At that time, Mr. Singer was critical of the Dodd-Frank Act for its failure to bring transparency to the financial system and its reliance on regulators to effectively monitor the Too Big to Fail banks.
Mr. Singer is back with a letter to investors in his Elliott Management funds which once again sounds themes that are very familiar to regular readers.
In a NY Times Dealbook article on the letter, Mr. Singer observes:
A great deal of stupidity has chipped away at the massive advantages of Western civilization, which could terminally decline if it remains on the current path. But these problems can be solved — and swiftly ....This observation confirms the long term economic impact of the Japanese model for handling a bank solvency based financial crisis (preserve bank capital and only recognize losses as banks generate earnings to absorb them). The US, UK and EU policies since the beginning of the financial crisis reflect this model.
As shown by Japan, the impact of the Japanese model and its supporting fiscal and monetary policies is long term economic decline. In Japan's case, its economy has shrunk over the last 15 years.
This observation also supports the idea that adopting the Swedish model for handling a bank solvency based financial crisis and requiring banks to recognize all of their losses today will bring a quick end to the global financial crisis.
Mr. Singer is generous with his ire, directing it at the United States, the European Union and Japan, and offering a critical assessment of the sorry state of affairs in the world marketplace.
Here is a current snapshot of the U.S., Europe and Japan: the financial sector is overleveraged and opaque. Fiscal, tax, and regulatory policies are unsound and not oriented toward growth and efficiency. On a long-term balance sheet basis, these countries are insolvent, with no hope of paying presently promised benefits regardless of the level of growth achieved or tax rates charges. Monetary policy is extreme and experimental. None of these assertions is refutable...The financial sector is opaque and, with the blessing of regulators, hiding losses.
He goes a step further, too, arguing that “the epoch of investor confidence in money backed by nothing is coming to an end.”
As he often has in recent letters, Mr. Singer spends pages railing against the Federal Reserve for buying bonds, printing cash and keeping interest rates at or near zero percent.
“This policy is arrant idiocy and is likely to ultimately lead to serious inflation, a risk that governments continue to ignore at their peril,” he writes.Whether it leads to serious inflation or not, Mr. Singer joins Bill Gross, Charles Schwab and Walter Bagehot in thinking that the zero bound for monetary policy is at an interest rate greater than zero and more like Mr. Bagehot 2%.
Mr. Singer spells out a clear casualty of pursuing a zero interest rate monetary policy: investor confidence in money backed by nothing.
The peril he spells out for Europe, meanwhile, is much more immediate. He points out the circle of codependency between the nations and their banks: the nations support the banks to keep them from falling prey to markets, but the banks support the nations, too, by buying their debt.
In the next global trading crisis, characterized (as it may well be) by the cascading transmission of losses from one opaque, overleveraged institution to another, the survival of any given commercial or investment bank (or group of such institutions) is likely to depend more on the perception of the creditworthiness of the sovereigns which stand behind them (and the sovereigns’ willingness to actually do so) than on any analysis of the fundamentals of the afflicted institutions....By adopting the Japanese model, nations have to stand behind their banks to inject capital should a bank's book value fall. As a result, there is a circle of codependency between banks and sovereign.
Under the Japanese model with its emphasis on protecting the level of capital at the banks, opacity is a policy requirement. For example, regulators have given RBS's Stephen Hester permission to hide the losses on and off the RBS balance sheet and only recognize them as RBS has earnings to absorb them.
If the Swedish model were adopted, nations would only stand behind the bank depositors. This breaks the circle of codependency.
Under the Swedish model with its emphasis on protecting Main Street and requiring banks to recognize the losses on and off their balance sheet, transparency is a policy requirement. If banks disclose their current asset, liability and off balance sheet exposure details, market participants could see that all their losses have been recognized.
Back home, a bevy of regulation in the wake of the financial crisis has done little to shelter the system from risk, address leverage or puncture the veil of secrecy at large financial institutions, he writes.
The argument is context to his real point, however, about impending regulation of hedge funds: “It is worse than pointless.”...
“We wonder if the Securities and Exchange Commission, the regulatory body tasked with policing hedge funds in the U.S., has the sophistication and resources to sniff out issues related to the myriad of complicated trades, strategies and securities that these firms manage,” he writes, before throwing some salt on a particularly sensitive wound at the agency. “Hopefully this new crop of regulators will be more astute than those who ignored a 15-page detailed analysis of the Madoff fraud that was handed to them on a platter years before his unmasking.”If every financial institution over a certain size were required to provide ultra transparency, the regulators could enlist the resources of the market to help them understand each firm and the risks it poses to the system.
For example, JP Morgan could help the regulators in their analysis of Citi and BofA. Likewise, these firms could help in the analysis of JP Morgan.