Financial Skeptic Bulletin, February 2008
- 20080129 : Unwinding the Fraud for Bubbles ( Unwinding the Fraud for Bubbles, Jan 29, 2008 )
- 20080129 : fed-approaches-negative-real-interest ( fed-approaches-negative-real-interest, Jan 29, 2008 )
- 20080128 : Video - CNBC.com ( Video - CNBC.com, Jan 28, 2008 )
- 20080128 : AmEx CEO Clear signs of a weakening economy and business environment ( AmEx CEO Clear signs of a weakening economy and business environment, Jan 28, 2008 )
- 20080128 : Financial Crisis: 20 Years in the Making ( January 26, 2008 , Economic Dreams - Economic Nightmares )
- 20080128 : Spectre of sovereign wealth funds by K. SUBRAMANIAN ( October 09 , 2007, , Sify.com )
- 20080128 : IMF, Larry Summers- The Wile E. Coyote Moment Has Arrived ( IMF, Larry Summers- The Wile E. Coyote Moment Has Arrived, Jan 28, 2008 )
- 20080128 : Global Recession Risk Grows as U.S. `Damage Spreads (Update1) by Rich Miller ( Global Recession Risk Grows as U.S. `Damage' Spreads (Update1) , Jan 28, 2008 )
- 20080128 : Time To Move On to the Next Bubble Clean Energy by Mark Braly ( Time To Move On to the Next Bubble Clean Energy, Jan 28, 2008 )
- 20080128 : Reflation without Representation - iTulip.com Forums ( Reflation without Representation - iTulip.com Forums, Jan 28, 2008 )
- 20080128 : Maybe Securitization Really is Casino Capitalism ( Maybe Securitization Really is Casino Capitalism, Jan 28, 2008 )
- 20080127 : The Great Private Equity Cash Robbery of 2007 by Jeff Matthews ( January 23, 2008 , Is Not Making This Up )
- 20080127 : To Build Confidence, Try Better Bricks by Robert Shiller ( To Build Confidence, Try Better Bricks, Jan 27, 2008 )
- 20080127 : LTCM-style bailout for ABK and MMBI ? ( Accrued Interest )
- 20080126 : Job Description – Rogue Trader ( Job Description – Rogue Trader, Jan 26, 2008 )
- 20080126 : Andrew A. Samwick - A Better Way to Deal With Downturns - washingtonpost.com ( Andrew A. Samwick - A Better Way to Deal With Downturns - washingtonpost.com, Jan 26, 2008 )
- 20080126 : Who Is Jerome Kerviel - Seeking Alpha ( Who Is Jerome Kerviel - Seeking Alpha, Jan 26, 2008 )
- 20080126 : Massachusetts Subpoenas MBIA and Ambac Over Disclosure ( Massachusetts Subpoenas MBIA and Ambac Over Disclosure, Jan 26, 2008 )
- 20080125 : Jeff Matthews Is Not Making This Up The Great Private Equity Cash Robbery of 2007 ( Jeff Matthews Is Not Making This Up The Great Private Equity Cash Robbery of 2007, Jan 25, 2008 )
- 20080125 : Greenspans Client List Needs Someone Like Me by Caroline Baum ( Greenspan's Client List Needs Someone Like Me, )
- 20080125 : Robert Reich Grasps the Enormity of the Problem ( Robert Reich Grasps the Enormity of the Problem, )
- 20080125 : The Dollar Crisis and Coming Gold Boom - Seeking Alpha ( The Dollar Crisis and Coming Gold Boom - Seeking Alpha, )
- 20080125 : naked capitalism ( naked capitalism, )
- 20080125 : "Expansionary Aggregate Demand Policies are Likely to Bring about a Period of Stagflation" ( )
- 20080125 : Dr. James K. Galbraith Interview - Janszen - iTulip.com Forums ( Dr. James K. Galbraith Interview - Janszen - iTulip.com Forums, )
- 20080125 : Federal Reserve Bank of Philadelphia Speeches ( Federal Reserve Bank of Philadelphia Speeches, )
- 20080125 : Flagstar Bancorp: Concerned About Consumers Walking Away ( Flagstar Bancorp: Concerned About Consumers Walking Away, )
- 20080125 : Even Tobin Smith is now a bear ( Even Tobin Smith is now a bear, Jan 25, 2008 )
- 20080124 : How to Stop the Downturn, by Joseph Stiglitz, Commentary, NY Times ( How to Stop the Downturn, by Joseph Stiglitz, Commentary, NY Times, Jan 24, 2008 )
- 20080124 : The Big Picture Feds Folly Fooled by Flawed Futures ( The Big Picture Fed's Folly Fooled by Flawed Futures, Jan 24, 2008 )
- 20080124 : Every Major U.S. Bank Was Profitable Last Year" ( )
- 20080122 : Preemptive easing - Paul Krugman - Op-Ed Columnist - New York Times Blog ( Preemptive easing - Paul Krugman - Op-Ed Columnist - New York Times Blog, Jan 22, 2008 )
- 20080120 : The price of everything Keeping your balance on Dover Beach ( The price of everything Keeping your balance on Dover Beach, Jan 20, 2008 )
- 20080120 : The price of everything ( The price of everything, )
- 20080120 : Inflation or Deflation ( Inflation or Deflation, )
- 20080120 : The Education of Ben Bernanke ( Jan 20, 2008 )
- 20080120 : Asia Times Online Asian news and current affairs ( Asia Times Online Asian news and current affairs, )
- 20080120 : [link] ( [link], Jan 18 )
- 20080120 : Bloomberg.com Worldwide by Mark Pittman ( Bloomberg.com Worldwide, Jan. 17 )
- 20080120 : Cramer on Merrill Wheres the SEC! - Stock Market US News Story - CNBC.com ( Cramer on Merrill 'Where's the SEC!' - Stock Market US News Story - CNBC.com, Jan 17 )
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- 20080117 : A new type of writedown: monolines hit Merrill's numbers by Helen Thomas ( A new type of writedown: monolines hit Merrill's numbers, Jan 17 )
- 20080117 : thomas-palley-investing-in-china-fools ( thomas-palley-investing-in-china-fools, )
- 20080115 : How Wall Street broke the free market by Andrew Leonard ( How Wall Street broke the free market , Jan 15, 2008 )
- 20080115 : Mishs Global Economic Trend Analysis ( Mish's Global Economic Trend Analysis, )
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- 20080115 : FT Alphaville / ( FT Alphaville / , Jan 14 )
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- 20080115 : Bloomberg.com Audio-Video Reports ( Bloomberg.com Audio-Video Reports, Jan 14 )
- 20080115 : ( )
- 20080115 : CFCs Kowalczyk Sees Earnings Guidance Depressing Stocks: Video ( softpanorama.org, Jan 14 )
- 20080115 : ( )
- 20080115 : Calculated Risk ( Calculated Risk, )
- 20080115 : ( )
- 20080114 : Mishs Global Economic Trend Analysis ( Mish's Global Economic Trend Analysis, Jan 14, 2008 )
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- 20080114 : BofAs Countrywide Purchase is a Huge Mistake - Seeking Alpha ( BofA's Countrywide Purchase is a Huge Mistake - Seeking Alpha, )
- 20080112 : 7 years of the stock market ( Jan 12, 2008 )
- 20080112 : Angry Bear ( Angry Bear, )
- 20080112 : ( )
- 20080112 : Econbrowser What Are the Prospects for a Two Recession Bush Presidency ( Econbrowser What Are the Prospects for a Two Recession Bush Presidency, Jan 12 )
- 20080112 : ( )
- 20080112 : Mishs Global Economic Trend Analysis ( Mish's Global Economic Trend Analysis, Jan 12 )
- 20080112 : ( )
- 20080112 : naked capitalism ( naked capitalism, Jan 12 )
- 20080112 : ( )
- 20080112 : UBS - Letter to shareholders ( UBS - Letter to shareholders, Jan 12 )
- 20080112 : ( )
- 20080112 : Nationalization of the Banking System ( Nationalization of the Banking System, Jan 12 )
- 20080112 : ( )
- 20080112 : Greenspans Reputation at Risk as Recession Odds Growbe Alan Greenspans reputation." ( Greenspan's Reputation at Risk as Recession Odds Growbe Alan Greenspan's reputation." , Jan 11 )
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- 20080102 : ( )
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- 20080102 : ( )
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- 20070116 : Bond Insurer Death Watch Continues ( Bond Insurer Death Watch Continues, Jan 16, 2007 )
- 20070116 : Somber Fed Says Economy Has Lost Punch Financial News - Yahoo! Finance ( Somber Fed Says Economy Has Lost Punch Financial News - Yahoo! Finance, Jan 16, 2007 )
- 20070116 : Clusterfuck Nation by Jim Kunstler ( Clusterfuck Nation by Jim Kunstler, Jan 16, 2007 )
- 20070101 : naked capitalism The Rising Tide of Liquidity, Part 3 ( naked capitalism The Rising Tide of Liquidity, Part 3, Jan 01, 2007 )
- 171226 : International Political Economy Zone Casino Capitalism ( International Political Economy Zone Casino Capitalism, )
|"The dollar is our currency, but your problem."
Nixon's Secretary of State John Connally to
who were carping at him about a falling dollar
|All the middle-class 401K frogs are welcomed to the slowly
warming stagflation pot.
|Practical men, who believe themselves to be quite exempt
from any intellectual influences, are usually the slaves of
some defunct economist.
John Maynard Keynes
|"You can fool some of the people all of the time and those
are the ones you want to concentrate on"
What was the business model behind all this craziness ? Is it worth
it to originate or buy 49 fraudulent loans in order to get that one good
March 26, 2007 |
My theory of the Fraud for Bubbles is, in a nutshell, that it isn't
that lenders forgot that there are risks. It is that the miserable dynamic
of unsound lending puffing up unsustainable real estate prices, which
in turn kept supporting even more unsound lending, simply masked fraud
problems sufficiently, and delayed the eventual "feedback" mechanisms
sufficiently, that rampant fraud came to seem "affordable." So many
of the business practices that help fraud succeed-thinning backoffice
staff, hiring untrained temps to replace retiring (and pricey) veterans,
speeding up review processes, cutting back on due diligence sampling,
accepting more and more copies, faxes, and phone calls instead of original
ink-signed documents-threw off so much money that no one wanted to believe
that the eventual cost of the fraud would eat it all up, and possibly
... ... ...
I suspect most of us feel, generally, that fraudsters-borrowers,
lenders, anyone else-who get burned just got what they deserved. True
enough. But lending fraud, like warfare, creates quite a bit of "collateral
damage," in all senses of the term. Those honest homeowners watching
their neighborhoods collapse after the fraud-bombs finally detonated
are not probably very comforted by the fact that it wasn't their fault.
So when we debate the question of potential "bailouts," we keep running
up against the question of who needs or deserves the bailout. If you
want to do something to assist the honest homeowner who bought with
an 80% loan but is now upside down because of the neighbors' fraud,
how do you do that without, inevitably, helping out the lender who facilitated
that fraud, too? If you want to do something to protect the stability
of the honest lenders, how do you do that in a way that doesn't, inevitably,
also protect the scumballs and incompetents?
Getting into a bubble is easy. Getting out?
[Jan 28, 2008]
Video - CNBC.com High Time For High Yield
There is risk, but there is a reward too. In any case 401K investor
needs to stick to junk funds that are focused on BB and B issues of
the junk bond spectrum. The latter is higher end of the spectrum.
Pimco, T. Row Price and Vanguard high yield funds belong to this
"... we saw clear signs of a weakening economy and business environment
Kenneth I. Chenault, chairman and CEO.
"Irrational enthusiasm" is finally over and
confidence in Fed is lost. "Fed bubble" was the last bubble to pop.
Doug Noland tells us - preaching to the choir, since no one else
will listen - that the stage for the mess now unfolding was built on
a foundation laid over 20+ years by US Federal Reserve policy, cheerled
by Wall Street finance. Noland says, "The unfolding financial and
economic crisis has been more than 20 years in the making. It's a creation
of flawed monetary management; egregious lending, leveraging and speculating
excess; unprecedented economic distortions and imbalances on a global
basis. And I find it rather ironic that Wall Street is so fervidly lambasting
the Fed. For twenty years now the Fed has basically done everything
that Wall Street requested and more." Here's more:
More than 20 Years in the Making, Doug Noland, Credit Bubble
Bulletin, Jan. 25: … When the junk bonds,
LBOs, S&Ls, and scores of commercial banks all came crashing down
beginning in late-1989 to 1990, the Greenspan Fed initiated an historic
easing cycle that saw Fed funds cut from 9.0% in November 1989 all
the way to 3.0% by September 1992. In order to recapitalize the
banking system, free up system Credit growth, and fight economic
headwinds, the Greenspan Federal Reserve was more than content to
garner outsized financial profits to the fledgling leveraged speculator
community and a Wall Street keen to seize power from the frail banking
system. Wall Street investment bankers, all facets of the securitization
industry, the derivatives market, the hedge funds and the GSEs never
looked back - not for a second.
In the guise of "free markets," the
Greenspan Fed sold their soul to unfettered and unregulated Wall
Street-based Credit creation. What proceeded was
the perpetration of a 20-year myth: that an historic confluence
of incredible technological advances, a productivity revolution,
and momentous financial innovation had fundamentally altered the
course of economic and financial history. The ideology emerged (and
became emboldened by each passing year of positive GDP growth and
rising asset prices) that free market forces and enlightened policymaking
raised the economy's speed limit and increased its resiliency; conquered
inflation; and fundamentally altered and revolutionized financial
risk management/intermediation. It was one heck of a compelling
- alluring - seductive story.
But, as they say, "there's always a catch". In order for New
Age Finance to work, the Fed had to make a seemingly simple - yet
outrageously dangerous - promise of "liquid and continuous" markets.
Only with uninterrupted liquidity could much of securities-based
contemporary risk intermediation come close to functioning as advertised.
Those taking risky positions in various securitizations (especially
when highly leveraged) needed confidence that they would always
have the opportunity to offload risk (liquidate positions and/or
easily hedge exposure). Those writing derivative "insurance" - accommodating
the markets' expanding appetite for hedging - required liquid markets
whereby they could short securities to hedge their risk, as necessary.
There were numerous debacles that should have alerted policymakers
to some of New Age Finance's inherent flaws (1994's bond rout, Orange
Co., Mexico, SE Asia, Russia, Argentina, LTCM, the tech bust, and
Enron to name a few). Yet the bottom line was that the combination
of the Fed's flexibility to aggressively cut rates on demand; ballooning
GSE balance sheets on demand; ballooning foreign official dollar
reserve holdings on demand; and insatiable demand for the dollar
as the world's reserve currency all worked in powerful concert to
sustain (until recently) the U.S. Credit Bubble - through thick
Despite his (inflationist) academic leanings and some regrettable
("Helicopter Ben") speeches as Fed governor, I do believe Dr. Bernanke
aspired to adapt Fed policymaking. His preference was for a more
"rules based" policy approach of setting rates through some flexible
"inflation targeting" regime, while ending Greenspan's penchant
for kowtowing to the markets. Today, it all seems hopelessly naïve.
Inflation is running above 4%, while the FOMC is compelled to quickly
slash the funds rate to 3%. And never - I repeat, never - have the
financial markets been more convinced that the Federal Reserve fixates
on stock prices while is permissive when it comes to inflationary
pressures. Today, the contrast to the ECB and other global central
banks could not be starker. The Fed
has climbed way out on a limb, and it is difficult at this point
to see how they regain credibility as inflation fighters or supporters
of the value of our currency. It is not only trust in Wall Street-backed
finance that is being shattered.
The greatest flaw in the Greenspan/Bernanke monetary policy doctrine
was a dangerously misguided understanding of the risks inherent
to their "risk management" approach. Repeatedly, monetary policymaking
was dictated by the Fed's focus on what it considered the possibility
of adverse consequences from relatively low probability ("tail")
developments in the Credit system and real economy. In other words,
if the markets (certainly inclusive of "New Age" structured finance)
were at risk of faltering, it was believed that aggressive accommodation
was required. The avoidance of potentially severe real economic
risks through "activist" monetary easing was accepted outright as
a patently more attractive proposition compared to the (generally
perceived minimal) inflationary risks that might arise from policy
ease. As it was in the late 1920s, such an accommodative ("coin
in the fuse box") policy approach is disastrous in Bubble environments.
The Fed's complete misconception
of the true nature of contemporary "inflation" risk was a historic
blunder in monetary doctrine and analysis. To be
sure, the consequences of accommodating the markets were anything
but confined to consumer prices. Instead, the primary - and greatly
unappreciated - risks were part and parcel to the perpetuation of
dangerous Credit Bubble Dynamics and myriad attendant excesses.
Importantly, the Fed failed to recognize that obliging Wall Street
finance ensured ever greater Bubble-related distortions and fragilities
- deeper structural impairment to both the financial system and
real economy. In the end, the Fed's focus on mitigating "tail" risk
guaranteed a much more certain and problematic "tail" - a rather
fat one at that.
Fundamentally, the Greenspan/Bernanke
"doctrine" totally misconstrued the various risks inherent in their
strategy of disregarding Bubbles as they expanded - choosing instead
the aggressive implementation of post-Bubble "mopping up" measures
as necessary. They were almost as oblivious to the
nature of escalating Bubble risk as they were to present-day complexities
incident to implementing "mop up" reflationary policies. "Mopping
up" the technology Bubble created a greatly more precarious Mortgage
Finance Bubble. Aggressively "mopping up" after the mortgage/housing
carnage in an age of a debased and vulnerable dollar, $90 oil, $900
gold, surging commodities and food costs, massive unwieldy pools
of speculative global finance, myriad global Bubbles, and a runaway
Chinese boom is fraught with extraordinary risk.
Furthermore, the Fed's previously most
potent reflationary mechanism - Wall Street-backed finance - is
today largely inoperable. …
It is also as ironic as it was predictable that Alan Greenspan
- Ayn Rand "disciple" and free-market ideologue - championed monetary
policies and a financial apparatus that will ensure the greatest
government intrusion into our Nation's financial and economic affairs
since the New Deal. Articles berating contemporary Capitalism
are becoming commonplace. I fear that the most important lesson
from this experience may fail to resonate: that to promote sustainable
free-market Capitalism for the real economy demands considerable
general resolve to protect the soundness and stability of the underlying
Credit system. …
October 09 , 2007, |
With apologies to Karl Marx, a spectre is haunting the capitalist
West: that of sovereign wealth funds (SWF).
The rates at which foreign exchange reserves of emerging economies
rise, and the efforts made by them to invest abroad are scary.
In recent years, the International Monetary Fund (IMF), the Bank
for International Settlements (BIS) and major banks have been publishing
data on the rising reserves of these countries. Until two years ago,
they were not troubling.
What set the cat among the pigeons was a study by Morgan Stanley
published in May 2007 (⌠How big could sovereign wealth funds be by 2015?).
It reported that SWFs could turn absolutely massive and rise from the
current level of $2.5 trillion to $12 trillion by 2015, with an annual
rise of $500 billion. The report went on to suggest how this would affect
fundamentally the risky assets trade and give rise to ⌠financial protectionism.
The Economist described SWFs as a "secretive society" flush with
assets and added how, if they continued with their spree, ⌠the world
will witness the intriguing spectacle of its largest private companies
being owned by governments whose belief in capitalism is often partial.
Sebastian Mallaby of The Washington Post (⌠The Next Globalization
Backlash, June 25, 2007) narrated the challenges posed by them to globalisation
and how ⌠chunks of corporates could be bought by Beijing"s government
- or, for that matter, by the Kremlin.
It is evident is that the fear of SWFs
that has been creeping in recently has degenerated into paranoia. A
Cold War-like atmosphere permeates discussions on the subject.
This turnaround is surprising as, till recently, members of the developed
world were the advocates of globalisation with capital freedom and foreign
investment as its centre-pieces.
Further, economists sympathetic to the concerns of emerging economies
were cautioning the latter about the "excessive" build-up of reserves
and investing them in low-yielding US Treasuries.
Prof Lawrence Summers, former US Treasury
Secretary, in a lecture in Mumbai in March 2006, bemoaned the irony
of the emerging nations wasting their reserves. He pleaded
for a new focus toward the challenge of deploying them effectively.
Within the emerging economies, public opinion turned against their
central banks and pressed them to adopt bolder
strategies. With the levels of reserves far exceeding
prudential liquidity needs, the central banks themselves realised the
need for setting aside a part of the reserves in separate vehicles for
investments to get better returns.
Singapore set the precedent by creating Temasek. Oil exporters such
as Kuwait, Abu Dhabi and Saudi Arabia had set them up earlier. Russia,
with its equalisation fund, is a recent addition to the pantheon.
China setting up a State Foreign Exchange Investment Corporation
with a capital of $300 billion was a thriller when it was reported.
The formal launch on September 28 of China Investment Corp (GIC) with
a capital of $200 billion was a low-key affair, ostensibly in order
not to ruffle the feathers of western critics.
On date, the SWF club has 25 members and includes small countries
such as Kazakhstan and Botswana. Truly, it is a motley assortment. Many
are new to the game and do not have any common strategy. And yet, their
emergence has disconcerted the older players.
The chorus voicing concerns over SWFs is from Western governments,
academics and journalists. Broadly, they allege that SWFs are state-owned
and, ergo, are not commercially driven and thus their motives suspect.
Prof Summers would argue that these funds "shake capitalist logic" (Financial
Times, July 29, 2007) as they seek non-economic objectives.
It is also suggested that SWF operations are clothed in secrecy and
lack transparency. Most attacks on SWFs harp on these themes in some
form or other.
Clay Lowry, Acting Under-Secretary of the US Treasury, gave his views
in a lecture delivered in San Francisco. He felt that the ⌠common objective
should be an international financial system where countries do not accumulate
more foreign exchange assets than they want or need. Sadly, he could
not elaborate how this utopia could be achieved with the US" uncontrolled
Indeed, he was pragmatic and added, "SWFs are not going away, and
it will be increasingly necessary to work to integrate these funds as
smoothly as possible into the international financial system". His main
thrust was on transparency of their operations and adoption of "best
practices." He hoped a joint task force of the IMF and the World Bank
could work out the guidelines.
There are reports about Germany drawing up plans to stop strategic
assets falling into the hands of ⌠giant locust funds controlled by Russia,
China and West Asian governments. Germany"s fear was over Russia "stealing"
its technology, though it does not say it openly. It is said to be drafting
new legislation to cover national security and, possibly, energy.
The EU Commissioner for Economic and Monetary Affairs, Joaquin Almunia,
explained in an interview on September 27 that unless
investments by SWFs are more transparent, they would
be restricted. The intention, as he explained, was not to be "protectionist"
but to protect the region"s interests without being "protectionist."
Though somewhat ambivalent, the UK holds a similar position.
Fear of SWFs has deep roots. There has been a southern shift in economic
balance in recent years. The US has been losing its hegemonic role even
in financial markets. In the post-bubble era, its strength was boosted
by the passive piling of reserves by emerging economies. In fact, they
were subsidising the US financial market and some economists even dubbed
it ⌠Bretton Woods II which would subsist for long.
As Prof Brad Setser of Oxford put it in his blog (of July 10), The
taxpayers are subsidising the US to the tune of roughly
$130 billion a year. That is roughly 1 per cent of US GDP. It helped
Americans buy BRIC goods and services at lower prices. It kept interest
rates low and helped banks and brokers make huge capital gains selling
debt back to emerging economies in complex packages.
Private equity firms might not be the
kings of Wall Street in the absence of huge surge in central bank for
debt, and the resulting easy availability of liquidity.
They would lose their kingdoms if emerging economies withdrew their
reserves or diversified into other economies. True, there are limits
to which they may do it individually or collectively. However, there
are signs that the trend has commenced.
Stephen Roach of Morgan Stanley puts it more trenchantly:
"The day will come when surplus funds will
begin to shift focus away from functioning as lender to the external
world". It would lead to a shifting mix in composition
of global savings and tradeoffs associated with the alternative uses
of funds. There will be downward pressure on the dollar and upward pressure
on long-term US real interest rates. Investment through SWFs is another
major and significant trend. All these together
would end the party in New York. This is the spectre that haunts the
Larry Summers is an interesting transformation of an economist emerged
in casino capitalism environment. He was implicated in the "privatization"
team that destroyed the economics of Russia more successfully that Hitler
armies ;-). Later he tried to protect from prosecution professors Andrei
Shleifer and Jonathan Hay "who illegally speculated in Russian stocks and
bonds, even as they directed a US-funded, Harvard-backed project to help
the Russian government set up honest and transparent capital markets --
a project whose rules expressly forbid them to invest in the host country."
Principals He was also implicated in Enron fraud as well gold manipulations.
Not surprisingly Summers he has a plan on how to solve the current crisis
It is critical that sufficient capital is infused into the bond insurance
industry as soon as possible. Their failure or loss of a AAA rating
is a potential source of systemic risk. Probably it will be necessary
to turn in part to those companies that have a stake in guarantees remaining
credible because they have large holdings of guaranteed paper. It appears
unlikely that repair will take place without some encouragement and
involvement by financial authorities. Though there are many differences
and the current problem is more complex,
the Long-Term Capital Management work-out is an example of successful
public sector involvement.
If global growth slows, the idea that export will save the USA economics
is a wishful thinking...
Global growth may decelerate close to the 3 percent pace economists
deem a worldwide recession, from a 4.7 percent rate in 2007.
... ... ....
The meltdown of the U.S. subprime-mortgage market has pushed up credit
costs worldwide and forced European and Asian banks to write down billions
of dollars in holdings. Tumbling U.S. stock prices are dragging down
"We'll see more collateral damage," says Allen Sinai, chief economist
at Decision Economics in New York. "The risk of a global recession is
...the IMF postponed publication of its latest world economic forecast,
originally due Jan. 25, to take into account recent market turbulence.
In Davos, Klaus Kleinfeld, chief operating officer of Alcoa Inc.,
the world's third-largest aluminum producer, said he foresees ``a difficult
year. I don't think the world can decouple itself from what's happening
in the U.S.''
The U.S. economy is a bubble economy -- going from bubble to crash
to the next mania -- and the new bubble is likely to be clean energy,
says Wall Street insider Eric Janszen in the cover story of the February
We've seen two bubbles, internet and housing, within a decade, writes
Janszen, "each creating trillions of dollars in fake wealth."
"There will and must be many more such booms, for without them the
economy of the United States can no longer function. The bubble cycle
has replaced the business cycle."
Here's why Janszen thinks the necessary next bubble will be clean
energy. The new bubble sector must:
1. Already be formed and growing as the previous bubble (housing)
2. Have in place or in the works legislation guaranteeing investors
favorable tax treatment and other protections and advantages. Check.
3. Be popular, "its name on the lips of government policymakers and
4. "Support hundreds or thousands of separate firms financed by not
billions but trillions of dollars in new securities that Wall Street
will create and sell." Is that coming? Janszen is quite expansive
in his definition of clean energy, including a massive retooling of
the country's transportation and power infrastructure.
Janszen, a one time venture capitalist and serial entrepreneur, thinks
the financial sector is driving the U.S. economy (and, per force, much
of the global economy). The financial sector gets behind whatever new
thing they think can provide the hyperinflated returns they require.
And they bring to bear massive political influence, well lubricated
by money, to insure whatever public policy they require.
Advocates of renewable energy might say bring on this bubble. But
Janszen cautions: "Bubbles are to industries that host them what clear-cutting
is to forest management. After several years of recession, the affected
industry will eventually grow back, but slowly."
In an email interview I asked Janszen if a clean energy bubble was
a good thing - bringing massive investment to vital new industries -
or bad, leaving those industries struggling in the wreckage of the inevitable
crash down the road.
"The term 'bubble' is pejorative," he replied. "The alternate title
for the Harper's piece was 'The Good Bubble.' These are changes we need
but lack the political ability to make due to the inertia of entrenched
interests...Employment of the bubble system that was responsible for
the tech and housing bubbles may be the only means available both to
fight the impact of the debt deflation recession that started in Q4
2007 and also to deploy resources on the scale required."
In this scenario, the big losers will likely be the investors or
taxpayers, as in the housing collapse.
The System is not designed to purify credit addicted lost souls or
soulless bankers through poverty and perdition, and if a soup line forming
and mass bank failure inducing economic debacle did occur the primary
victims–as usual and in the current instance of historically unprecedented
distribution of wealth, more than usual–will be the middle class on
down the economic prosperity ladder. This group has hardly any liquid
assets net of what's put aside to cover the housing bubble bloated mortgage
and refinancing payments on the rapidly depreciating homestead.
...With millions of households fragile from a decade of excessive
borrowing and thousands of businesses levered up on debt from the LBO
boom, the US economy is better poised for a 50 foot swan dive into a
dirt pit than at any time in the last 70 years. (You remember the LBO
boom, right? It was the nearly daily announcements of multi-billion
dollar buyouts that suddenly stopped last summer. Here's an idea for
a new web site: Forgotten Financial News. If you create it, don't forget
to feature Jim Cramer. He's busy now recasting himself as a champion
for the little guy who warned about the bear market,
again.) Thus it is the majority, the great mass of voters, who in
our great republic are carefully managed during a recession, especially
in an election year.
That's an apt new term "casino capitalism". BTW inflation is a regressive
tax.For example, the DOE and DOT say an American car gets an average of
24 MPG. The average price of a gallon of regular gas a year ago was $2.27
versus $3.11 today. The average car owner who earns less than $30,000 a
year will spend about $375 more this year than last year just on gasoline,
while the car owner who makes more than $100,000 will spend $492 more.
December 26, 2007 |
Securitization involves the packaging of various assets to be sold
to other investors in the form of, well, securities. Most infamously,
residential mortgage backed securities or RMBS have been in the limelight
as the subprime mess has hit primetime and housing loans which should
never have been granted in the first place have begun defaulting in
ever higher numbers. Actually, I am not a hardened critic of the idea
of securitization as it can serve as a worthwhile way for securing additional
funding. However, there isn't much you can do when what is being securitized
is garbage to begin with like in the case of the housing mortgage mess.
Garbage in, garbage out--there is no such thing as financial alchemy
that allows trash to end up golden. King Midas is not a mortgage broker.
I got a chuckle after visiting the American Securitization Forum website
and seeing a
notice that its 2008 annual conference will be held in Las Vegas
for the second year in a row--at the Venetian, no less. If you're a
hard boiled critic of the whole securitization mess, the choice of location
is rich with irony. Las Vegas, the "ultimate boomtown," is now beset
highest rates of foreclosure in the US as that market has cratered,
to state things conservatively. Is securitization all smoke and mirrors,
mere hocus-pocus, or both? And, is securitization a fancy word for gambling,
oftentimes with the fortunes of others? You've got all the Star Wars
discussed at this event, that's for sure--CDOs, CLOs, RMBS, ABS,
ABCPs, SIVs, etc. In particular, I am keen on the concept of "whole
business securitization." While pretty much any asset which yields
an income stream can be securitized, this kind of securitization involves
what it says--securitizing an entire business operation. As the link
above suggests, this kind of securitization is more worthwhile for firms
that are rich in intellectual property--brands, patents, and trademarks.
Given the current rate of financial innovation, maybe we'll see "whole
country securitization" in a few years' time...
Looks like S&P500 might fall below 1200, which was the starting
point of "Paulson rally" :-(.
Well, as far as NotMakingThisUp is concerned, the most
obvious thing missing in all of yesterday's headlines was this:
no share buybacks were announced by any
major company before, during or after the brief morning sell-off.
During the panic of October 1987, grey-beards will recall, the tape
was clogged not only with headlines of trading-halts amidst the worldwide
rush to sell, but also with a steady stream of share buyback announcements
by U.S. companies.
Coke, P&G and many others that week and in weeks subsequent to the
Crash of '87 used the substantial cash on their balance sheets to take
advantage of the market dislocations that caused even the good here
no share buy-backs announced yesterday?
Could it be that the Great Private Equity
Cash Robbery of 2007, in which previously healthy companies either "cleared"
their balance sheets of cash-to use the euphemism employed by Steve
Odlund, the Chief Cash Clearer at Office Depot-by buying back their
own stock at bull-market peaks or faced the prospect of having it cleared
for them by the Private Equity Cash Robbers?
We suspect that is precisely the case, and in continuing our look-back
here at previous efforts to Not Make It Up, reprint this review of the
Great Private Equity Cash Robbery of 2007 through the eyes of a made-up
public company CEO ruefully ruminating on the after-effects of his effort
to "return value to shareholders"
Now with confidence in banks being a toast
and Greenspan name becoming similar to a dirty word, more, not less regulation
might be beneficial. After Depression measures were actually a big success
in taming excesses of 'wild' capitalism...
... We need to restore confidence in the markets' basic ability to
function, not in their presumed tendency to make us all rich by always
One main response to the Depression that helped was
a set of tools that improved confidence by truly improving market security.
One of these was the Federal Deposit Insurance Corporation, in 1933,
but there were also a large number of others, especially the Securities
and Exchange Commission the next year.
These were not obvious innovations and, in fact, were highly controversial
at the time. Indeed, it is never obvious how the government should foster
well-functioning markets. The fundamental role of governments in promoting
markets is clear, but the design of their instruments must make creative
use of a great deal of information about financial theory, human psychology
and existing institutions and practices. The successful markets we have
are a result of considerable inventive effort.
The F.D.I.C. was controversial because it was established amid the
ruins of various state-level deposit insurance plans that had just gone
bankrupt. Critics at the time also argued that federal deposit insurance
would encourage unsound banking. But it turns out that the F.D.I.C.
was a very good idea. It restored confidence in the banking system during
the Depression, and with hardly any cost.
The S.E.C. was similarly controversial. Critics said it would hamstring
or straitjacket the markets. But it is now the model for securities
regulation around the world.
We need ... to set up a national study commission and to pay for
serious creative research on how to adapt important ideas, like deposit
insurance and securities regulation, to a modern financial world. ...
There is still a disconnect between the general level of optimism and
the reality of the "post subprime" economy. Unemployment rate dynamics is
Bail-out for ABK and MBI? Sounds more and more likely something
is going to happen. The story from the WSJ makes it sound similar to
LTCM bailout, where a group of parties interested in seeing the
bond insurers survive provide the capital, not as a strategic investment,
but to protect themselves from bigger losses. I've said before that
I don't like a
government bailout, but if a group of banks/brokers have essentially
bet too heavily on bond insurers surviving, then they should pay the
price when the insurers need more capital. Nothing wrong with that.
is an extract from "Traders, Guns & Money: Knowns & Unknowns in the
Dazzling World of Derivatives"J (2006; Pearson Education) © 2006 Satyajit
(The "rogue" term is generally not to be used explicitly especially
with senior management, directors, shareholders and clients for fear
The position reports
along "functional' and "geographic" lines to the Head of Trading and
Head of the Region. (Nobody, really. A multi-dimensional matrix structure
is currently in operation so that everybody reports to several people
allowing a total absence of accountability.)
candidates may have a preference for working in head office where total
confusion and chaos reigns facilitating successful rogue trading. Other
candidates may prefer a remote location where benign neglect and absence
of supervision may provide rogue trading opportunities.)
A leading edge
investment bank with a global brand, presence in key financial markets,
superb product range and unparalleled client list.
(Our PR firm told
A global trading
team trading in a wide variety of cash and synthetic instruments, including
a number of "proprietary" structures.
(You can lose money
pretty much any way you like. There are some trades that even we don't
understand but the models say we are making money).
Supported by a
world class risk management team (they are readily identifiable by their
guide dogs) and operational staff and systems (they have been specially
chosen for their total ignorance.)
prospects (We have sinecures for everybody who has failed to perform.)
Trading with the
bank's capital to achieve targeted risk adjusted returns on capital
under the bank's unique Economic Capital Allocation system. (If you
are half as smart as you think you are then you will be able to game
the system from day 1. Everybody else has.)
trading strategies. (You need to be able to come up with hare brained
trading schemes based on the relationship between the El Nino cycle
and market prices.)
trading positions. (You need to be able increase your bet when your
position shows losses until you bankrupt the firm.)
models and valuation procedures (You need to ensure that all pricing
models are impossible to understand and give the valuations that you
want by simple unverifiable changes in model inputs.)
of positions (You will need to fudge all the Greek risk measures. We
suggest you start to report risk data in an ancient Nubian dialect that
is purely oral. You will ensure that your risk always appears miniscule
irrespective of market conditions. People have a tendency to panic otherwise.)
will need to be able to disguise breaches by not booking the trades
or taking advantage of systems deficiencies.)
and volatility of earnings (You must disguise losses either by recording
them as amounts owed to you (the Leeson gambit), undertaking off-market
trades such as deep in-the-money options (the Rusnak variation) or incorrect
valuations (Rogue Trading 101).)
You need to be
able to take the trading function to a new plane. (You need to show
larger losses than the last rogue trader the firm employed.)
of financial markets and trading techniques.
(You should wax
lyrically about obscure markets (the Zambian Kwatcho and Islamic finance
techniques) and complex mathematics (field theory; neural networks;
fractals; Frank copula models). Everybody will think you are a genius
or a fool but will be unsure of which.)
of derivatives, including exotic and non-standard structures. (Everybody
knows that derivatives allow highly leveraged positions that are impossible
to understand or value accurately.)
No minimum formal educational qualifications or direct previous experience
in a similar role is necessary. (Nobody believes your CV. It is merely
a statement of your aspirations. Nobody will believe you if you said
that you had rogue trading experience.)<
Ability to communicate and work closely with senior management (You
will need to make sure that you generate enough "phantom" profits to
make sure their bonus expectations are met.)
Ability to work
closely with operational staff (You must bully them or cajole them into
concealing limit breaches and losses.)
qualities (You will claim all profits are the result of your perspicacious
skills. All losses will either disappear or if found will be hedge losses
offset against gains in other positions.)
Preferred age –
under 30 years. (Have you ever heard of an old rogue trader? There is
an exception for Japanese rogue traders who are generally older.)
qualities. (You will have "attitude". A year round sun tan and a wisp
of beard underneath your chin is good. You will treat everybody around
you as idiots incapable of understanding the complex nature of your
(You will need to be able to hide losses and limit breaches. The Japanese
rogue traders never took holidays.)
a strong performance linked component. (You don't need to be paid as
it is assumed that you will defalcate ample amounts.)
We are proud to
be an equal opportunity employer. (We do not discriminate on any basis.
How else can you explain the calibre of Directors and Senior Management
not to mention risk managers and auditors that we have?)
Note: The idea
is based on a column published by Trevor Sykes (writing as Pierpoint)
of the Australian Financial Review [see "Indispensable Guide For Rogue
Traders" (30 January 2004) Australian Financial Review] However, the
text is different.
Treacherous time for 401K investor. Bond rates are no longer compensatory
and Fed can cut to 2.5%; stocks are too dangerous. Deficit spending means
inflation or worse stagflation.
Let's drop the euphemism of "stimulus package" and call this agreement
by its proper name: "deficit spending."...
This "stimulus bill" is really $150 billion worth of some future
generation's resources appropriated to finance our own consumption....
The imperative to do "something" is all the entitlement politicians
need. In political arguments, you can't beat something with nothing.
But we can learn from this experience to have a better menu of fiscal
policy options the next time around. Two changes to our budget policy
would go a long way toward that goal.
First, we should rule out deficit spending to finance a consumption
binge. As the economy slows, the deficit will widen even without changes
in fiscal policy. But an honest budget policy would be calibrated to
balance the budget over a complete business cycle.... [W]e must not
waive pay-as-you-go rules that require spending that increases the current
deficit to be offset later, when the economy is stronger.
Second, we can plan well in advance.
The federal government has a critical role in maintaining and developing
public infrastructure, whether in transportation, telecommunications
or energy transmission projects. A sensible capital budget
would include a prioritized list of projects that need attention. Some
would be slated for this year, some for 2009 and so on, over the useful
lives of the projects. When economic growth falters, the government
would be in a position to move some of the projects from later years
into the present year....
With a little forethought, short-term economic concerns and long-term
budget goals need not be in conflict.
Citi and Merrill can lose $20 billion in one quarter and is S&P 500
did not decline much that's OK. But a sharp stocks drop because unwinding
of trades of a rogue trader who managed to lose $7 billion for the whole
year forced Fed jump into the action... "The mistaken belief of market
fundamentalism" is more dangerous that you can infer from the paper.
"If, as Soros argues, the underlying cause of
the problem is the end of the
then the Fed is doing more damage by treating the symptom, i.e. cutting
interest rates to support the stock market. "
Some commentators may nominate Jerome Kerviel as the poster boy for
everything that is wrong with the Federal Reserve's policies.
The Fed has demonstrated by now that they
prefer to treat the symptom, and not the cause. Monday's
carnage on stock markets was the symptom, and Societe Generale's weak
internal control was one of the causes. Cutting interest rates by 0.75%
isn't going to stop Jerome Kerviel v2.0 from trying to cheat the system.
Of course, the Fed has little control
over the internal controls at banks, but the above example illustrates
the futility of treating the symptom instead of the cause.
Let's take the cause/symptom analogy a step further. What if the current
crisis is merely a symptom of a deeper cause? To quote the legendary
investor George Soros: "The current crisis is not only the bust that
follows the housing boom [symptom], it's basically the end of a 60-year
period of continuing credit expansion based on the dollar as the reserve
currency [underlying cause]. Now the rest of the world is increasingly
unwilling to accumulate dollars."
If, as Soros argues, the underlying cause
of the problem is the end of the
then the Fed is doing more damage by treating the symptom, i.e. cutting
interest rates to support the stock market. By using
aggressive interest rate cuts to shore up stock markets, the Fed devalues
the yield advantage of the greenback. Why should other nations hold
the dollar as a reserve currency if the Fed shows no restraint in damaging
its value? Why should other nations hold the dollar when the Fed is
reactive instead of proactive? Not to mention the wave of inflation
that will come on the back of the recent rate cuts.
What if every modern day financial crisis is a symptom of a deeper
cause? Once again, to quote George Soros: "This is the end of credit
expansion [the symptom] based on the mistaken belief of market fundamentalism
[the cause], that you should let markets have total freedom." If you
give the market total freedom, you create myriad opportunities for Jerome
Kerviel v2.0. I assure you that he is not
the only "computer genius" conducting fictitious futures trades to lift
bonuses or cover up embarrassment. How much of the world's
derivatives market is fiction?
Are monolines the next domino to fall in this mess ? To what extent
Fed bears the responsibility for the failure of oversight ?
'This office wants to know when and if MBIA and Ambac disclosed
to bond issuers -- the cities, towns, districts and other public
authorities -- that their financial
condition as an insurer was being severely impacted as a result
of their involvement with these highly risky securities,'
The Shareholder Letter You Should, But
Won't, Be Reading Next Spring
Well, it seemed
like a good idea at the time.
I am referring
to your board's decision to approve a massive share buyback and huge
special dividend last summer, when the buzzwords going around Wall Street
were "returning value to shareholders."
Why we did
it was this: a smart banker from Goldman Lehman Lynch & Sachs came in,
all gussied up and looking sharp, and made a terrific PowerPoint presentation
to the board with multi-colored slides that showed how paying a special
$10 a share dividend, plus buying back a bunch of our stock at the 52-week
high, would "return value to our shareholders."
have thrown the fellow out the window, along with his PowerPoint slides,
but what happened was, my fellow board members and I were so busy deleting
emails from our Blackberries that we just didn't notice the last slide
showing (in very tiny numbers) the "Trump-style" debt we would be incurring
to do so.
We also missed
the footnote showing the fees that would go to Goldman Stanley Lynch
& Sachs for the courtesy of their showing us how to wreck our balance
I am embarrassed to say, amounted to more money than we made the quarter
before we "returned value to shareholders."
But the fact
is, we'd been getting so much pressure over the last few years from
the hedge fund fellows who own our stock for ten minutes tops, not to
mention the so-called "analysts" on Wall Street (around here we call
them "Barking Seals"), to do something with the cash...well, the truth
is we just couldn't stand answering our phones any more.
So, in order
to finally start getting things done instead of spending all day explaining
to these hedge fund fellows and the Barking Seals on Wall Street why
we weren't "returning value to shareholders," we decided to do the big
buyback and the big dividend.
And for a
few weeks there, it was pretty nice.
jumped, the phones stopped ringing, and the Barking Seals started congratulating
us on the conference calls instead of asking us when we were going to
get rid of our cash.
not only did getting rid of our cash and taking on a huge debt load
NOT "return value" to you, our shareholders, it actually crippled the
company for years to come.
as you know, the aftermath of last summer's sub-prime debt crisis is
forcing perfectly fine companies to liquidate businesses at fire-sale
prices…but we can't take advantage of those prices, because we have
no cash. And thanks to the debt we incurred "returning value to shareholders,"
the banks won't loan us another dime.
as you also know, we've had to lay off hundreds of loyal, hard working
employees to pay the interest expense and principal on all that debt,
because unlike Donald Trump, we actually feel like we ought to repay
as you probably don't know, we've also scaled back some interesting
research projects that had great long-term potential for the company,
but were deemed too expensive to continue in light of the fact that
we have no cash.
Now, I'd feel
a heck of a lot worse about all this if we were the only company suckered
into buying our stock at a record high price and paying a big fat dividend
on top of it.
But I'm happy
to report there were others who also did the same stupid thing.
Cracker Barrel, the restaurant chain that depends on people having enough
money for gas to get to its stores along Interstates across America,
spent 46 bucks a share for 5.4 million shares of its stock early last
year to "return value to shareholders."
stock now trades at $39.
Miracle-Gro, whose business is so seasonal it loses money two quarters
out of four, put over a billion dollars of debt on its books with the
kind of special dividend and share buyback we did.
Associates-a healthcare chain that can't collect money from about a
quarter of the patients it handles-paid shareholders ten bucks a share
in a special dividend to "return value to shareholders" and then missed
its very next earnings report because of all those unpaid bills and
all that new interest expense it was paying.
Oh, and Dean
Foods, a commodity dairy processor with 2% profit margins, returned
all sorts of value to shareholders early last year-almost $2 billion
worth-just before its business went to hell in a hand basket when raw
milk prices soared.
So, you see,
everybody was doing it.
And boy, do I wish we hadn't.
I Am Not
Making This Up
Jan. 18 | Bloomberg
Mr. Alan Greenspan Greenspan Associates
1133 Connecticut Avenue NW Washington, DC 20500
Dear Mr. Greenspan:
I was somewhat surprised to read that you had been hired as an adviser
to John Paulson, the hedge fund manager who made a killing last year
betting against the mess you made. The irony is really rich: Paying
someone whose policy mistakes and missteps were the source of your success!
I'm sure it will be a productive working relationship for everyone involved.
What got my wheels turning, though, was re-reading your comments
about your ``Rule of One,'' as I call it. You have said that you would
consult with only one client in each industry.
So far, your roster includes one bank (Deutsche Bank AG), one bond-fund
manager (Pimco), and now one hedge fund. I'm sure there's some overlap
in what these firms do, but my intent here isn't to quibble about details.
If I understand you correctly -- you speak much more clearly than
you did when you were Fed chairman, now that you're getting paid a bundle
per word -- you still have an opening for a media company. So I'd like
to propose what I think could be a mutually beneficial relationship
between you and, yes, me.
The benefits to you should be immediately apparent.
1. Buying Access
With each announcement of your exclusive consulting relationship
with a client, the chatter is that these firms are buying ``access'':
access to your institutional knowledge of the Fed; access to your Rolodex;
access to any inside information you might get from policy makers in
the U.S. and overseas.
The way I see it, it wouldn't be a bad idea for you to buy access
-- from me. Lots of politicians see my column; maybe even a few who
are running for president. I might be able to put in a good word for
you that would give you a shot at Treasury secretary, an opportunity
lost when Jimmy Carter defeated Jerry Ford in 1976.
Running the mint isn't nearly as glamorous as controlling the printing
press, but at least it keeps you in the public eye (not that you ever
2. Keep Your Friends Close, And Your Enemies Closer
Let's face it: No one has been a bigger thorn in your side than yours
truly. I started my journalism career a few months before you landed
at the Fed, and we've been joined at the hip ever since.
If I were on your payroll, you can be pretty sure I'd be talking
you up rather than putting you down. I mean, it wasn't until Bill Gross
hired you that he stopped trashing you. And you didn't even have to
pay him to change his tune!
If you put me on retainer, you'll be surprised how easily I can be
persuaded to see economic history in a different light.
Remember how you denied there could be a housing bubble, only belatedly
acknowledging some ``froth'' in certain local markets? I've already
forgotten you said that, along with your lament on how homeowners would
have done better with adjustable- rate mortgages.
Or how about that ridiculously low federal funds rate that overstayed
its usefulness for years, not months? I think I could make an argument,
based on a ``risk-management'' approach, that it was necessary to ward
In other words, Mr. Greenspan, money talks -- or in this case, money
would encourage me to talk less, if you know what I mean.
3. Playing Cyrano to Your Christian
Just as Christian de Neuvillette used Cyrano de Bergerac's words
to woo Roxane, you, sir, could use a bit more dash when it comes to
preserving or, at this point, resuscitating your legacy.
No one ever accused me of being dull or uninspired. And I've always
had a hankering to play Cyrano, sucker that I am for that swashbuckling,
``I draw my sword and raise it high.'' ``Let me choose my rhymes.''
``Then, as I end the refrain, thrust home!'' Oh, it will be grand. Together
we can win their hearts!
4. A Better Crystal Ball
This may be a sore subject with you, but your forecasting acumen
hasn't been the best. Your visibility on bubbles has been close to zero.
You were late to see recession in both 1990 and 2001. Your rationalizations
for your forecasts have been pretty lame as well.
Money manager Bill Fleckenstein sets your record straight in a just-published
book, which isn't likely to be a coffee-table fixture in your household.
If you saddle up with me, you can get rid of all those arcane manufacturing
ratios and obscure indicators you used to pull out of a hat to justify
a policy action. You can do better watching two rates -- the overnight
rate that the Fed sets and the long-term rate determined by the market
-- than you can with the 18,500 indicators you reportedly track in the
I'd like to thank you in advance for considering my offer. I'm ready
to proceed with negotiations as soon as I hear back from you.
Very truly yours,
Caroline A. Baum
Although Robert Reich is a smart fellow (and I mean that sincerely),
like a lot of Beltway types, he isn't as well versed in the ways of
the world of finance as he is in the workings of public policy and opinion.
Thus I found his recent post, "The
Politics of an Economic Nightmare," intriguing due to its shift
in posture. Heretofore, Reich has been calling for stimulus to save
the working man. It's been well argued, but nevertheless pretty standard
"here's' what you do in a slowdown" fare. But it is now clear that Reich
has engaged the problem more deeply, and realizes that a stimulus package
is not only more likely as a sop to the voting public in an election
year, but is almost guaranteed to be badly focused, overly large, and
ineffective. If Reich now understands most of the elements of our problem
that is a positive sign from a policy standpoint, i.e, that influential
people who are not finance types are wising up.
He also acknowledges the ugly fact that our salvation lies in the hands
of rich foreigners, but misses the fact that trashing our currency via
aggressive rate cuts and an even larger fiscal deficit won't exactly
endear us to them. But there is only so much you can say in a single
post, particularly since Reich's preference is for brevity.
A possible economic meltdown is worrisome enough, but a possible
meltdown in an election year is downright frightening. For months
now, Republicans have been pushing the White House to take some
action that looked and sounded big enough to give them some cover
if and when things got worse. President Bush has now responded with
a stimulus package more than twice as large as the one Bill Clinton
briefly entertained at the start of 1993 but couldn't get passed.
Not to be outdone, Democrats want to appear at least as bold, which
means they'll suspend pay-go rules and throw fiscal responsibility
out the window. In other words, hold your noses, because the "bipartisan"
stimulus package that's about to be introduced could be a real stinker,
including tax cuts for everyone and everything under the sun --
except, perhaps, for the key group of lower-income Americans. These
are the people who don't earn enough to pay much if any income taxes,
but who are the most likely to spend whatever extra money they get
and therefore are most likely to stimulate the economy. The real
behind-the-scenes battle will be over whose constituencies get what
tax cuts, and for how long. Don't be surprised if the only thing
Congress really stimulates is campaign contributions.
Meanwhile, Fed chairman Ben Bernanke and Co. have surprised everyone
with a rate cut larger and sooner than expected. The three-quarters
of a percentage point ("75 basis points" in biz-speak) cut announced
Tuesday morning may not sound like much, but it's bigger than any
rate cut in decades. The politics here are more subtle because Bernanke
and his Federal Reserve governors are supposed to be independent
of politics. But as witnessed under the reign of previous chairman
Alan "it's prudent to reduce the surplus with a tax cut" Greenspan,
Fed chairs can have political agendas. Bernanke has been under a
lot of pressure lately to cut rates big-time -- and the pressure
has come not only from Washington Republicans but from panicked
Wall Street Democrats, including, apparently, my old colleague Robert
Rubin, formerly President Clinton's treasury secretary. (By the
way, what could Rubin have been thinking when he allowed Citicorp
to sell all those fancy securitized debt instruments, while agreeing
to buy them back if they couldn't be resold?) Expect lots and lots
more Washington activity -- enough seemingly bold strokes to convince
voters that our nation's capital is doing whatever is necessary
to stop whatever seems to be going wrong with the economy.
The problem is, people have different views about what's going wrong.
Wall Street sees it as a credit crisis -- a mess that seems never
to reach bottom because nobody on Wall Street has any idea how many
bad loans are out there. Therefore, nobody knows how big the losses
are likely to be when the bottom is finally reached. And precisely
because nobody knows, nobody wants to lend any more money. A rate
cut won't change this. It's like offering a 10-pound lobster to
someone so constipated he can't take in another mouthful.
Main Street sees it as a housing crisis. As I've noted, homes are
the biggest assets Americans own -- their golden geese for retirement
and their piggy banks for home equity loans and refinancing. But
home prices have been dropping quickly. It's the first time this
has happened in many decades -- beyond the memories of most Americans,
which is why they never expected it to happen, why they bought houses
so readily when credit was so easily available, and why so many
people bought two or more of them, speculating and fixing up and
then flipping. But now several million Americans may lose their
homes, and tens of millions more have only their credit cards to
live on and are reaching the outer limits of what they can spend.
As consumer spending shrinks, companies will reduce production and
cut payrolls. That has already begun to happen. It's called recession.
How much worse can it get? As I said before, the housing bubble
drove home prices up 20 to 40 percent above historic averages relative
to earnings and rents. So now that the bubble is bursting, you can
expect prices to drop by roughly the same amount, and new home construction
to contract. The latter plunged last month to its lowest point in
more than 16 years. A managing partner of a large Wall Street financial
house told me a few days ago the scenario could get much worse.
He gave a 20 percent chance of a depression.
Even if a stimulus package were precisely targeted to consumers
most likely to spend any money they received, the housing slump
could overwhelm it. According to a recent estimate by Merrill-Lynch,
the slump will hit consumer spending to the tune of $360 billion
this year and next. That's more than double the size of the stimulus
package President Bush or any leading Democrat is now talking about.
And the Merrill-Lynch estimate is conservative.
In reality, the crisis is both a credit crunch and the bursting
of the housing bubble. Wall Street is in terrible shape and Main
Street is about to be in terrible shape. And there's not a whole
lot that can be done about either of these problems -- because they
are the results of years of lax credit standards, get-rich-quick
schemes, wild speculation on Wall Street and in the housing market,
and gross irresponsibility by the Fed, the Treasury and the Comptroller
of the Currency.
As a practical matter, our only real hope for avoiding a deep recession
or worse depends on loans and investments from abroad -- some major
U.S. financial firms have already gotten key cash infusions from
foreign governments buying stakes in them -- combined with export
earnings as the dollar continues to weaken. But this is something
no politician wants to admit, especially in an election year. So
we're going to go through weeks of posturing about stimulus packages
of one sort or another, and then see enacted the big fat bonanza
of a temporary tax break that will likely have little effect. That,
perhaps along with a few more rate cuts by the Fed. The presidential
candidates will be asked what should be done about the worsening
economy, and they'll give vague answers. None will likely admit
the truth: We're going to need the rest of the world to bail us
Interestingly enough, remember what the IMF's solution
for the Asian tigers was back in 1997 (a solution that worked by the
way) ? (1) Cut back on government spending to reduce deficits; (2) Allow
struggling illiquid banks and financial institutions to fail, and (3)
Aggressively raise interest rates. When faced with the exact same scenario
(caused by similar conditions), the U.S. Feds instead chose to (1) Raise
the national debt ceiling and increase deficits; (2) Bail out insolvent
banks and financial institutions by printing as much money as they needed;
and (3) Aggressively reduce interest rates. Does anyone really believe
that this solution will end well?
Strong and continued inflation of a currency will
always invoke a couple of reactions:
Wealth will be stored not in domestic currencies
but in non-monetary assets or in a relatively strong foreign currency
to maintain Purchasing Power Parity (PPP).
Monetary and trade transactions occur in a foreign
stable currency, not the domestic currency.
Certainly condition (1) has been executed by Americans,
at least among savvy investors, for many years now with the accumulation
of foreign currencies as well as the accumulation of lots of gold, silver
and real estate in emerging and developing countries. Condition (2),
while not yet common, is starting to appear. I've seen U.S. based merchants
online now demand Euros as the default currency of payment rather than
Two more such rate cuts and we might need to learn Japanese. Main Street
will definitely pay for the sins of Wall Street but US always has something
in the sleeves when the situation became untenable. Last time it was PC
revolution that saved the day. then collapse of the USSR helped enormously.
Still in the short time frame the most plausible trajectory for S&P500 for
the next couple of quarters is down. Defensive allocation like 80%
bonds 20% stocks might be better then banalced ( 50%/50% or 100%-your age)
for 401K health.
A comment by Ricardo Hausmann in today's Financial Times
takes US policymakers to task for trying to prop up demand and stave
off a recession.
We've pointed out repeatedly, as have various economists quoted here,
that consumption as a percentage of US GDP is unsustainably high and
saving correspondingly too low. It can only continue with massive foreign
borrowing, and there are limits to how long friendly central bankers
will keep bailing us out. If the US does not reduce consumption and
increase savings, it will eventually and even more painfully be foisted
on us when our creditors start cutting the debt supply.
Lower consumption means lower domestic demand. At a minimum, that translates
to lower growth, and give how far our savings rate has plunged, probably
The US has repeatedly given that sort of tough-medicine advice to developing
nations, and many readers have commented on the hypocrisy of the US
deciding that it is a special case, exempt from normal good economic
"Expansionary Aggregate Demand Policies are Likely to Bring about a
Period of Stagflation"
Guillermo Calvo responds to Larry Summers
call to to move beyond monetary and fiscal stimulus and begin repairing
the underlying problems in the financial system. While he agrees that
the financial system needs to be strengthened, he does not have much
faith in monetary and fiscal policy and believes their use will result
Guillermo Calvo, Economic Forum: I agree that we need "consistent,
determined approaches" which will probably take us far beyond conventional
monetary and fiscal policy. The main problem, however, is that we
don't seem to have a consistent macro view that is widely agreed
upon and is itself consistent with the stylized facts of the current
crisis. Thus, for example, policy has strongly relied on lowering
the reference interest rate, a policy that is typically justified
in models that abstract from credit market difficulties. The same
applies to fiscal expansion. This lack
of intellectual consistency is bound to create further confusion.
Thus, I would encourage Larry and the other high-profile commentators
to give a simple but clear view of their underlying assumptions.
To be consistent with my preaching, let me say that
I am of the view that the current subprime
crisis is starting to look more and more like those in emerging
markets. The big but somewhat superficial difference,
however, is that initially the problem did not entail a whole country
but a sector (and, incidentally, since
a sector does not print its own money, its situation is similar
to that in emerging markets which suffer from Liability Dollarization,
or Original Sin).
Since the subprime sector hit the global financial market, it
had the potential to damage other sectors through contagion, much
like it happened in emerging markets after the Russian August 1998
crisis. Thus, we are witnessing the effects of a "supply" shock,
implying that the crisis is unlikely to be fully resolved by a stimulus
to aggregate demand through lower interest rates.
And even less by transitory fiscal expansion, for the additional
reason that credit crises involve "stocks," while transitory fiscal
policy involves "flows." Thus, if you agree with my view, a key
to resolving the current crisis is to reinforce the financial sector
which, incidentally, leads me to enthusiastically agree with Larry's
thrust in his column. But, on the other hand, I have a much less
favorable opinion about expansionary monetary and fiscal policy.
These aggregate demand policies are easy to implement in the short
run, while strengthening the financial sector is time consuming.
Since the latter would be key for avoiding a slowdown, expansionary
aggregate demand policies are likely to bring about a period of
stagflation, seriously undermining the credibility of policymakers.
Should not military spending keep the USA out of recession ?
EJ: So what you are saying is that post-bubble reflation policies,
including tax cuts and an increase in deficit spending, allowed a few
of the areas that benefited from the tech stock bubble to benefit from
government policies designed to support the economy after the tech bubble
popped-in effect bubble double dipping?
JG: No, the geographic pattern changed. Under the Democrats,
income growth was led by companies, large and small, in the tech sector.
After the tech bubble collapsed, the recovery was led by the government
sector, especially military spending, and by the continued expansion
EJ: Interesting that you mention the increase in military spending.
That's not discussed much. I'll relate it to events here in the Boston
area for local readers. The Boston Globe recently ran a piece-"The
defense dollars flow: In antiwar state, contracts have soared since
9/11"-that goes a long way toward explaining
why the economy is doing as well as it is in our area, the suburbs outside
Boston. The growth ain't coming from biotech: I'll quote
from the article, "Since 2001, contracts awarded annually to Massachusetts
companies by the Pentagon have surged from $5.3 billion to $8.3 billion.
Almost $1,300 is being spent by the military for every man, woman, and
child in Massachusetts." Military spending
contributes three times as much to the local economy as biotech.
This explains why the nearby Burlington Mall, for example,
is packed this holiday shopping season. Since we didn't make your county
list, this local phenomenon is apparently not outstanding and so perhaps
is occurring across the United States near the levels we are seeing
here, with defense contracts increasing 30 to 40 percent.
Looks like Fed partially lost the credibility and stimulated inflation:
after 0.5% cut 10 years note yield is moving up not down +0.0690 (+1.89%)
As we have already noted, the Fed lost all credibility in the 1970s
as inflation soared into the double digits.
By the time Paul Volcker
became Chairman of the Federal Reserve, it was painfully obvious that
inflation had to be brought under control. He was committed to lowering
inflation, but neither he nor the Fed had much credibility with the
public. The price we had to pay to regain that reputation and credibility
was severe, as I suggested earlier.
We would rather not go through that
experience again. It was the price we paid for operating without commitment.
Can mass "home walking" (sending the lender keys and moving to a
similar house that costs probably $100K less then current loan" create
an interesting new situation ?
"Another effect we are seeing has been a challenge with the
media and consumer groups; and with consumers
willingness just to walk away from homes. We haven't
seen anything like this since Texas during the oil bust and
people just willing to declare bankruptcy
and walk away. We are seeing a lot of that similar type
social phenomenon occurring, especially in California. And that
is concerning to us."
Hammond also expressed concern that a larger percentage of homeowners
- as compared to previous housing busts - that go delinquent, don't
cure. They just "go under" in Hammond's words.
Mark Hammond, CEO, Flagstar Bancorp
conference call. (hat tip Scott)
Here is what Hammond means: Say a homeowner misses a payment and
becomes delinquent. Historically most homeowners try to make future
payments - even if they stay 30 days late. Now, according to Hammond,
once they go 30 days late, many homeowners just give up and keep
missing all payments; they go 60 days late, 90 days late, and on
Also, there was some concern expressed about CRE loan concentrations
"this won't be a
drive-by recession like the one we experienced in 2002." I think
that the US economy will just scrape through 2008 without one due to huge
That Greenspan Made
For those of you who have seen those loopy Fox Business infotainment
shows on the weekend with their uber-bullish cast of characters and
seemingly endless optimism about owning stocks, this
report of an about-face by Tobin Smith, formerly the uberist of
the uber-bulls, might come as a bit of a surprise.
The evidence has been building that we are in a recession.
He goes on to talk about things like getting rid of high P/E stocks,
holding more cash, and recommends against any sort of panic selling.
And according to all of the indicators I study,
this won't be
a drive-by recession like the one we experienced in 2002.
All four key barometers used by the National Bureau of Economic
Research-employment, real personal income, industrial production,
and real sales activity in retail and manufacturing-are negative.
The US economy
is stalled, and without another historic set of interest
rate cuts by the Federal Reserve and another round of big tax cuts,
we are likely going to continue crawling.
If he is as wrong about panic selling as he was about what the Fed would
do (this was written two days ago), his inbox will probably fill up
rather quickly between now and the next Bulls & Bears.
America's economy is headed for a major slowdown. Whether there is
a recession ... is less important than the fact that the economy will
operate well below its potential, and unemployment will grow. The country
needs a stimulus, but anything we do will add to our soaring deficit,
so it is important to get as much bang for the buck as possible. The
optimal package would contain one fast-acting measure along with others
that could lead to increased spending if and only if the economy goes
into a steep downturn.
We should begin by strengthening the unemployment insurance system,
because money received by the unemployed would be spent immediately.
The federal government should also provide some assistance to states
and localities, which are already beginning to feel the pinch, as property
values have fallen. Typically, they respond by cutting spending, and
this acts as an automatic destabilizer. Federal assistance should come
in the form of support for rebuilding crucial infrastructure.
a few days there it looked like overconsumption and the lack of domestic
savings in a bubble-economy that had run out of bubbles was about to meet
its inevitable end."
Regardless, it took only 2 days to learn just how ill-considered the
Fed's emergency market rescue plan was: To wit, a fraudulent series
of losses led to a major European bank unwinding a huge trade:
Societe Generale Reports EU4.9 Billion Trading Loss.
dollar unwinding led to panicked futures selling on Monday and Tuesday.
Hence, we quickly learn what sheer folly and utter irresponsibility
it is for the Fed to use its limited ammunition to intervene in equity
prices. Their panicky rate cute were
not to insure the smooth functioning of the markets, but rather,
to guarantee prices.
As we have been saying for the past two days, this is not the Fed's
charge. They are supposed to be maintaining price stability (fighting
inflation) and maximizing employment (supporting growth) -- NOT guaranteeing
Helicopter Ben | Jan 24, 2008 10:51:12 AM
If we are realists (rather than members of the bull or bear dogmatic
religions), then we need to accept that the Fed is a put on the investment
community. It matters not what their job description is in the public
arena -- aren't we all believers in the maxim "actions speak louder
One of the underlying presuppositions
that seems to cause faulty expectations is that the US exhibits either
a free market system or is aspiring to do so. As a student of history,
I do not believe either are true. The wealthy will always
protect one another, and they will manipulate the system to maintain
the orderly structure that has benefited them in the past. With all
do respect, anyone who does not believe such behavior will continue
is a bit naive (or waiting for a messiah).
The power elite will never support a true free market system because
in practice it means chaos or at least letting go of the yoke they so
tightly grasp. "Free market" is nothing more than the catch phrase of
the day. Anyone who knows economic reality knows that all markets are
manipulated by laws and power (including money).
Kudlow is a perfect example of why "free
market" is nothing more than double speak for "fiscal and legislative
aid for investor capitalists."
Also note that although the Fed is bailing
out speculators, they are ALSO providing a put for all the boomers
who are currently or in the near future set to retire (or supplement
income) on the worth of their two major assets: house AND EQUITIES.
The value of equities play a very real role in consumer sentiment
and per capita wealth. Thus, with all due respect, I think focusing
on the Fed's effect on speculators over simplifies the issue.
Every Major U.S. Bank Was Profitable Last Year"
John Berry says we shouldn't feel too sorry for banks, or worry that
credit is about to dry up and ruin the economy [Update: After today's
events, I'll be curious to see if John Berry, who has been more bullish
(or at least less bearish) than many other commentators, changes his
tune at all.]:
Every Major U.S. Bank Was Profitable Last Year, by John M. Berry,
Bloomberg: With all the large writedowns and losses announced
for the fourth quarter, hardly any attention is being paid to just
how profitable U.S. banks really are.
That inattention has raised unnecessary concerns that the banks
may be so crippled by losses that they will cut lending to the point
it might undermine the U.S. economy.
Some commentators have said the banks are in the worst shape
since the Great Depression. That isn't close to being correct.
Other analysts have raised the specter of the stagnant Japanese
economy of the 1990s, when banks there were crippled by huge losses
when a real estate price bubble burst... This comparison also is
Even Citigroup Inc., by far the hardest hit of the big U.S. banks
by subprime-related problems, earned $3.62 billion last year. That
was with a $9.83 billion fourth-quarter net loss and more than $22
billion in writedowns and additions to loan-loss reserves.
For JPMorgan Chase & Co., the third-biggest U.S. bank, the focus
was on the 34 percent drop in fourth-quarter profits from a year
earlier. Its full-year $15.4 billion profit, a record, was largely
Economist Robert E. Litan, a senior fellow at the Brookings Institution
who has done numerous studies of the U.S. financial system, said
the banks are in far better shape than the dire assessments suggest.
''Strip out the losses and Citi could make close to $10 billion
a quarter,'' Litan said. Noting how quickly the bank has been able
... to replace the capital depleted by losses, he added, ''Why would
anybody buy stock if they thought Citi was going down the tubes?''
''And this is nothing like the Japanese situation,'' Litan said.
... The story is largely the same at Merrill Lynch & Co., the world's
largest brokerage, though the losses are greater relative to its
Credit isn't as readily available as it was for several reasons,
including a less favorable economic outlook, tighter lending standards,
particularly for mortgages, and a lack of a secondary market for
some types of loans such as jumbo mortgages.
On the other hand, the interest rates many borrowers are paying
have dropped. The bank prime rate, to which many loans are linked,
is 7.25 percent, the lowest since January 2006.
As of Jan. 17, the average interest rate on 30-year fixed- rate
mortgages dropped to 5.69 percent, the lowest level since June 2005.
In the two weeks ended Jan. 18, corporate borrowers sold $50
billion worth of investment-grade bonds at the lowest interest rates
since April 2007.
The credit well hasn't run dry and it's not about to. And the
nation's banks will be supplying a large share of it.
Wow. First the markets, now the Fed's
What you probably should know is that Ben Bernanke, in his capacity
as a professional economist, spent a lot of time worrying about Japan's
experience in the 1990s. (So
did I.) What was so disturbing about Japan was the way monetary
policy became ineffective; by the later 1990s the short-term interest
rate was up against the ZLB - the "zero lower bound."
This is alternatively known as the "liquidity trap."
And once you're there, conventional monetary policy can do no more,
because interest rates can't go below zero.
There was a lot of discussion of various unconventional monetary
things you could do. But the best answer was not to get there in the
first place. A 2004
by Bernanke argued that the ZLB could and should be avoided by "maintaining
a sufficient inflation buffer and easing preemptively as necessary".
It's amazing how many people now want heads of "best friends of Alan
Greenspan" -- investment bankers...
ways of Wall Street invariably seem impenetrable to outsiders. This
may indeed be because they defy conventional commercial logic. Most
listed businesses are presumed to be run for the benefit of shareholders,
employees and "stakeholders" (whatever that means), in that order. But
as Bloomberg's Michael Lewis writes ("What does Goldman know that we
don't ?"), conventional commercial logic and Wall Street make uneasy
bedfellows. How else to explain, for example, the payment for failure
pocketed by outgoing Merrill Lynch CEO and amateur golfer Stan O'Neal
($161.5 million) versus Merrill's latest $16.7 billion
writedown ? Commercial language can't really cope with this mismatch
between reality and the money-porn fantasy that passes as executive
compensation. Fiction can at least attempt to – we can legitimately
say that this is 'Alice through the Looking Glass' stuff.
at today's battered down valuations, it is debatable whether investors
have truly priced in the disappearance of so many different revenue
streams for what may be some time to come, and the likely permanent
closure of some of the more exotic or opaque structuring areas.
investors who bought what they presumed to be AAA rated debt offering
a riskless premium to Treasuries and saw it default in a matter of months
will surely take a more skeptical view of Wall Street's plat du
jour in future – if they have the luxury of retaining their jobs
"By coining unnecessary paper, as the Fed has done and continues to
do, the Fed effectively freezes prices at stratospheric levels, to the benefit
of the institutions who screwed up, and at the expense of "ordinary Joes"
whose savings are in bonds, CDs, etc. It subsidizes
speculators over savers."
Michael Panzner offers a useful post, "The
Wrong 'Flation" on this topic, arguing for the deflationary outlook.
The most powerful evidence for this view comes from the fact that the
monetary authorities have lost control of credit generation (broader
money, the old M3) as observers ranging from
market mavens like Michael Shedlock to
Serious Economists like Mohamed El-Erian have pointed out. The credit
crisis means credit contraction, a process the Fed will likely be unable
to staunch. That in turns points to deflation.
However, "unlikely" does not necessarily mean "unable". Bernanke
is a well known expert on the Great Depression, and well schooled in
the dangers of letting contractionary processes feed on themselves.
So he and his colleagues will be doing everything in their power from
keeping a vicious circle from setting in. The Term Auction Facility
was a creative measure that managed to stave off a crisis in the money
markets. Perhaps he will be able to use a combination of novel measures,
liquidity injections, and smoke and mirrors to keep confidence at a
reasonable level (confidence and willingness to extend credit are what
really is at risk here).
Yes, in the near term, it leads to plunging consumption, which, in
turn, forces a plunge in prices, until a new, cheaper equilibrium is
reached. By coining unnecessary paper, as the Fed has done and
continues to do, the Fed effectively freezes prices at stratospheric
levels, to the benefit of the institutions who screwed up, and at the
expense of "ordinary Joes" whose savings are in bonds, CDs, etc.
It subsidizes speculators over savers.
[Jan 20, 2008] The Education of Ben Bernanke
God knows what will happen if the 401K lemmings became scared enough
to pull their money out of stock funds. Looks like a real crisis in confidence
can be in the cards.
8,000 word article on Ben Bernanke.
As a doctoral candidate at M.I.T., he blossomed into a star, and
at the tender age of 31 he received
a tenured position in the economics department at Princeton.
(what a joke -- tender
age; 31 is not 21 --NNB)
His academic research was
steeped in the increasingly sophisticated discipline of econometrics,
which uses computer models to simulate (and predict) the economy.
By contrast, Greenspan often relied on his hunches. The difference
is partly generational, but Bernanke is clearly more comfortable
working with mathematical formulas than with anecdotal examples.
(One looks in vain in his Depression writings for stories of banks
that failed or of workers who lost their jobs.).
(looks like Greenspan was grossly undereducated
for the job, but he was a shrewd politician and an excellent PR
man; Bernanke might be well over-educated --NNB)
A lot of 401K participants out there might also enter a steep learning
curve a kind of replay of 2001-2003 scenario.
Drunk in a bankrupt world
By Chan Akya
Rising interest rates in turn made bankrupt the people borrowing
money they couldn't pay for houses they couldn't afford on incomes they
"Bankers caught with their hands in the cookie jar are reprimanded,
but almost never dismissed thanks to the complete lack of accountability
The running total is that there has now been $100bn of subprime-related
write-offs and $59bn of capital injections (see FT report on the
latest shocker, from Merrill Lynch)."
Wall Street's five biggest firms together paid a record
$39 billion in bonuses, even though three of them suffered the worst
quarterly losses in their history and shareholders
lost more than $80 billion.
Goldman Sachs Group, Morgan Stanley, Merrill
Lynch, Lehman Brothers Holdings and Bear Stearns together paid $65.6
billion in compensation and benefits
last year to their 186,000 employees. Year-end bonuses usually account
for 60 percent of the total, meaning bonuses exceeded the $36 billion
distributed in 2006 when the industry
reported all-time high profits.
Merrill Lynch Plans to Write Off ACA Bond Insurance (Update1)
January 17, 2008 | Bloomberg
Merrill Lynch & Co., the biggest underwriter of collateralized debt
obligations, said it will write off $2.6 billion in default protection
from bond insurers including ACA Capital Holdings Inc. because it's
Merrill Lynch cut $1.9 billion of debt insured by ACA, whose debt
ratings were lowered 12 levels to CCC in December, and $679 million
from other insurers. Guarantors including MBIA Inc. and Ambac Financial
Group Inc. are under threat of losing their AAA ratings from Moody's
Investors Service and Standard & Poor's.
"We are reserving against ACA dollar for dollar so it's 100 percent
reserved,'' said John Thain, chief executive officer of New York-based
Merrill Lynch, during a conference call today with analysts and journalists.
Merrill Lynch's writedowns demonstrate how a downgrade of bond insurer
credit ratings can spread throughout financial markets. Losing the AAA
stamp would cripple the bond insurers and throw doubt on the ratings
of $2.4 trillion of securities.
The bond insurers guaranteed almost $100 billion of CDOs backed by
subprime-mortgage securities as of June 30, according to an Aug. 2 report
by Fitch Ratings. Most of those guarantees are in the form of derivative
contracts. Unlike insurance, those contracts are required to be valued
at market rates.
ACA Financial Guaranty Corp., a unit of ACA Capital, had to seek
approval from the Maryland Insurance Administration before pledging
or assigning assets or paying dividends, the New York- based company
said in a filing Dec. 27 with the U.S. Securities and Exchange Commission.
A telephone call to Karen Barrow, a spokeswoman for the Maryland
Insurance Administration, wasn't immediately returned. A message left
for Alan Roseman, ACA's chief executive officer, also wasn't immediately
New York-based ACA reached agreements to avoid posting collateral
until tomorrow against credit derivatives it uses to insure the debt.
The Maryland regulator held off filing delinquency proceedings while
ACA seeks ways to raise capital.
ACA was required under its agreements with swap counterparties to
post collateral on those contracts if its rating fell below A-.
Canadian Imperial Bank of Commerce had to sell more than C$2.75 billion
($2.7 billion) in stock to investors to rebuild its balance sheet after
taking writedowns tied to ACA guarantees. Canada's fifth-biggest bank
sold C$1.5 billion in stock to institutions and another C$1.25 billion
to individual investors, the Toronto-based bank said in a statement
CDOs are created by packaging debt or derivatives into new securities
with varying ratings.
ACA, down 94 percent this year, fell 12 cents to 47 cents in over-the-counter
trading at 3:27 p.m. in New York. The company was founded in 1997 by
former Fitch executive H. Russell Fraser.
S&P's projected losses for the bond insurance industry will be 20
percent higher than in its previous review, based on updated results
from a new "stress scenario,'' the ratings company said today.
Credit-default swaps tied to MBIA's bonds soared 15.5 percentage
points to 31.5 percent upfront and 5 percent a year, according to broker
Phoenix Partners Group in New York. The contracts trade upfront when
investors see a high risk of default. The price means it would cost
$3.15 million initially and $500,000 a year to protect $10 million in
MBIA bonds from default for five years.
Contracts on Ambac, the second-biggest insurer, rose 15 percentage
points to 30 percent upfront and 5 percent a year, prices from CMA Datavision
in London show.
To contact the reporter on this story: Mark Pittman in New York at
Nicely executed and probably pre-rehearsed Cramer rant :-) It's clear
that a fundamental weakness of free-market system is that in boom
periods there is a significant decline in ethical standards. There
is only one analog in the last 100 years for the five year, 200% rise in
the Dow in the late 1990s -- the 1920s. The cultural context ("greed is
good", Greenspan, etc) is also reminiscent of the 1920s.
"How can we have these levels of fiction in financials after Sarbanes-Oxley?
How do people get away with this? How do they live with themselves?"
Cramer made his comments
while reviewing results from Merrill. But his real consternation surrounded
the insurers who cover banking investments. Some of those insurers haven't
come clean about their liabilities, Cramer speculated. Eventually they
will, and then the "fiction" will disappear, he said.
The banking sector
and its related industries are all too chummy, Cramer accused. That
led the numbers related to mortgage investments -- investments that
are currently souring -- to break from reality.
"I think the financial guys all belong to
the same club and they got to protect each other," he
Worse, those executives
behind the current credit crunch are unlikely to get any punishment
for their mistakes and disingenuousness about their numbers, Cramer
"I'm fed up with it.
The American people should be fed up with it. And the SEC should be
fed up with it," Cramer said.
"This is what the
SEC is supposed to protect us from," he added.
[Jan 17, 2008] today S&P500 return from Jan 1996 using cost averaging
starting from zero retuned -2% in comparison with Vanguard institutional
stable value fund
Here are stable value returns used in the calculation
This is the first acknowledgement a major institution that part of the
bond insurance as "worthless". Aren't monoline bond insurers the next
shoe to drop. "Merrill Lynch cut $1.9 billion of debt insured by ACA, whose
debt ratings were lowered 12 levels to CCC in December, and $679 million
from other insurers."
Buried amid a rather dismal set of numbers from Merrill Lynch on
Thursday, proof positive that the ailing monoline bond insurers
have the potential to inflict further pain on the Wall Street banks.
... ... ...
But the bank also took "credit valuation
adjustments of $2.6bn related to hedges
with financial guarantors on US ABS CDOs."
reflect the write down of the firm's
current exposure to a non-investment
grade counterparty from which the firm
had purchased hedges covering a range
of asset classes including U.S. super
senior ABS CDOs.
Having worked with the Japanese, and knowing how hostile they are
to any meaningful foreign role in their economic affairs, I never saw
Chinese attitudes, at their core, as fundamentally different (although
their playbook bears little resemblance to that the Japanese, who have
the disadvantage of being a military protectorate of the US, despite
the existence of the Japanese
Self Defense Forces). Push comes to shove, the Chinese would have
few inhibitions about nationalizing foreign assets.
... ... ...
Americans tend to disregard history. Henry Ford declared bluntly,
"History is bunk," while Gore Vidal calls the U.S. "the United States
of Amnesia." Usually, this disregard has few consequences, but sometimes
not. That may be so with investing in China, where history suggests
profits will be far below expectations, possibly making those investments
China's history is completely different from that of the United
States and it has left deep imprints on China's politics. Therein
lies the trap for investors and policymakers who ignore history
and wishfully think market forces will inevitably make China just
like the United States.
One critical factor is China's attitude to foreigners. That attitude
is captured by the Great Wall of China, which provides a metaphor
for China's long history of isolationism and xenophobia. A second
critical factor is the legacy of China's humiliating defeats in
the unjust 19th century opium wars with Great Britain. At the time,
Britain was importing large amounts of tea and silks from China,
and demanded the right to sell Indian opium in exchange. As the
opium trade grew, not only did it cause massive addiction, it also
caused a damaging monetary outflow of silver from China. That prompted
China to stop the trade, and Britain then turned to military force
to keep China's market open.
Came on, state capitalism is alive and well in the USA.And the fact
the Wall street strayed from the course is partically due to the fact the
a bank loggist was at the helm of Fed for too long.
Less than two decades after the collapse of the Soviet Union and
the West's gleeful jig dancing on the grave of communism, state capitalism
is suddenly threatening the autonomy of the global "free" market. Wall
Street's elite banks, longtime freedom fighters for deregulation and
scorners of all government intervention in the marketplace, are now
begging, cup in hand, for aid from a gallery of regimes that includes
some of the most authoritarian and undemocratic governments on the planet.
... ... ...
...The root of Wall Street's woes leads back directly to their own
strategic missteps, greed, speculation-run-amok, and lack of appropriate
supervision. The brightest minds in finance had exactly what they
wanted, a playground where the monitors were looking the other way,
and they blew it. When the China Investment Corp. pumps in $5
billion to Morgan Stanley, we are not witnessing the triumph of state
capitalism, but rather, the embarrassing, humiliating failure
of Reagan-Thatcher style unregulated capitalism. So now the U.S. buys
Chinese toys at Wal-Mart, and China uses the resulting cash to buy American
banks. Hey, anything's fair in love and war and free markets.
The suburban living was an experiment that might recently enter a failure
mode due to high costs and inefficiencies.
We do not need more Steak n Shakes (SNS), Pizza Huts (YUM), McDonald's
(MCD), Panera Breads (PNRA), Starbucks (SBUX) or any other restaurants
for that matter, at least in the US.
- Steak N Shake has overexpanded.
- Restaurants in general have overexpanded.
- Retail stores have overexpanded.
- Strip malls have overexpanded.
- Commercial Real Estate has overexpanded.
- Europe and Asia will not disconnect from the US.
- PEs of 23+ are silly for big restaurant chains.
Layoffs related to all of the
above are coming. Consumers are tapped out.
Those who think Europe will disconnect from the US are likely to
be sadly mistaken. Investing in restaurants with PEs of 20+ when the
economy is in a recession and you can still get 5% guaranteed on a CD
does not make a lot of sense to me.
[Jan 14] FT Alphaville / CDS
might just be the new subprime.
CDS might just be the new subprime. "Last week
Bill Gross of Pimco gave a round-about figure of $250bn as a potential loss
from CDS contracts defaulted."
Here's Wolfgang Münchau, writing in Monday's FT:
If this had been a mere subprime crisis,
it would now be over. But it is not, and nor will it be over soon.
The reason is that several other pockets of the credit market are
also vulnerable. Credit cards are one such segment, similar in size
to the subprime market. Another is credit default swaps, relatively
modern financial instruments that allow bondholders to insure against
This is a theme that the FT's markets team
picked up on Friday. Credit default swaps, it seems, are in
for a lot of column inches in 2008. CDS might just be the new subprime.
As Münchau explains, the reasons for that are principally linked
to the now-likely prospect of a US recession.
At a time of low insolvency rates, many investors
used to consider the selling of protection as a fairly risk-free
way of generating a steady stream of income. But as insolvency rates
go up, so will be the payment obligations under the CDS contracts.
If insolvencies reach a certain level, one would expect some protection
sellers to default on their obligations.
Last week Bill Gross of Pimco gave a round-about figure of $250bn
as a potential loss from CDS contracts defaulted. Commenters on FT Alphaville
picked up that figure and took umbrage with it: pointing out that some
cases -namely Delphi - CDS contracts are taken out for up to ten times
the value of the bonds they insure.
The key question is how much capital will be diluted by those write
downs. Citi need to raise 10 billion dollars to offset write-downs.Mark
to make belief need to be replaced with the realistic mark, but they cannot
write down them to zero.Same financials that did well in the last quater
might outperfom in the next.
Jeff Harte Expects `Stunning' Writedowns
for Financials: Video January 14 (Bloomberg) -- Jeffery Harte, an
analyst at Sandler O'Neill & Partners, talks with Bloomberg's Carol
Massar from Chicago about the outlook for fourth-quarter earnings at
U.S. financial-services companies and his investment strategy. Bloomberg's
Julie Hyman also speaks.
The miracle of compounding is working against US now.Perhaps
the question that should be asked is: How much time will be required to
get all the rot out of the system?10 year ? More then that ?
Darius Kowalczyk, chief investment strategist at CFC Seymour Ltd., talks
with Bloomberg's Mark Barton and Sara Walker from Hong Kong, about fourth-quarter
corporate earnings, guidance for this year and the outlook for investment
in banks by sovereign wealth funds.
the largest U.S. lender, is seeking a total of $8 billion to $10 billion
from investors including Saudi Prince Alwaleed bin Talal, who already
owns almost 4 percent of its shares, and China's government, the Wall
Street Journal reported Jan. 12, citing people familiar with the matter.
A lot of financial companies disclosed additional subprime losses.Who
will bail out citi ?
From Wolfgang Münchau at the Financial Times:
This is not merely a subprime crisis (hat tip FFDIC)
If this had been a mere subprime crisis, it would now be over. But
it is not, and nor will it be over soon. The reason is that several
other pockets of the credit market are also vulnerable. Credit cards
are one such segment, similar in size to the subprime market. Another
is credit default swaps, relatively modern financial instruments
that allow bondholders to insure against default.
The article focuses on Credit Default Swaps (CDS) and suggests the current
downturn could be longer than most anticipate (including me):
The German experience has taught us
that persistent problems in financial transmission channels cause
long economic downturns. Today, the really important
question is not whether the US can avoid a sharp downturn. It probably
cannot. Far more important is the question of how long such a downturn
or recession will last. An optimistic scenario would be a short
and shallow downturn. A second-best scenario would be for a sharp,
but still short, recession.
And from Robin Sidel and David Enrich at the WSJ:
High-End Cards Fall From Grace (hat tip Brian)
A truly awful scenario would be a long recession.
The luster on all those silver, gold and platinum credit cards is
getting tarnished. For the past few years, banks that issue credit
cards have aggressively wooed affluent customers with lavish perks
and fat credit lines. Now, that high-end strategy is coming back
to bite the banks: There are growing signs that some of those consumers
are having a hard time paying their bills.
Affluent customers aren't paying their credit card bills? How did the
credit card companies define "affluent"? The same standard as the mortgage
lenders: Fog a mirror, get a Platinum card?
We're all subprime now.
Looks like "home slaves" will suffer most... And it might be that 2008
is just a second inning...For now, risk
remains very high for equities.
Growth of houses exceeded growth in jobs. Wages did not keep up.
It was an artificial boom. Driving around I have been wondering for
years "How can everyone afford to live like this?" Here is the answer.
They can't. That shiny new SUV parked in the driveway may signal trouble,
...This is the suburbia trap in action. People are trapped in a gridlock
of homes, a gridlock of roads, and a gridlock of false prosperity. Things
appear to be booming. It's an artificial boom that's now collapsing.
...people here cannot afford the interest rates, the property taxes,
the upkeep on a house compared to an apartment, rising gasoline prices,
energy prices and a whole bunch of other things. Affordability is a
mirage. Foreclosures are proof.
...As stated earlier, it was an artificial boom, not a real one.
Artificial booms eventually collapse when the pool of greater fools
Things Are Going To Get Worse. Much worse.
...This is the equity trap. And collapsing prices will keep folks
trapped for much longer than anyone thinks.
...The boom is not coming back anytime soon. Rising foreclosures are
going to keep putting on home prices. Will county is still overbuilding
commercial real estate right now. What happens when the last remnants
of that commercial real estate boom fade away? What happens to traffic
at all those restaurants and shopping malls when consumers cut back
even more than they have?
Here is the answer to both questions. Jobs are going to vanish into
thin air. They are starting to already:
Unemployment Soars as Private Sector Jobs Contract. Those stores,
malls and restaurants you see are going to start sporting "For Rent"
signs in the not too distant future.
People are trapped in their homes, with nowhere to go, struggling
to pay bills. In the meantime foreclosures keep adding to supply. Soon,
foreclosure may be seen as an easy way out of the trap. Certainly it
is a good option for anyone who bought with no money down and is now
$50,000 or more in the hole.
Heaven help us if the masses decide that walking away from a home
is a socially acceptable thing for someone with a job to do. Even if
that doesn't happen, banks will eventually be forced to dump the properties
they own. This will further suppress prices.
...Anyone who thinks this blows over in 2008 is in fantasy land.
Payback for the unsupported boom we experienced is just in the second
inning. A severe recession is coming that has not yet hit full force.
This post is not really about Will County Illinois, Portland Oregon,
or (ya gotta love the name) Happy Valley. There are thousands of "Happy
Valley USA" suburbia stories out there.
"Happy Valley" is not so happy. Many are trapped. Many more will
be trapped as the recession worsens. Unfortunately, foreclosure may
be the only viable way out.
Imagine a rookie investor sitting on a wad of cash, and itching to
invest it. He makes a decision to invest in a stock and it goes down.
Yeah, bad move, but the stock will go up, I just know it will, he thinks.
So he throws the rest of his money at the stock, in effect catching
that falling knife with both hands. Next thing, he's nearly wiped out.
How many times have you heard this story?
[Jan 12, 2008] 7 years of the stock market
A very educational chart. Such moments happen from time to time as S&P500
returns oscillate around T-bill returns.Jan 2001 was bounce back from lows
in Dec 2000 but it still was lower then peak (1460 I think) by approximately
100 points. That means it is very dangerous to buy S&P500 close to the all
Earlier today Cactus posted on the real Dow over the past seven years.
Another comparison is to look at the alternative strategy, investing
in cash or 3 month T bill.If in January, 2001 you had placed your investments
in 3 month T bills and reinvested the income in 3 month T bills, at
the end of December, 2007 your total returns would have been almost
exactly the same as if you had invested in the S&P 500 with daily dividend
Way to go team Bush.
P.S. In looking at the current stock market and listening to strategist
this chart is an important lesson to think about. You will hear from
Wall Street analysts that if you do not go back into the market and
miss the first leg off the bottom you are missing a great opportunity.
Of course they are right. But if you miss that first bounce off the
bottom and wait to go back into the market as long as you return while
the market is below the cash line you are still better off than if you
rode the market down and back up.
Spencer, way to go, nothing more drives home a point other than a
chart. Only but a few astute investors actually understand that wall
st makes money from fees and the pandering of marked to model flawed
investments that our fine pension fund managers are so easily duped
into buying. Great visual and it is exactly what I try to convey to
all of my colleagues and cohorts, the buy and hold strategy in equities
is over, the smart investor will move around his portfolio according
to market conditions and if that means staying out of equities for years
than so be it.......but it is very hard to change the human brainwashed
psyche, but visuals like this are a necessary tool...thanks
magne13 | 01.12.08 - 10:51 am |
|Thanks spencer, indeed a good reminder.
Extend it out another ten years and of course it will look differently.
But to Bruce's point, investors hope for better returns than
for cash, which means some return for risk assumed to invest
in non-cash. Most average investors use advisors, or investment
managers, or invest in managed mutual or ETF funds. They have
a right to expect the experts to do exactly what Bruce says
- have a crystal ball to make better than cash returns.
Otherwise, why have all the analyst and trading infrastructure
of Wall Street? It turns out they all use a variant of the same
portfolio models and trading models, instead of acute analysis
and insights tailored to changing times. I got tired of paying
for some moron's MBA school debts after years of mediocre results.
OldVet | 01.12.08 - 1:45 pm |
|I think one thing worth taking away
from this dialog is that it is very hard to stop working and
live on economic rent for a long period.
Most people who think they will "retire" soon-or-someday WILL
If they are lucky -- they will work until they die. If unlucky
-- they will need to work -- but be unable to.
With or W/O SS -- all this imaginary paper "wealth" will not
support tens of millions of people for dacades.
Edward Charles Ponzi Jr. |
Homepage | 01.12.08 - 3:28 pm |
|i love the way that the likes of formerly
anonymous and corev completely miss the point: returns from
stocks in a period of growth, low interest rates, and high profitability
should beat returns on 90-day federal paper, yet they haven't.
it doesn't matter which individual did or did not time the market
Ponzi, just to check your memory: right after the '87 crash,
stocks fell about as low as 1400, so at the highs a few months
ago, stocks were up 10x over 20 years. meanwhile, real gdp growth
over that span has been a little under 3% annually, or roughly
75-80%. The rest of the stock price growth has been multiple
expansion and an increase in relative share of profits within
the distribution of gdp growth.
that said, as this chart shows, stocks were also up 10x after
13 years; indeed, real gdp growth from january, 2001 to now
has been roughly 18%, profits have increased, and as i've noted
now several times, we still haven't seen any stock price gain
over that span.
(i'm pulling the data from here:
howard | 01.12.08 - 6:08 pm |
|jeff, from my perspective the EMH (which
version, strong, semi-strong, weak?) is not correct, market
price does not capture all relevent information; there can be
large gaps between price and value. OK, is that just juan speaking?
No, also Shiller, Bernstein, Arnott, Russell, Smithers, probably
Vogel, certainly Marx and Keynes.
I'll add something which I wrote last October:
'It's more than an opinion that the quality of financial accounting
deteriorated* from the early 1980s on, with listed firms increasingly
presenting results distinct from their realities, with the financial
press and msm not sufficiently questioning but, rather, all
'getting with the program', as did most analysts, politicians,
etc etc as the Grand Casino was built up and as price(s) failed
to capture gross inefficiencies but instead depend on them.
Corruption and mispricing became endemic with investors, if
that's the proper word, of all sizes being taken to the cleaners
while constantly fed a stream of easily digested 'always up'
*See, e.g., Walter Cadette, David Levy, and Srinivas Thiruvadanthai,
Two Decades of Overstated Corporate Earnings: The Surprisingly
Large Exaggeration of Aggregate Profits , The Levy Institute
Forecasting Center, September 2001.
Or - Robert Kuttner; The Market Can't Soar above the Economy
Forever, Business Week, 15 April, 2002. (clip: "For two decades,
stock prices have outstripped corporate profits and the growth
of the economy.")'
Bluntly, GIGO, share prices and earnings rose even as underlying
economic profit deteriorated, something which at least I took
to be very relevent -- conversely, even as the Southern Cone's
economies entered into recovery, most (U.S.) 'players' failed
to notice but, instead, paid attention to such MSM stupidities
as 'leftist former labor leader may win the election', so drove
prices further down.
As the real global economy's real condition becomes increasingly
clear, Ponzi's prediction will prove true. BTW, there are dedicated
short funds which, unless we see a complete vaporization of
fictitious capital, can be used to offset long side risk and/or
gain during down markets. The world is not either/or.
juan | 01.12.08 - 6:18 pm |
"...the Fed will be forced to choose between inflation stabilization
and output stabilization. With Ben Bernanke at the helm, I think I know
on which side he would err. "
Will the rest of the world save the US economy? Well,
e-forecasting's index of
leading indicators (January 2 newsletter; documentation
here), besides indicating a 81% probability of recession, incorporates
a large negative effect coming from the foreign demand component. This
has been described to me as being based on incoming orders of manufactured
goods coming from foreign countries.
Figure 6: Components of the e-forecasting eLEI. Source:
Not good news for the decoupling hypothesis. This is consistent with
earlier skepticism regarding the decoupling hypothesis, and
ambivalence regarding whether net export growth could prevent the
US economy from going into recession.
He said, she said...But there is supporting evidence for this statement
: " So did the U.S. economy dodge a bullet? Yes, it did... While we dodged
a bullet, however, there are between one and three more bullets
headed our way."
Paulson said he expects the U.S. will avoid a recession, helped
in part by record exports. Yet he acknowledged the U.S. economy
is heading for tougher times.
...Paulson knows that things have weakened considerably. That much
is clear. However, he somehow thinks we can avoid a recession that we
are already in. In addition, his export theory does not fly. Exports
are not going to save the US because the world (the UK and EU in particular)
is not going to decouple from a US recession.
If grain prices keep rising, oil prices collapse, and consumers stop
buying junk from China then yes, trade imbalances will improve. but
it will take a collapsing economic picture to sink oil prices. For the
record, I think oil prices have reached a near term peak, but prices
could easily double if Bush was to do something stupid like invade Iran.
MBIA's yield is equivalent to 956 basis points higher than U.S. Treasuries
of a similar maturity. The extra yield, or spread, on investment-grade
bonds is 217 basis points, according to Merrill Lynch index data. The
premium to own high-yield, or junk-rated, debt is 663 basis points.
A basis point is 0.01 percentage point.
``That would be close to distressed levels,'' said Martin Fridson,
chief executive officer of high-yield research firm FridsonVision LLC
in New York. Distressed bonds trade at 1,000 basis points over Treasuries
of similar maturity.
Although we can take measures to strengthen UBS, we cannot control
the environment in which we operate. Our geographical diversity is an
advantage, as are our very strong fee earning businesses in wealth management,
asset management and investment banking. Nevertheless, it is important
to recognize that the problems that the financial industry faces have
not evaporated with the turn of the year, and that
2008 is likely to be another generally difficult
Eminent Nationalization of the Banking System ? Aren't we seeing the
"internationalization" not nationalization as SWF
are players? If yes, then 10% drop of S&P 500 probably is just a beginning
and 20% are in the cards...If no,then all bets are offin "Back in the USSR"
Mish's Global Economic Trend Analysis
Mr. Practical chimed in this morning with these comments on the
We are starting to see the first steps in nationalization of the
U.S. banking system. Large institutions are being "cajoled" into
buying smaller ones. They could wait for bankruptcy to buy the assets,
which would be smart, but they aren't as I believe
the show is worth much to Washington: it is very important that
equity investors be calmed by that stabilization effect.
No matter. As the bad assets are pooled we will eventually see some
type of government bailout or quasi-nationalization of the banking
system. Banks literally have no capital left.
Stay the course. Risk is high. We will
be seeing many more "interesting" things from government as it becomes
a larger and larger part of the economy. But remember,
stocks are options on profits.
The real owners of companies are bondholders who always get paid
When companies raise capital at 12%, like Citigroup (C), profits
go away. When the government steps in, profits go away.
Is not the process already started ? Should not high federal officials
prohibited from publishing books for at least 4 years after leaving office
The next bubble to deflate may be Alan Greenspan's reputation.
... ``He's had a bubble reuta U.S. household
wealth,'' said Edward Chancellor, author of ``Devil Take
the Hindmost: A History of Financial Speculation.''
``As that goes down, his standing as a superstar
At stake is not only Greenspan's legacy but also the future
of policies he espoused during 18-1/2 years atop the central bank.
Critics blame his aversion to regulation
and reluctance to use interest rates to puncture asset bubbles for the
boom in mortgage lending and house prices that has since gone bust,
threatening to throw the economy into recession.
... ... ...
Fed Chairman Ben S. Bernanke has already moved away from the laissez-faire
approach of his predecessor by proposing
new restrictions on subprime mortgages.
... ... ...
The 81-year-old former Fed chief falls
short of that lofty grade, though, for his oversight of the banking
industry, Blinder said.
`Slow on the Draw'
``The Fed and the other regulatory agencies were slow on the draw,''
Blinder said. ``They could have made this debacle substantially smaller,
not by better monetary policy, but by better
regulatory and supervisory policy.''
Desmond Lachman, a former International Monetary Fund official now
at the American Enterprise Institute in Washington, blames Greenspan's
libertarian bent for his failure to curb lending abuses:
``That philosophy got us into a lot of trouble.''
... ... ...
Some economists, including Blinder, also fault Greenspan for fostering
the housing bubble by keeping interest rates too low for too long. The
Fed cut its benchmark rate to a 45-year low of 1 percent in June 2003,
held it there for a year, then raised it only gradually, in quarter-percentage-point
``For that episode of monetary policy, I would probably give him
a B, where my overall grade is A or A-plus,'' Blinder said.
A simulation by Stanford University professor John Taylor suggested
that much of the housing boom could have
been avoided if the Fed hadn't cut rates so deeply and had raised them
back up more quickly.
Meltzer said that while Greenspan was a ``great Fed chairman,'' he
erred in ignoring warnings about the risks of keeping rates low.
``I think he lets himself off much too easy,'' Meltzer said, adding
that he told Greenspan at the time that he was exaggerating the danger
of deflation and thus making a mistake in cutting interest rates to
Allen Sinai, chief economist at Decision Economics Inc. in New York,
said the Fed's experience is leading other central banks to rethink
their approach to asset bubbles.
``There is a growing body of thinking in central banking that
one should not let these bubbles run and allow them to burst,'' he
said. ``They should lean against them.''
... ... ...
Ok, Citi can be nationalized, but what to do with others ?
Word Count: 318|Companies Featured in This Article: Capital One
Capital One Financial Corp. is expected to announce today that its
2007 profit will fall about 20% short of its previous forecast because
of deepening loan troubles and the weakening U.S. economy.
The results by the McLean, Va., credit-card company are the latest
sign that mortgage woes are spreading to other types of loans. Capital
One is also a major originator of auto loans, ...
...Goldman also sees "a significant decline in profit growth" in 2008...
...excerpted from the WSJ:
Goldman Sees Recession This Year. Here is the current Goldman GDP
forecast by quarter:
Goldman also sees "a significant decline
in profit growth" in 2008 and significant declines in house prices with
"an ultimate peak-to-trough decline of 20%-25%". This
decline in house prices would mean the value of existing household real
estate, as reported by the Fed Flow of Funds report, would decline by
$4 Trillion to $5 Trillion (yes, Trillion and I think that deserves
a capital "T").
...Finally note that Goldman sees the
duration or the recession as less than one year, and therefore not as
a severe recession. I tend to agree, but I think the
recovery will be sluggish too, especially for employment growth following
the recession, so it will probably feel like the recession is lingering
M&A activity contributed to 20% rise of S&P500. Andoversized financial
sector for another, say, 10%-20% rise. Now this factor is out of picture
does this mean that there is a chance ofa 30%-40% drop ? "Some
U.S. $150 billion of leveraged loans come due in 2008. " Who and
how will refinance themwhen the banks will fight for life due to huge subprime
Private equity deals in recent years were predicated
on a combination of a growing economy, cheap debt and a buoyant stock
market allowing the quick resale of the company. Weaker earnings and
more expensive debt could lead to losses and distressed sales over time.
Recent private equity deals also face re-financing
risk. Some U.S. $150 billion of leveraged loans come due in 2008.
Financial engineering techniques – toggles, pay-in-kind
securities and covenant-lite (lack of maintenance covenants) structures
– will delay the problem but probably cannot
forestall the inevitable rise in defaults.
Looks like Citi needs another Arab prince to for bail out, does not
it ?How much S&P500 will drop when citi results for the quarter will be
It's a bit like guessing the number of pennies in a jar. Except the
jar is the world's biggest bank. And the pennies are quite big too.
Roughly half-way between the estimate from Sanford Bernstein analysts
($12bn) and Goldman Sachs analysts ($19bn). The variance alone here
is surely something to be worried about. A breakdown of Citi's likely
losses, courtesy of Goldman, is available
"The combination of financial innovation, opacity
and leverage is generally explosive."
Risk can't be measured. Competition is destructive. Oh, and that
bonus… you didn't deserve it.
Three cursory observations from rating agency Moody's (by their own
admission, now measurers of the unmeasurable) sent out in a note to
clients on Monday. And that's before we get onto the "Faustian pact"
Pierre Cailleteau, chief international economist at the agency, says
is behind it all. What matters this financial endless toil/when at a
snatch crisis should end the coil?
Risk traceability has declined, probably forever.
It is extremely unlikely that in today's markets we will ever know on
a timely basis where every risk lies.
This is brave stuff. Moody's are barring no holds. They paint a picture
of a market where risk is unquantifiable and the value of products unknowable
-- papered over by sky-high bonuses.
Here, from "Archaeology of the Crisis", are a few highlights - all
worthy of extensive discussion in their own right:
The combination of financial innovation,
opacity and leverage is generally explosive.
Information asymmetries are the source of profits for some and,
at the same time, of mispricing and excessive risk-taking for others.
The "originate-and-redistribute" model for banks has entailed some
degree of system-wide information loss once banks have started transferring
risk that they would have preferred not to keep on their balance
Financial innovation often leads to an uneven distribution of the
information available to the different parties at risk - usually
until a crisis forces a more equal and adequate sharing. The problem
in the case of extreme complexity of interconnecting financial systems
is that it is hard to see how the level of information could reach
levels adequate to enable reasonable risk management standards.
On competition and stability:
… a second, somewhat disquieting, reason:
in the financial industry, in contrast with other businesses, there
is a point beyond which increased competition is not stability-enhancing,
but rather potentially destabilising.
Heightened competition is beneficial in terms
of providing a better service and eliminating poor performers in
the industry; however, past a certain point - difficult to identify
- more competition means more, and perhaps socially undesirable,
On bonuses and compensation:
In plain English, it is not clear that existing
compensation mechanisms effectively ensure that traders take into
account the long-term interests of the bank for which they work
- i.e. its survival. A recent policy announced by several banks
to cap wages at a "moderate" level and pay the rest of the compensation
in the form of stock is an acknowledgement of this problem. However,
such "good intentions" do not generally survive a boom period, and
in any event typically have unintended consequences of their own.
On asset valuation (and why your bonus was to blame):
The mark-to-market approach has obvious and
compelling advantages in terms of apparent neutrality, timeliness
and transparency. It is in tune with the explosion in the tradability
of financial claims. It is also clearly superior to highly subjective
mark-to-model accounting and apparently retrograde historical accounting
However, somewhat like democracy, it is only the "worst system after
all the others".
The key issue is whether the market value corresponds to the economic
value of an asset. One could, of course, retort: what is the economic
value if it is not the tradable value of the asset.
At the same time, however, pretending that the economic value is
necessarily equal to the market value ignores the possible existence
of bubbles, overshooting, panic, mis-alignments… Or simply the fact
that the "price" in question is only the fortuitous offspring of
a handful of transactions.
In the credit market, an imperfect valuation
paradigm has combined with misaligned incentive structures. In boom
times exuberant market prices led to excessive investor returns;
in bust times, doomsday valuations are feeding perverse market dynamics.
In a way, inflated boom-time profits fuel individual remunerations
(and risk-taking), whilst pessimistic spirals call for public intervention.
The road to a "perfect" valuation paradigm in credit mar-kets is
not in sight, and it is not at all clear that equity or exchange
rate markets have reached this point either. However, relying on
a valuation system based on efficient market theory is - unless
it is accompanied by other types of safeguards- a recipe for trouble.
Credit cycles are redundant concepts:
The idea of the "end of the cycle" at the
end of the 1990s for instance proved to be an illusion - even if
cycles now appear to be more moderate. Sorting out what in the recent
decade is cyclical and what is structural is a most complex question
and one on which a considerable volume of investments depend.
The difficulty of measuring risk over time
is compounded by the way in which regulation is designed. Modern
banking regulation aptly requires a proportionate increase in capital
when risk increases. But all depends on what "risk" means. If the
measure of risk accompanies the business cycle - i.e. risk is perceived
as lower at times of boom and higher at times of downturn - the
odds are that regulation will be pro-cyclical. Indeed, contrary
to casual perceptions, risk in fact increases during boom times
and simply "materialises" during the downturn.
And finally, the subprime crisis, and what the rating agencies
were "supposed" to do:
As it happened, risk transfer has not been
information-neutral: in other words, the final holder of a financial
claim has probably less information than the originator of the claim.
Rating agencies were supposed to bridge some of the information
asymmetries, but this proved to be some-what unrealistic when the
incentive structure of (sub-prime) loan originators, subprime loan
borrowers, and market intermediaries also shifted in favour of less
So what to do about all this? The trouble of course, is that Moody's
can talk only in the most general terms. The problems are deeply ingrained…
bust follows boom. With that in mind then, better the devil you know.
Is Bear Stern harbinger of what the rest of Wall Street firms report
for a quarter ?
...In addition to the mortgage-related losses, fourth-quarter revenue
from equity sales and trading dropped 11 percent to $384 million. Investment-banking
fees during the quarter fell 44 percent to $205 million.
Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group
Inc. posted gains for the quarter from trading stocks and advising on
Merrill analyst Guy Moszkowski has also doubled his loss estimate
for Citi; putting it at $1.43 a share, up from 73 cents.
Bear Stearns's return on equity dropped to 1.8 percent for 2007 from
19 percent the year before. Morgan Stanley reported a 7.8 percent return;
Lehman generated 21 percent. Goldman Sachs delivered 33 percent for
the year. All the firms are based in New York.
"Leamer believes we bought ourselves a boom in 2004-2006 at the expense
of a recession in 2007-2008." Was not Sir Alan over-engaged in protecting
his lucrative franchise ?
this selection from a recent post on the Fed's Jackson Hole conference:
James Hamilton (enough of a Serious Economist to get to present
a paper as Jackson Hole) comments approvingly on
an observation by UCLA's Ed Leamer (note he was lukewarm about
other aspects of Leamer's presentation):
I found another of Leamer's main themes to be an intriguing
suggestion. He claims we should
think of monetary policy as doing very little about the long-run
growth rate (which he thinks will be within 3% of a 3% annual
growth line regardless of policy), and that stimulating the
housing market therefore just changes the timing.
Specifically, Leamer believes we bought ourselves a boom
in 2004-2006 at the expense of a recession in 2007-2008.
Now what if Leamer is right, that cheap credit pushed the US above
trend-line growth and a period of below-average growth is inevitable?
That means that the best stimulus measures can do is reduce the severity
of the slowdown but at the cost of increasing its length. At worst,
if they succeed in pushing growth to or above trend line, they will
make the inevitable contraction worse.
So the real problem may be that we want to have our cake and eat
it too. There is some evidence that a service based economy will show
lower productivity gains than a manufacturing-driven economy (remember,
economic growth is due to population gains and productivity improvements).
But high growth periods help assure re-election, among other things.
So the public at large approves of the good times they enjoy in unsustainable
high growth periods, and then wants to avoid the inevitable consequences
of a retrenchment.
And if you subscribe to the Schumpeterian line of though, recessions
are a useful, "creative destruction" phase.
The author analysis is far from being impressive but one comment on
this weak article . Time to a new FDR, is not it ? The rule of economic
Rasputins made a mess that their beloved unregulated free market might not
not be able to sort out without FDR-style intervention.
FDR railed against "economic royalists" and "privileged princes"
who sought to establish an "industrial dictatorship" and a "new despotism."
Roosevelt issued about 3,700 executive orders, many limiting business
activity, and let lose a plague of anti-trust lawyers on American industry.
New securities laws made it difficult to raise capital. FDR ordered
the breakup of the nation's strongest banks, including those with the
lowest failure rates.
Rewriting the Depression from 75 years hence by
Now that the well-informed are dead,
it makes sense for the right-wing rewrite of the Depression experience.
To say it was a result of government when government was a minor
part of the economy is in need of review.
I am not aware of the liberal scholar who argues that New Deal policies
brought us out of the Depression. Rather, World War II ratified the
theory, and the three decades of growth following the War further ratified
the theory and practice.
The war was organized with Keynesian tools and so was the subsequent
economy. Free marketeers ought to be dealing with the current collapse
as a perfect laboratory for their theories. The financial sector since
2000 has been substantially free of interference by government and free
to show its self-correcting and universally beneficent nature.
Those who claim the Fed is currently printing like mad simply have
no solid evidence to support it. What the printing like mad crowd is
talking about is M3 (credit) which indeed has been soaring. Unfortunately
these "printing" claims keep making the rounds but repeating a false
claim 200 times does not make it the truth.
Printing claims are typically made by people who do not understand
the difference between money and credit. While credit acts like money
in most circumstances, when debt can no longer be serviced, the difference
Right now we are seeing huge warning signs that debt can no longer
be serviced. Those signs are soaring foreclosures, soaring bankruptcies,
soaring defaults in credit cards, and a slowdown in consumer spending.
In spite of what one thinks about the CPI and how manipulated it
might be, one can expect treasuries to rally in this environment. Indeed
The Journal piece, "Investors
Reconsider The Pariahs of '07," is longer and is careful to discuss
the downside as well as the potential of taking a flier on subprime-damaged
Fallout from subprime-mortgage woes and the global credit crunch
has weighed heavily on stocks in the financial and housing sectors,
and has driven down prices of riskier corporate bonds. But while
these assets could still drop further, many mutual-fund managers,
Wall Street strategists and financial advisers say they are starting
to engage in some bargain hunting....
The shifting sentiment comes as some foreign governments' sovereign
funds place big bets on U.S. financial companies....
Citigroup Inc.'s Citi Global Wealth Management is calling for a
rebound in financials in 2008. IMS Capital Management's Capital
Value and Strategic Allocation funds have begun buying home-builder
stocks. And Deutsche Bank Private Wealth Management says that "junk"
bonds, issued by companies with lower credit ratings, are now giving
investors good yields in exchange for their added risk.
But investors need to step carefully. No one knows the full extent
of the subprime problems, and many beaten-down stocks may fall further
or simply take years to get moving again.
Many investors also may already be heavily exposed to financials
through a broad market holding like an S&P 500 index fund.
A slowing economy, or possibly even a recession, poses added risks.
It could prolong the pain for financial firms and home builders.
And while high-yield bonds may appear more attractive than they
were earlier last year, the current low level of defaults is expected
"There is no free lunch in the investment
world," says Alan Skrainka, chief market strategist at Edward Jones.
"These stocks are cheap because the risks are very high, and there's
a lot of uncertainty."
I doubt that changes of recession are 50/50 as Iraq war spending still
provide a cushion for any drop.Inflation is the other story...Interesting
forecast: "..many economists expect national
housing prices to fall by 5 to 10% more in 2008, and perhaps into 2009 as
well, before hitting bottom. "
January 2, 2008 | NYT
"There are even odds of a recession," said Mark Zandi, chief economist
"It literally could go either way."
The year that just ended was not for the faint of heart. As mortgage
debt became synonymous with toxic waste, banks got spooked and tightfisted.
Job growth slowed. Inflation fears grew. Still, consumers kept spending,
and unemployment stayed flat. American companies found enough sales
abroad to compensate for weakness at home.
The bursting housing bubble remains a locus of concern. An era of
free-flowing credit and speculation has led to a far-flung empire of
vacant, unsold homes - 2.1 million, or about 2.6 percent of the nation's
housing stock, Mr. Zandi said. Even in the worst years of recessions
in the early 1980s and 1990s, the share of vacant homes did not exceed
... ... ...
Though default rates on loans to homeowners
with relatively good credit are far lower, they
are rising sharply, too.
In November, 6.6
percent of so-called Alt-A home loans - those
deemed somewhat less risky than subprime - were
either delinquent by 60 days or more, in foreclosure,
or had been repossessed. That was up from 4.3
percent in August.
This is a potentially ominous sign, because
subprime and Alt-A mortgages issued in 2006
together made up about 40 percent of all mortgages.
Like many of the
subprime loans that have landed in trouble,
Alt-A loans often begin with a low introductory
interest rate that later escalates.
The spike in foreclosures is happening even
before many mortgages have reset to higher rates,
suggesting that borrowers are falling behind
because their homes are worth less. Many are
having trouble refinancing as banks tighten
All of which
explains why many economists expect national
housing prices to fall by 5 to 10 percent more
in 2008, and perhaps into 2009 as well, before
Such a drop could ripple out to the broader
economy by depressing consumer spending, which
accounts for about 70 percent of all economic
The real question is not GDP, but the level of inflation in 2008, is
not it ? What is the level of temptation solve the insolvency crisis by
inflating the currency like Weimar Germany ?
At the end of 2008, however, Lehman Brothers predicts 1.8 percent
overall growth, and Merrill Lynch believes that GDP growth in 2008 economy
will be only 1.4 percent. Thomson Financial more optimistically expects
GDP to grow between 2 percent and 2.5 percent over 2008.
Many analysts point out that although the economy and housing market
will struggle in the new year, this may not necessarily result in recession.
"While undeniable accurate, the fact that these recommendations are
on his list is an appalling indictment
of the job central bankers are doing." The Fed, for instance,
did not do its own homework and was unduly influenced by Brave New World
views of investment banks
Their power has diminished as the financial system has gotten much
better at generating liquidity outside their purview. Yet despite this
shrunken role, politicians and the public expect them to be able to
steer macroeconomic policy as before. Any manager will tell you that
having responsibility without having authority is a terrible position
to be in.
El-Erian gives a five point program. Two items are revealing:
First, they need to improve their understanding of the new financial
landscape....Third, they need to improve, directly or indirectly,
scrutiny of financial activities that have migrated outside their
While undeniable accurate, the fact that these recommendations are
on his list is an appalling indictment
of the job central bankers are doing.
The Fed, for instance, did not do its own homework and was unduly
influenced by Brave New World views of investment banks and commercial
banks merrily reaping current profits with little thought as to the
long-term consequences of their moves (and why should they be? They
don't affect this year's bonus).
As someone who did have the Fed inspect his books once upon a time,
my memory tells me that they were very big on invoking "street practice".
If you're up to it, you were okay. But there is no questioning whether
the entire street might be bonkers, and certainly no attempt (and no
ability) to understand the products on the book.
Pershing Square believes, based on MBIA's latest SEC filing, that
the firm will need $10 billion in additional capital to maintain its
AAA rating, up from an estimate of $8 billion in November (note that
this is the requirement over time, not an immediate need).
Problems will be amplified by diminished local governments spending
due to lower tax revenues...
The Fed's snapshot of business conditions showed a national economy
losing momentum heading into the new year and a future riddled with
uncertainty. The persistent housing slump and harder-to-get credit are
making people and businesses ever more cautious, it said.
Separately on Wednesday, more big banks reported losses and said
people were having trouble making payments for everything from credit
cards to cars. Stocks were mostly down for the day, the Dow Jones industrial
average declining 34.95 points, or 0.28 percent.
The Fed report was the unwelcome icing on a recent batch of economic
indicators -- ranging from a plunge in retail sales to a big jump in
unemployment -- raising concern that the country is heading for its
first recession since 2001.
At the beginning of last year, many economists put the chance of
a recession at less than 1-in-3; now an increasing number say 50-50
or even worse. Goldman Sachs, the biggest investment bank on Wall Street,
thinks a recession is inevitable this year.
This is a little bit alarmist post but author makes a couple of interesting
points. The efficiency of individual car-based transit is really unacceptably
low and its feasibility depends on the low price of gasoline. Sitting for
hours in the traffic to get to metropolis is just the waist of time and
resources. Hybrids like Toyota Prius can greatly help but railways looks
like are "back to the future" transportation.
The dark tunnel that the US economy has entered began to look more
and more like a black hole last week, sucking in lives, fortunes, and
prospects behind a Potemkin facade of orderly retreat put up by anyone
in authority with a story to tell or an interest to protect -- Fed chairman
Bernanke, CNBC, The New York Times, the Bank of America....
Events are now moving ahead of anything that personalities can do to
The "housing bubble" implosion is broadly misunderstood. It's not
just the collapse of a market for a particular kind of commodity, it's
the end of the suburban pattern itself, the way of life it represents,
and the entire economy connected with it. It's the crack up of the system
that America has invested most of its wealth in since 1950. It's perhaps
most tragic that the mis-investments only accelerated as the system
reached its end, but it seems to be nature's way that waves crest just
before they break.
This wave is breaking into a sea-wall of disbelief. Nobody gets it.
The psychological investment in what we think of as American reality
is too great. The mainstream media doesn't get it, and they can't report
it coherently. None of the candidates for president has begun to articulate
an understanding of what we face: the suburban living arrangement is
an experiment that has entered failure mode.
I maintain that all the "players" -- from the bankers to the politicians
to the editors to the ordinary citizens -- will continue to not get
it as the disarray accelerates and families and communities are blown
apart by economic loss. Instead of beginning the tough process of making
new arrangements for everyday life, we'll take up a campaign to sustain
the unsustainable old way of life at all costs.
A reader sent me a passle of recent clippings last week from the
Atlanta Journal-Constitution. It contained one story after
another about the perceived need to build more highways in order to
maintain "economic growth" (and incidentally about the "foolishness"
of public transit).I understood that to mean the need to keep the suburban
development system going, since that has been the real main source of
the Sunbelt's prosperity the past 60-odd years. They cannot imagine
an economy that is based on anything besides new subdivisions, freeway
extensions, new car sales, and Nascar spectacles. The Sunbelt, therefore,
will be ground-zero for all the disappointment emanating from this cultural
disaster, and probably also ground-zero for the political mischief that
will ensue from lost fortunes and crushed hopes.
From time-to-time, I feel it's necessary to remind readers what we
can actually do in the face of this long emergency. Voters and candidates
in the primary season have been hollering about "change" but I'm afraid
the dirty secret of this campaign is that the American public doesn't
want to change its behavior at all. What it really wants is someone
to promise them they can keep on doing what they're used to doing:
buying more stuff they can't afford, eating more shitty food that will
kill them, and driving more miles than circumstances will allow.
Here's what we better start doing.
Stop all highway-building altogether.
Instead, direct public money into repairing railroad rights-of-way.
Put together public-private partnerships for running passenger rail
between American cities and towns in between. If Amtrak is unacceptable,
get rid of it and set up a new management system. At the same time,
begin planning comprehensive regional light-rail and streetcar operations.
End subsidies to agribusiness and instead direct dollar support to
small-scale farmers, using the existing regional networks of organic
farming associations to target the aid. (This includes ending subsidies
for the ethanol program.)
Begin planning and construction of waterfront and harbor facilities
for commerce: piers, warehouses, ship-and-boatyards,
and accommodations for sailors. This is especially important along the
Ohio-Mississippi system and the Great Lakes.
In cities and towns, change regulations that mandate the accommodation
of cars. Direct all new development to the finest grain, scaled to walkability.
This essentially means making the individual building lot the basic
increment of redevelopment, not multi-acre "projects." Get rid of any
parking requirements for property development.
Institute "locational taxation" based on proximity to the center
of town and not on the size, character, or putative value of the building
Last week I received an e-mail that made chilling reading. The author
claimed to be a senior banker with strong feelings about a column I
wrote last week, suggesting that the explosion in structured finance
could be exacerbating the current exuberance of the credit markets,
by creating additional leverage.
"Hi Gillian," the message went. "I have been working in the leveraged
credit and distressed debt sector for 20 years . . . and I have never
seen anything quite like what is currently going on.
Market participants have lost all memory
of what risk is and are behaving as if the so-called wall of liquidity
will last indefinitely and that volatility is a thing of the past.
"I don't think there has ever been a time in history when such a
large proportion of the riskiest credit assets have been owned by such
financially weak institutions . . . with very limited capacity to withstand
adverse credit events and market downturns.
"I am not sure what is worse, talking to market players who generally
believe that 'this time it's different', or to
more seasoned players who . . . privately acknowledge that there
is a bubble waiting to burst but . . . hope problems will not arise
until after the next bonus round."
He then relates the case of a typical
hedge fund, two times levered. That looks modest until you realise it
is partly backed by fund of funds' money (which is three times levered)
and investing in deeply subordinated tranches of collateralised debt
obligations, which are nine times levered. "Thus every
€1m of CDO bonds [acquired] is effectively supported by less than €20,000
of end investors' capital - a 2% price decline in the CDO paper wipes
out the capital supporting it.
"The degree of leverage at work . . .
is quite frankly frightening," he concludes. "Very few hedge funds I
talk to have got a prayer in the next downturn. Even more worryingly,
most of them don't even expect one."
FAST WEALTH AND BITTER
The oil prices
start to soar
While Real Estate
has hit the floor,
The Stock Market
The future prospects
Wall Street and Main Street,
As all alike
know they must eat
bread, their bitter bread,
Who let fast
wealth get to their head.
So China props
the dollar up,
But will not
fill your beggar´s cup
When she determines
not to prop you--
So will not
common sense then stop you
From your spendthrift
No priest nor
prophet comes to bless
bread, your bitter bread,
Who let fast
wealth go to your head.
It was a fond,
it would seem,
superb ambitions went
Before, it was
This hope, sans
rolling up one´s sleeves
But bitter bread,
such bitter bread,
Who let fast
wealth fill all their head.
Two Party System
as Polyarchy :
Corruption of Regulators :
and Control Freaks : Toxic Managers :
Harvard Mafia :
: Surviving a Bad Performance
Review : Insufficient Retirement Funds as
Immanent Problem of Neoliberal Regime : PseudoScience :
Who Rules America :
: The Iron
Law of Oligarchy :
War and Peace
Finance : John
Kenneth Galbraith :Talleyrand :
Oscar Wilde :
Otto Von Bismarck :
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Propaganda : SE
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Random IT-related quotes :
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Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient
markets hypothesis :
Political Skeptic Bulletin, 2013 :
Unemployment Bulletin, 2010 :
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(October, 2011) An observation about corporate security departments :
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(May, 2013) Corporate bullshit as a communication method :
Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law
Fifty glorious years (1950-2000):
the triumph of the US computer engineering :
Donald Knuth : TAoCP
and its Influence of Computer Science : Richard Stallman
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: CPU Instruction Sets :
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Principle : Parkinson
Law : 1984 :
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The Last but not Least Technology is dominated by
two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt.
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