downturn.

The financial system is substantially frozen. It cannot channel funds from savers to those who need to borrow money. Businesses are struggling for access to funds, depressing corporate investment. Homeowners feel poorer as home prices fall, which causes them to spend less. The typical American family will cut its spending by about 7 cents for every dollar in housing wealth it loses, so the potential decline of over $4.5 trillion in home prices could lead to a nationwide reduction in consumer spending of over $300 billion this year, enough to tip the economy into recession.

The Fed's role. The good news is that federal expenditures today as a percentage of gdp are about seven times greater than in 1929, which dramatically compounds the effective automatic countercyclical forces that are in place. Furthermore, the Fed today can ease monetary policy when it deems necessary; by contrast, gold standard laws in the early 1930s forced the Fed, counterproductively, to drain reserves from the banking system when foreigners redeemed dollars for gold.

What is to be done?

Left to itself, the market will wring out trillions of dollars of debt that had artificially driven up the price of real estate and financial assets — in effect, an economy that was living beyond its means.

The Fed cannot block this process. But it is necessary for it to proceed in an orderly fashion. This will involve central bank intervention unprecedented in scale and scope to break the vicious circle of fear and forced selling. The Fed must buy time, and only the Fed can do that on the scale required.

The most compelling need is to find additional capital for the financial system. Otherwise, the adverse feedback loop could intensify. The government has also unleashed the special housing agencies — Fannie Mae, Freddie Mac, and the Federal Home Loan Banks — to buy hundreds of billions of dollars of mortgage-backed securities, despite concerns over supporting unsustainable prices in, for example, residential real estate. Again, in order to stem panic and buy time, the Fed has no choice but to lend more money to more banks for longer periods against worse collateral.

These costs will be steep. But the alternative is worse: a market collapse that could result in the loss of millions of jobs.

I suggest seven reforms:

1. The government should have a central regulatory focus to assess risk across financial markets, regardless of corporate form. The government should have the power and capacity to intervene, when appropriate, either by forcing companies to cut back on leverage or by raising their capital requirements.

2. Any financial institution that stands to benefit from Federal Reserve assistance in a crisis must be subject to regulatory scrutiny to make sure it is managing its risk prudently. The Federal Reserve should have the right to command the information it needs to make judgments and to impose the biggest capital requirements on those who take the greatest risk.

3. Regulators must be given the ability to do their own assessment of capital liquidity and risk and not leave the task to banks and credit rating agencies.

4. Credit rating agencies should be required to certify to their boards — with corresponding liability — the independence of the rating process from borrower influence.

5. Mortgage brokers must be licensed nationally. In the housing bubble, we've had too many inappropriate or fraudulent mortgages.

6. The banks must enhance the transparency of their financial risks and exposure. They should be obliged to retain a significant part of the risk on their own balance sheet, if they originate securitized obligations, so that they will bear some cost if things go wrong.

7. Fannie Mae and Freddie Mac should be forced to raise adequate additional equity capital quickly.

The categorical imperatives are: greater disclosure, more oversight, improved risk-management by our banks and investment institutions, and new regulatory agencies to make sure this all happens. The current system of voluntary codes and industry standards is broken.

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JWR contributor Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report. Send your comments to him by clicking here.


© 2008, Mortimer Zuckerman