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Financial Skeptic Bulletin, February 2008

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February

[Feb 29, 2008] Keeping Down With The Joneses

Less than a year ago it was a struggle to keep up with the Joneses. Now the Joneses are not spending. The new struggle is to keep down with the Joneses. This theme is discussed in Consumers cut back on small pleasures.

Such small luxuries seemed almost necessities in happier economic times. But no more for lots of folks, including those and other USA TODAY readers who described how they've changed their habits.
The murky financial outlook and recession fears are factors. Another driver: fear of being out of step with a cultural mind-set that increasingly says less is more. If your best friend and next-door neighbors are cutting back on little luxuries, shouldn't you be, too?

"For years, we had the opposite. It was all about keeping up with the Joneses. Now, the Joneses are starting to cut back," says Ellie Kay, author of 12 personal finance books.
"There's a sense that prices are rising — and will continue to rise — but wages will not," says Ken Goldstein, economist at The Conference Board. "This is squeezing household budgets whether they're $200 per week or $200,000 per year. Folks are looking closely at anything they don't have to purchase now."
"The new status isn't how much you've got, but your ability to show what you don't spend," says futurist Watts Wacker, who advises businesses on trends.

"This is a seminal moment. It's not a fad that will die out when the economy picks up."
Trends guru Faith Popcorn puts it this way: "It's cooler not to spend."

[Feb 28, 2008] Twenty-Cent Paradigms/Steven Pearlstein Takes on Wall Street

"Greenspan got out before he could be fired"... One thing we could do is not to glamorize Wall Street so much in the press or in movies, and begin to show more appreciation for real entrepreneurs and public servants and scientists and engineers.

February 24, 2008

In his Washington Post column last week, Steven Pearlstein offered a scathing multi-count indictment against Wall Street's purveyors of "financial innovation":

For starters, these innovations have helped to create a cycle of financial booms and busts that have a tendency to spill over into the real economy, contributing to a heightened sense of insecurity.

They have shortened the time horizons of investors and corporate executives, who have responded by under-investing in research and the development of human capital.

They have contributed significantly to massive misallocation of capital to real estate, unproven technologies and unproductive financial manipulation.

They have made it easy and seemingly painless for businesses, households and even countries to take on dangerous levels of debt.

They have given traders a greater ability to secretly manipulate markets.

They have given corporations clever new tools to hide risks, liabilities and losses from investors.

And by giving banks the tools to circumvent reserve requirements and make more loans with less capital, they have enormously increased the leverage in the financial system and with it the risk of a financial meltdown.

But far and away the greatest damage from all this financial wizardry is the obscene levels of compensation it has generated for a select group of Wall Street executives and money managers.

For when you look over the long term, at the good periods and the bad, it is obvious that the pay collected by these masters of the universe has been grossly excessive -- out of line with the personal financial risk they have taken, out of line with their skills relative to the next-best performers and certainly out of line with the returns earned by investors...

It would be bad enough if the consequences of this excessive pay were confined to Wall Street. Unfortunately, it has not worked out that way. For the prospect of earning untold wealth also has attracted an enormous amount of young talent that could have been more productively used in science, engineering, medicine, teaching, public service and businesses that generate genuine long-term value.

Is it not fair to ask whether the United States can remain the world's most prosperous and innovative economy when half of the seniors at the most prestigious colleges and universities now aspire to become "i-bankers" at Goldman Sachs?

So I hope you'll forgive me, dear readers, when I say that the best thing that could happen to our economy is for a dozen high-profile hedge funds to collapse; for investment banking to enter a long, deep freeze; for a major bank to fail; and for the price of a typical Park Avenue duplex to fall by 30 percent. For only then might we finally stop genuflecting before the altar of unregulated financial markets and insist that Wall Street serve the interest of Main Street, rather than the other way around.

So, what is to be done? Some of the implications came up in Pearlstein's "chat" with readers. One is better regulation:

Boston, Mass.: Citigroup, State Street, and myriad other US banks hid billions in contigent SIV liabilities off-balance sheet, often using off-shore tax havens. What does this say about the FED's competence as a regulator? Or do you think it's a matter that the FED is corrupt and turned a willful blind eye to all of these off-balance sheet transactions? Is it time to combine regulators so that there is one sole financial markets regulator? Thanks Steve!

Steven Pearlstein: The Fed is not corrupt but they have been blinded by the mindless regulatory philosophy of the Greenspan era and they do look on the big bans and the holding companies as their charges -- institutions to be protected, part of a financial system that needs to be protected -- so they never utter a bad word about them and try to handle things quietly and without penalty. The result is that they give up the deterrant aspect of regulation, which is to have a ritual hanging every couple of years and scare the bejezzus out of people so they behave better in between the hangings. The Fed doesn't believe in that. They also don't believe they should substitute their judgment for the markets, which is crazy, because in financial regulation, that is exactly the purpose of regulation. Otherwise, you'd just leave things to markets. It is a form of modesty that they have taken to gross excess. And frankly it is not going to change until someone like Barney Frank finally makes such an example of a Fed chairman of the head of the Fed's banking regulation department that they get fired for being a bad regulator. Greenspan got out before he could be fired, but there are others who should be held accountable so that their unpleasant dismissal will be a lesson that will be remembered by their successors.

(N.B. Barney Frank is Chairman of the House Financial Services Committee). Pearlstein isn't the only one calling for more effective regulation - Martin Feldstein, one of Ronald Reagan's economic advisors (i.e., not a lefty), recently did so. The economic market failures that necessitate regulation are primarily of the "imperfect information" variety - i.e. that when people (or institutions) buy a financial asset they have a limited knowledge of the underlying risks. This problem seems to get worse as the financial assets become more complicated.

Another, more profound, issue that deserves more thought than it gets is the type of behavior that receives approbation in our society:

Potomac, Md.: Steven, thank you for your comment on the status of America's financial system today. As a 24 year-old finance professional looking to apply to business school in the coming years, I hope to shift into a line of work that generates "genuine long-term value." I remember at graduation the air of superiority surrounding my classmates who landed jobs as analysts on Wall Street. For many of us at "elite" Northeast schools, they seem to be the only jobs out there, because everyone is gunning for them. How can the other industries appeal to the talented kids who are so easily swayed by the glamour of I-banking salaries and bonuses?

Steven Pearlstein: That's a simple question that probably doesn't have a simple answer. But one thing we could do is not to glamorize Wall Street so much in the press or in movies, and begin to show more appreciation for real enterpreneurs and public servants and scientists and engineers. I think a lot of this is as much cultural as economic.

The "credit crunch" resulting from some of these "financial innovations" turning out badly is one of the reasons the US economy may be headed into a slump. That is, if there is a recession, we have partly to blame our excessive zeal for "de-regulation," "free markets," and greed (er, "rational self-interest"). The age of Milton Friedman, indeed.

[Feb 28, 2008] LEADER- Dangerous animals in the banking zoo

"An investment bank is more like a zoo, full of bizarre, prideful and sometimes dangerous animals."

Feb 23 2008 | Financial Times

Commercial and retail bankers are like battery hens. You put them in a small cubicle, pressurise them with tough sales targets but provide a decent salary, and they will produce a steady stream of returns. Most are conservative, somewhat harassed souls, who seldom think to bite the hand that feeds them.

An investment bank is more like a zoo, full of bizarre, prideful and sometimes dangerous animals. A zookeeper who pushes them around, or issues orders, is asking to have an arm bitten off. Instead, the job is to keep the animals in their cages, so they do not savage the paying customers, while understanding their individual behaviour patterns. What does it mean, for example, when a derivative trader refuses to take a holiday...

[Feb 28, 2008] Contracts, by Dean Baker

The banks are very upset over the possibility that Congress may change the law to allow bankruptcy judges to rewrite the terms of mortgage loans as they can other loans when a person declares bankruptcy. Naturally they are pulling out all the stops in making their case. The Washington Post quotes a Bush administration spokesperson saying that the proposed change "is interfering with contracts."

... ... ...

Clearly, neither the Bush administration nor the banks, both of whom eagerly supported the bankruptcy reform bill, have any principled objection to interfering with contracts. Their objection seems to be based more on whom the interference is favoring. ...

[Feb 28, 2008] FT.com - Columnists - Martin Wolf - Why Washington’s rescue cannot end crisis story By Martin Wolf

February 26 2008

Last week’s column on the views of New York University’s Nouriel Roubini (February 20) evoked sharply contrasting responses: optimists argued he was ludicrously pessimistic; pessimists insisted he was ridiculously optimistic. I am closer to the optimists: the analysis suggested a highly plausible worst case scenario, not the single most likely outcome.

Those who believe even Prof Roubini’s scenario too optimistic ignore an inconvenient truth: the financial system is a subsidiary of the state. A creditworthy government can and will mount a rescue. That is both the advantage – and the drawback – of contemporary financial capitalism.

In an introductory chapter to the newest edition of the late Charles Kindleberger’s classic work on financial crises, Robert Aliber of the University of Chicago Graduate School of Business argues that “the years since the early 1970s are unprecedented in terms of the volatility in the prices of commodities, currencies, real estate and stocks, and the frequency and severity of financial crises”*. We are seeing in the US the latest such crisis.

All these crises are different. But many have shared common features. They begin with capital inflows from foreigners seduced by tales of an economic El Dorado. This generates low real interest rates and a widening current account deficit. Domestic borrowing and spending surge, particularly investment in property. Asset prices soar, borrowing increases and the capital inflow grows. Finally, the bubble bursts, capital floods out and the banking system, burdened with mountains of bad debt, implodes.

With variations, this story has been repeated time and again. It has been particularly common in emerging economies. But it is also familiar to those who have followed the US economy in the 2000s.

When bubbles burst, asset prices decline, net worth of non-financial borrowers shrinks and both illiquidity and insolvency emerge in the financial system. Credit growth slows, or even goes negative, and spending, particularly on investment, weakens. Most crisis-hit emerging economies experienced huge recessions and a tidal wave of insolvencies. Indonesia’s gross domestic product fell more than 13 per cent between 1997 and 1998. Sometimes the fiscal cost has been over 40 per cent of GDP (see chart).

By such standards, the impact on the US will be trivial. At worst, GDP will shrink modestly over several quarters. The ability to adjust monetary and fiscal policy insures this. George Magnus of UBS, known for his “Minsky moment”, agrees with Prof Roubini that losses might end up as much as $1,000bn (FT.com, February 25). But it is possible that even this would fall on private investors and sovereign wealth funds.

In any case, the business of banks is to borrow short and lend long. Provided the Federal Reserve sets the cost of short-term money below the return on long-term loans, as it has for much of the past two decades, banks can hardly fail to make money.

If the worst comes to the worst, the government can mount a bail-out similar to the one of the bankrupt savings and loan institutions in the 1980s. The maximum cost would be 7 per cent of GDP. That would raise US public debt to 70 per cent to GDP and would cost the government a mere 0.2 per cent of GDP, in perpetuity. That is a fiscal bagatelle.

Because the US borrows in its own currency, it is free of currency mismatches that made the balance-sheet effects of devaluations devastating for emerging economies. Devaluation offers, instead, a relatively painless way out of a slowdown: an export surge. Between the fourth quarter of 2006 and the fourth quarter of 2007, the improvement in US net exports generated 30 per cent of US growth.

The bottom line, then, is that even if things become as bad as I discussed last week, the US government is able to rescue the financial system and the economy. So what might endanger the US ability to act?

The biggest danger is a loss of US creditworthiness. In the case of the US, that would show up as a surge in inflation expectations. But this has not happened. On the contrary, real and nominal interest rates have declined and implied inflation expectations are below 2.5 per cent a year. An obvious danger would be a decision by foreigners, particularly foreign governments, to dump their enormous dollar holdings. But this would be self-destructive. Like the money-centre banks, the US itself is much “too big to fail”.

Yet before readers conclude there is nothing to worry about, after all, they should remember three points.

The first is that the outcome partly depends on how swiftly and energetically the US authorities act. It is still likely that there will be a significant slowdown.

The second is that the global outcome also depends on action in the rest of the world aimed at sustaining domestic demand in response to a US shift in spending relative to income. There is little sign of such action.

The third point is the one raised by Harvard’s Dani Rodrik and Arvind Subramanian, of the Peterson Institute for International Economics in Washington DC, (this page, February 26), namely the dysfunctional way capital flows have worked, once again.

I would broaden their point. This is not a crisis of “crony capitalism” in emerging economies, but of sophisticated, rules-governed capitalism in the world’s most advanced economy. The instinct of those responsible will be to mount a rescue and pretend nothing happened. That would be a huge error.

Those who do not learn from history are condemned to repeat it. One obvious lesson concerns monetary policy. Central banks must surely pay more attention to asset prices in future. It may be impossible to identify bubbles with confidence in advance. But central bankers will be expected to exercise their judgment, both before and after the fact.

[Feb 27, 2008] Monolines Now witness the destructive power!

February 23, 2008 |  Accrued Interest

To get to the bottom of this, let's look at Ambac and MBIA's "problem" bonds. These are the bonds trading at large discounts to their original value, and not just because of generalized weaker liquidity: closed-end second liens, home equity, sub-prime first liens, and ABS CDOs. Here is Ambac's exposure to "problem" bonds: (from Ambac's investment relations site)

• Closed-end second liens: $5.3 billion
• HELOC: $12 billion
• Sub-prime first liens: $8.4 billion
• ABS CDO: $32.2 billion

And MBIA:

• Closed-end second liens: $11.1 billion
• HELOC: $11.7 billion
• Sub-prime first liens: $4.7 billion
• ABS CDO: $30.6 billion

That's a total of $116.1 billion. So here are some of the questions that remain to be answered.

• To what degree have banks already written down the value of these bonds? All indications are that structured finance bonds have been trading like there is no insurance for a while. So if the banks have truly been marking to market, there should be little actual write downs. We'll have to see whether that's actually been the case or not. If I had to bet, I'd bet that the brokerages did a better job than banks in handling write downs.
• How much of this paper is held by U.S. banks vs. foreign banks? It was widely believed that European banks were big buyers of AAA-rated ABS CDO paper, and that they loved to get wraps on top of that. So it stands to reason that the CDO exposure may be heavily European.
• How much of a downgrade would the wrapped paper suffer? The banks that hold this paper probably know the answer, since some of the CDS contracts were done privately. That means that the bond's public rating is a uninsured rating. It gets its "insured" treatment by virtue of a separately negotiated CDS contract. Other paper was wrapped when the bond was issued, and may or may not have an underlying rating.

As long as these questions linger, the credit market is going to continue to discount brokerage and bank bonds, which are currently at or near all-time wides. In addition, if banks are uncertain about their capital position, their willingness to lend will be compromised. In other words, we need come to some conclusion with the monolines before the economy can start moving forward.

[Feb 27, 2008] Econbrowser How Much Stimulus Dollar Amounts versus Efficacy

I think that incipient Federal liabilities combined with the rest-of-the-world's disillusionment with dollar assets is going to mean that discretionary expansions in fiscal policy will be ill-advised.

Still, I think a fiscal stimulus of 1 percentage point of GDP to soften the slowdown makes sense -- as long as we get the maximum "bang for the buck" of deficit spending, and the stimulus is not open-ended. In other words, I share Andy Samwick's (and Jim Hamilton's) queasiness about letting the Bush-ian deficit spending/debt building tendencies persist (plenty of documentation here, here and here). In addition, the deficit spending should be aimed at increasing aggregate demand, as opposed to providing a windfall to households and businesses that will only enhance wealth or profits.

Comments

Having returned from Davos dazed and confused let me share the one major takeaway that I simply cannot shake.

There is a near universal contempt for the political leadership of the USA.

There is a near universal contempt for the economic policies of the USA.

There is a near universal contempt for the structural design of monetary policy making in the USA, focused "like a lazer beam" on the internally contradictory "dual mandate."

The takeaway is the relentless expression of contempt, not veiled, not thinly-veiled, just spat out into the face ... impolite critics, no defenders.

This is something that I have never experienced before, not from this collection of people.

I suspect that what blew it wide open was the Bernanke fiasco last week, coming right at the start of the events.

The entire experience has worn me out and wrung me out

====

Excellent work, but most analysis seem to miss the point. The business tax incentives and tax payer rebate checks are a diversion.

Lets mail the working stiff a one time $300 check, while we give $150K and a hall pass to the buyers and banks that got us into the mess.

Where's the beef? The pea is under the pod called the GSE loan limit increase from $417K to $729K.

The more stringent FNMA, FHLMC limits are raised for one year, while the less stringent FHA limits are raised, permanently.

According to California Sen. Barbara Boxer's office:

On the average $650,000 jumbo loan balance, a 30-year fixed rate mortgage, the lower rate (-1%) on the "conforming" GSE jumbo would result in an average $417 per month savings, every month for 30 years!

That's a $150K subsidy which amounts to white collar welfare for rich homeowners and speculators.

Millions of 1, 2, 3 & 5 year interest only & teaser jumbos will be reset this year. Calculations estimate if only 1 million default after a FHA refi, this will result in a $260 billion cost to the taxpayer within 2 years.

There is nothing preventing Countrywide and other lenders from refinancing their delinquent and defaulting "liar loans" with the GSE's under this program.

In effect tax payers will be subsidizing the banks and borrowers with non conforming jumbo loans: California 35%, New York 19.5%, New Jersey 13,5% & DC 21.5%

This stimulus package is despicable, disgusting, a disaster and a disgrace. Should it pass and be signed into law as currently drafted, its constitutional legality needs to be tested.

At a minimum, it is a violation of the GSE charters infringing into the "primary" mortgage markets. I urge you to contact your House & Senate reps to have the loan limit increase provision stricken from the bill.

http://naybob.blogspot.com/2008/01/barney-frank-hr-1852-sb-2338-economic.html

======

I'd also suggest taking a big knife to the bloated military budget and reallocating it to peaceful activities (education, health, energy efficiency) that could generate more jobs, better social outcomes, and contribute to real security in the longer term.

======

Sorry to all to be absent from the debate. The new semester is upon me.

One way to look at my argument is as follows. Stipulate that $150 billion is the size of the package to be implemented. Then, for each dollar, what provisions have the largest multiplier (in the Keynesian sense). So my criticism is not of investment incentives per se consituting 1/3 of the package, but rather that each dollar devoted to accelerated depreciation will lead to small impetus to aggregate demand. If those investment incentives were in the form of investment tax credits, I would be less critical.

So in this sense, kharris has perhaps said it better than I did.

Posted by: Menzie Chinn at January 29, 2008 02:01 PM

[Feb 27, 2008] Econbrowser Crony Capitalism Comes (Returns) to America By Menzie Chinn

February 23, 2008

Or, who will be the Keating 5 of the 2000's? Perspectives from those of us who remember the East Asian crises of the 1990's.

From the NYT:

News Analysis

A 'Moral Hazard' for a Housing Bailout: Sorting the Victims From Those Who Volunteered

By EDMUND L. ANDREWS

Published: February 23, 2008

WASHINGTON -- Over the last two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business and to obtain freer rein for "financial innovation."

But as losses from bad mortgages and mortgage-backed securities climb past $200 billion, talk among banking executives for an epic government rescue plan is suddenly coming into fashion.

A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government -- now that it is in trouble.

The proposal warns that up to $739 billion in mortgages are at "moderate to high risk" of defaulting over the next five years and that millions of families could lose their homes.

To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.

"We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market," the financial institution noted.

In practice, taxpayers would almost certainly view such a move as a bailout. If lawmakers and the Bush administration agreed to this step, it could be on a scale similar to the government's $200 billion bailout of the savings and loan industry in the 1990s. The arguments against a bailout are powerful. It would mostly benefit banks and Wall Street firms that earned huge fees by packaging trillions of dollars in risky mortgages, often without documenting the incomes of borrowers and often turning a blind eye to clear fraud by borrowers or mortgage brokers.

A rescue would also create a "moral hazard," many experts contend, by encouraging banks and home buyers to take outsize risks in the future, in the expectation of another government bailout if things go wrong again.

If the government pays too much for the mortgages or the market declines even more than it has already, Washington -- read, taxpayers -- could be stuck with hundreds of billions of dollars in defaulted loans.

But a growing number of policy makers and community advocacy activists argue that a government rescue may nonetheless be the most sensible way to avoid a broader disruption of the entire economy.

...

One paragraph in the article I find quite amusing is this one:

Surprisingly, the normally free-market Bush administration has expressed interest. Treasury officials confirmed that several senior officials invited Mr. Taylor to present his ideas to them on Feb. 15. Mr. Taylor said he had also received calls from officials at the Office of Thrift Supervision and the Office of the Comptroller of the Currency, which is part of the Treasury Department.

To me, it is completely unsurprising that the Administration should be willing to bail out financial institutions. They are well connected in the way that the unemployed [1] or the uninsured [2] are not.

However, this is not a rationale for not intervening. As I've said before, "Just say 'no'" is not a viable policy. The key point is to realize that, just like some of the East Asian economies in 1997, we are well past the point about worrying about the impact of current policies on "moral hazard" (see this analysis [pdf]). We needed prudential regulation in the period leading up to the housing boom (sadly, policy makers failed in that respect). That is when contingent liabilities built up (see these posts on "looting" [3], [4]). Now, it is not possible for the government to credibly commit to not intervene, when the financial system's operation is at stake (i.e., as Krugman has said, the horse is out the barn door).

And make no mistake -- the financial system is to some degree already frozen, and there is little prospect for a complete unfreezing of the system without substantial government intervention. From Deutsche Bank Economics/Strategy Weekly (Feb. 22):

...Taking MBS spreads as an example, spreads have now widened beyond the levels reached in the convexity episode of 2003, and is approaching the highs of the LTCM crisis of 1998. We emphasize that it is important for the market not to anticipate the kind of mean reversion that occurred in those previous widening episodes. In 1998, the spread widening wasn't a result of a systemic problem (at least in the principal developed economies), but rather was narrowly addressed with the unwinding of LTCM's positions. Spreads moved back relatively quickly on GSE buying, as GSE’s then were a reasonably large part of the mortgage market at that time, unlike the current moment, when the GSE's have been and are still hampered by regulatory and competitive restrictions, and thus are too small to serve as a stabilizing force.

In this sense, the current crisis is very much like the S&L crisis. And as it looks more and more likely that the government will have to spend billions of dollars bailing out investors, banks, and households, it seems to me that accountability is required. Who in the Administration pushed to prevent regulatory oversight? Who in Congress pushed the interests of the banks?

And we should look very carefully at the proposals that are being pushed by the financial industry, even as we acknowledge that laissez faire is not tenable, and we seek to establish procedures and institutional reforms that will prevent a replay. In particular, thinking about a well-funded, integrated, regulatory system that is insulated from political pressures would be a good place to start.

=====

Comments

I'm ready to sign on to a bank bailout as soon as we slap a 100% tax on all banker incomes above a generous $100,000 a year, more than twice the median income. After all, the bankers were very successful in pushing through bankruptcy reform in 2005 to keep consumers from defaulting. Likewise shouldn't we squeeze the people responsible for this debacle to pay for their own bailout. Why should guys like Charles Prince and Stan O'Neal be able to just walk away with hundreds of millions of taxpayer bailout money?

More seriously, how about public ownership equity in exchange for a bailout. It seems to work for Britain. Why should some guy from Abu Dhabi get an equity stake for his bailout of Citigroup and U.S. citizens get nothing?

Or how about a whopping increase in the corporate tax on financial institutions? Something like 40% of all U.S. company profits in recent years have been in the financial sector. This seems to be a perversion of the economy and maybe we need to discourage its growth.

======

It's amazing how ignorant of history some of the posters on this thread are.

In the 19th century, the banking system was virtually unregulated-- and there were frequent panics, fraud, and so on. The economic damage tended to be short-lived, but that was due to the fact that the economy was largely agricultural and regionally fragmented. As the nation became larger and the scale of banking increased, the consequences of crashes became more serious and longer-lasting.

There are some truly ludicrous proposals in the comments above. One commenter imagines that the solution is to go back to local banks. How does he imagine that large-scale enterprises, running into billions of dollars, could be efficiently funded by small banks? The more likely result is that corporations would get their funding from foreign competitors.

Another poster proposes that we let the banking system collapse, since a new banking system will arise like a phoenix from the ashes "in no time." This was tried in 1930, and after two years and the wreckage of 30% of the economy, the people grew restless at waiting for "no time" to elapse. Even with vigorous intervention, businesses that had closed "in no time" remained shuttered for a decade, and farmers displaced from their land never regained it.

There is something very wrong about an educational system that permits very ignorant people to think they have a right to be both rude and loud.

Posted by: Charles at February 25, 2008 08:41 PM It's early 2008 and AAA rated mortgage backed securities released as recently as last May are already at a 15% default rate. In early 2009, the default rate will be 60% at a minimum.

The Feds need to call in the CEO's of Citi, BoA, WashMutual, Wachovia, Merrill, and the dozen or so others who participated in producing, selling, packaging, rating, this crap. They need to be told in no uncertain terms that they have limited choices:

1. Avoid corporate bankruptcy by minimizing defaults. This can be done by working with borrowers NOW to discount loans and terms to market value. Where default is inevitable, they will need to dispose of property in an orderly and efficient manner to avoid further deterioration of their assets.

2. Any institution that declares bankruptcy or needs a bailout by American taxpayers who have already been bled white by these vulture's greed, incompetence and incomprehensibly poor business judgment will be nationalized. All executives and board members will be immediately fired. All executives and board members for the last 5 years will be required to return salaries and bonuses with interest because it's absolutely clear that, whatever else they were doing, it sure the hell wasn't their job. All land, buildings, contracts, and assets will become the property of the U.S. Treasury. The lawsuits alleging fraud that are beginning to be filed by the poor suckers who were last to hold the worthless securities will be allowed, but only against the individuals who perpetuated the fraud, not against the nationalized company.

If they don't like them beans, then they can work through this mess themselves.

Posted by: CathyG at February 25, 2008 09:36 PM

[Feb 26, 2008] The Anatomy of a Bear Market - Seeking Alpha

An interesting list of false predictions of a financial meltdown from quite respectable and extremely well informed people

a bear market is only possible if there is a consensus that a financial crisis is significantly worse than ever before. And that is why we are currently in a bear market. A few examples of this psychology:

• George Soros, who said that this is "the worst market crisis in 60 years". George Soros also reacted to Black Monday in 1987 with a single chilling sentence: "This is 1929"
   
• David Rosenberg at Merrill Lynch, who said "we confess that we have been in the business for 25 years and have never - and repeat never - seen a cycle like this one."
   
• Alan Greenspan described LTCM in 1998 as the worst crisis in his 60-year working lifetime.

[current predictions -- remains to be seens how good, bad]

• Nouriel Roubini of New York University's Stern School of Business, who said that this is "the worst housing recession in U.S. history"
   
• Legg Mason's CEO, Chip Mason, said that credit markets are in the "worst state he has seen in his 47 yrs in the business"

- etc.

This psychological trap will probably always be with us. The most experienced investors and bankers have careers that last about 30 years, a blink in economic history. "It is hardly surprising, therefore, that people are constantly amazed by each new cycle that comes along - and find it difficult to see it in historic proportion," says Kaletsky.

[Feb 26, 2008] Welcome to PrudentBear.com

There is now a positive feedback loop that feeds the crisis..

"Half of U.S. states are projecting budget deficits next fiscal year as the slowing economy curbs tax collections, forcing local governments to spend savings, cut funding for programs, borrow or raise taxes, a report found."
Bloomberg News, January 28, 2008
 

[Feb 26, 2008] Bernanke, Greenspan at Fault as U.S. Faces Slump, Stiglitz Says By Mark Barton and Ben Sills

Feb. 26 (Bloomberg) -- Joseph Stiglitz, a Nobel-prize winning economist, said successive Federal Reserve chairmen have left the U.S. economy facing a "very significant'' slowdown.

Current Fed chief Ben S. Bernanke was too slow to cut interest rates as the U.S. real-estate market deteriorated, while his predecessor, Alan Greenspan, "actively looked the other way'' as the housing market inflated, Stiglitz said in a Bloomberg Television interview today in London.

The spillover from the biggest U.S. housing slump in 25 years, turmoil in financial markets and higher energy prices are curbing growth in the world's biggest economy. The financial- services industry is curtailing credit and conserving capital.

Greenspan ``is right that this downturn is going to be the worst downturn in a quarter century, but he's largely to blame,'' Stiglitz said. "It's not just that he was asleep at the wheel, he actively looked the other way'' by dismissing the housing-price appreciation as ``froth.''

Following mounting losses on past loans, banks have already taken writedowns of $163 billion since the beginning of 2007. President George W. Bush signed a $168 billion stimulus package that will deliver tax rebates to more than 100 million households.

Bernanke cut Fed interest rates twice last month, including an emergency reduction of 75 basis points between meetings, in a bid to prop up growth as the financial writedowns and the prospect of a further housing decline saw U.S. stocks slump. The S&P 500 index is down 6.6 percent this year.

Too Late

"Clearly they acted too late,'' Stiglitz said. ``The dramatic lowering of the main interest rate by 75 basis points was a panic not a prudent measure.''

The $3 trillion cost of the Iraq war, which diverted the country's resources from investment in economic productivity and sent the budget deficit higher, will continue to hold back growth in the U.S., Stiglitz said.

[Feb 25, 2008] Insurers' Day of Reckoning

"I am afraid that all that is happening is the further leveraging of an already leveraged and highly interdependent financial system."

February 25, 2008  Mish's Global Economic Trend Analysis

Minyan Peter was writing about Insurers' Day of Reckoning earlier today before this news hit. Nothing happened to change the relevance of what he had to say so let's take a look.

A hurricane comes through your town and levels your house. A few weeks later, you receive a letter from your insurance company telling you that unless you buy some of its stock, it won’t be able to pay your insurance claim. What do you do?

As far fetched as this question may feel, this is, in principle, what’s behind the bailout of the monoline insurance companies. Unless their biggest CDS counterparties step up with more capital, the insurance companies won’t be able to make good on their CDS and the banks will be forced to take write-downs.

How this all plays out remains to be seen, but I would suggest that until additional capital comes into the financial services system from organizations other than other financial services companies, I am afraid that all that is happening is the further leveraging of an already leveraged and highly interdependent financial system.

[Feb 25, 2008] Credit Card Reform Is Coming/Payback For A decade Of Greed

"Treat people fairly instead of what you can get away with and this kind of reaction does not happen. For cash strapped banks, such legislation could not come at a worse time. But this is just a start. A reform of bankruptcy reform is bound to happen as well."

February 23, 2008 | Mish's Global Economic Trend Analysis

The pendulum has reversed. This is just the initial stages of reversal. The proposals are what they are and they do not have to make sense. Many won't. However, consumers are fed up and a Congress far more sympathetic to consumers' desires is going to be elected.

And as disgusting as two-cycle billing is, I would not legislate against it. There is a choice. Consumers do not have to choose Discover Card or any other 2-cycle lender.

But when banks purposely mail out statements at the very last minute (which they do), change terms for little reason (which they do), require receipt by noon even when their normal mail delivery is 2:00PM (which they do), and charge absurd overlimit fees instead of disallowing transactions (which they do), this is what happens. I have no sympathy for the banks when legislation over-reaches in the other direction.

Treat people fairly instead of what you can get away with and this kind of reaction does not happen. For cash strapped banks, such legislation could not come at a worse time. But this is just a start. A reform of bankruptcy reform is bound to happen as well.

Credit card and other reforms are coming. Banks better get used to the idea.

[Feb 25, 2008] Nissan's Ghosn U.S. auto market in recession

SEOUL, South Korea -- The head of Nissan Motor Co. said even if the United States is not in recession, its auto industry is.

"We are very lucid on the situation of the industry that there is a recession in the United States, at least in the car market," Chief Executive Carlos Ghosn told reporters, saying automakers face rising costs for iron ore, precious metals, aluminum and other materials.

"These represent risk for the industry," he said.

[Feb 25, 2008] Twenty-Cent Paradigms/Stagflation Redux?

"One reason stagflation is so pernicious is that it puts the Fed in an awkward spot. High inflation requires the Fed to tighten monetary policy (i.e. raise the fed funds rate target), while the proper response to stagnation is to loosen."

The latest inflation report from the BLS has generated some concern about "stagflation," an ugly artifact of the 1970's, making a comeback (can avocado appliances be far behind?). The word is a combination of "stagnation" (i.e. high unemployment and slow growth) and "inflation." We already knew that unemployment has been creeping up (4.9% in January, up from 4.4% last March). And now we learn that over the past 3 months, CPI inflation has been running at a 6.8% annual rate. Partly that reflects oil prices - just as 1970's inflation did - but the "core" CPI (i.e. with food and energy prices removed) has been increasing at a 3.1% annual rate. Ominous portents, but we have some distance to go before things look this bad:

(the red line is the unemployment rate, and the blue is CPI inflation)

One reason stagflation is so pernicious is that it puts the Fed in an awkward spot. High inflation requires the Fed to tighten monetary policy (i.e. raise the fed funds rate target), while the proper response to stagnation is to loosen. At Econbrowser, James Hamilton examines the numbers and the Fed's dilemma.

Paul Krugman believes the appropriate parallel is to early 1990's rather than the late 1970's. He writes:

...I don’t believe we’re really facing anything comparable to 1970s stagflation. For one thing, we’re less dependent on oil: America has more than twice the real G.D.P. it had in 1979, but consumes only slightly more oil. For another, there’s no sign of the wage-price spiral that once drove inflation into double digits — in fact, wage growth has been declining even as inflation rises.

What’s much more likely is that we’ll have an economy like that of the early 1990s, only worse.

The first President Bush presided over the 1990-1991 recession. But his real problem came during the alleged recovery, which was hobbled by financial problems at many banks, which had been badly damaged by the collapse of the late-1980s real estate bubble, and by sluggish consumer spending, held down by high levels of household debt.

As a result, the unemployment rate just kept rising, not reaching its peak of 7.8 percent until June 1992.

If all this sounds familiar, it should. Many economists have pointed out the parallels between the current situation and the early 1990s: another real estate bubble, subprime playing more or less the same role formerly played by bad loans by savings and loan institutions, financial trouble all around.

The difference is that the problems look a lot worse this time: a much bigger bubble, more financial distress, deeper consumer indebtedness — and sky-high oil prices added to the mix...

[Feb 23, 2008] 2007 Spending per Affluent Elite Household

In the original Hackonomics, I buried the detailed spending habits of the of the upper echelon of wealth in America. I suspect you will find this data a bit more unequal than the quintile nonsense we saw from Alm and Cox.

Here is how this group spent their money as follows:

Dollars Spent Category - 2007 Spending per Affluent Elite Household
                    Category           Category
                    Spending           Spending
Summer Spending        *       2007       *      2005    Change 2007/2005
Activity               %      $ Spent     %     $ Spent  $Change %Change
Yacht Rentals        10.60%  $384,000    9.50% $317,000  $67,000  21.14%
Redecorating         44.90%  $129,000   30.90%  137,000  ($8,000) -5.84%
Villa Rentals        15.70%  $106,000   13.80%  $79,000  $27,000  34.18%
Experiential
Excursions          25.80%  $103,000   22.70%  $79,000  $24,000  30.38%
Jewelry/watches      73.70%  $94,000    63.20%  $63,000  $31,000  49.21%
Luxury Cruises       47.50%  $92,000    43.10%  $71,000  $21,000  29.58%
Charitable Giving    97.50%  $82,000    98.40%  $52,000  $30,000  57.69%
Vacation Home
Rentals             12.10%  $82,000    11.80%  $64,000  $18,000  28.13%
Out-of-Home Spa
Services            67.70%  $61,000    48.70%  $49,000  $12,000  24.49%
Summer
Entertaining        93.90%  $56,000    92.40%  $39,000  $17,000  43.59%
Luxury Hotels        95.50%  $48,000    93.40%  $36,000  $12,000  33.33%
Luxury Resorts       84.80%  $41,000    82.60%  $23,000  $18,000  78.26%
At-Home Spa
Services            53.50%  $38,000    47.40%  $26,000  $12,000  46.15%
Apparel/accessories  92.40%  $34,000    86.80%  $16,000  $18,000 112.50%
Audio/visual         51.50%  $31,000    50.70%  $14,000  $17,000 121.43%
Wines and Spirits
for Social
Entertaining        86.90%  $24,000    77.00%  $19,000   $5,000  26.32%
Wines and Spirits
for Personal
Consumption         84.80%  $17,000    74.30%  $11,000   $6,000  54.55%

                                  2007             2005     $Change  %Change
    Total Luxury Summer
    Spending/Household       $622,202.02        $399,187.50 $223,015  55.87%

    *Percentage of those surveyed spending in this category Survey of Households with 
Net Worth $10 Million +

[Feb 22, 2008] Is Time Running Out for Bond Insurers?

Another $75 billion losses at the big banks ?

The decision by the big ratings agencies, Moody's, Standard & Poor's and Fitch is imminent, and at least one of the raters could make an announcement sometime today.
...
[A] downgrade of MBIA and Ambac could pose big problems for the banks that hold bonds they insure. Analyst Meredith Whitney said on CNBC yesterday that the downgrades could cause writedowns of another $75 billion at the big banks.

[Feb 22, 2008] U.S. Stocks Fall, Led by Financials; Fannie Mae, Goldman Drop by Michael Patterson

Bloomberg "People are coming to grips with what is the degree of financial issues,'' David Darst, the New York-based chief investment strategist at Morgan Stanley Global Wealth Management, which oversees $734 billion, said in a Bloomberg Television interview. "We think caution is called for.''

The S&P 500 has lost 1.1 percent this week and is down 9.1 percent in 2008 after a worse-than-forecast manufacturing report yesterday added to evidence that the economy is falling into a recession. The world's largest banks and securities firms have reported about $160 billion of credit losses and asset writedowns since the beginning of 2007 as the collapse in subprime mortgages spreads across debt markets.

"We do not think the stocks fully reflect the severity or duration of the financial headwinds facing the companies,'' he wrote in a research note to clients dated today. There is "more pain than gain.''

[Feb 22, 2008] The Fed's Self-Delusion (Inflation Edition)

Individuals and institutions are capable of considerable self-deception when faced with difficult choices. The Fed's latest signals about what it intends to do about inflation are a classic example.  

[Feb 22, 2008]Analyst Meredith Whitney Asks Banks "Where's Waldo ?"

From Mish's blog readers comments: "Whitney is a superstar - a real analyst who actually went with accounting 101 and called bull on Citibank before anyone else. That how she went from CIBC to Oppenheimer on a huge pay raise. What she says means business."

Mish's Global Economic Trend Analysis

I listened to the video (Click Here To Play Video) a half dozen times and offer this transcript by hand. The following may not be perfect but what's presented below should be extremely close. A few sections were not transcribed. Inquiring minds will want to play it.

Maria:
So you predicted the dividend cut, you've been negative on the banks tell us where we stand in this cycle right now. How much more pain is ahead?

Meredith:
Well a lot of people ask where are we in terms of innings or are we half way over. I think we are probably 40% of the way over. And the biggest problem has been this game of finding Waldo.

No one has been forthright about where their losses are actually hidden, where there exposure is. There's still so much risk remaining on bank balance sheets that has yet to be sold and this constrains lending and that’s why you have a problem with any type of hiring.

Banks aren’t lending so businesses can’t grow, manufactures can’t invest, and this is a systemic issue because banks are still in denial.

If these assets were truly marked to market banks would be indifferent to whether they hold them or sold them. Obviously they are not indifferent. The fact they are holding it means they have some hope that these assets will recover.

If they had sold these assets 6 months ago they probably would have gotten 50-75% more than they can sell these assets for today. When they do finally come up for sale there is going to be a supply jam that will drive these prices even lower.

That is just one part of banks problem. The other part of the problem is loss curves. Loans they have on balance sheets are accelerating in terms of losses and these banks are under reserved for those loans. So capital issues surround these banks all over the place and a couple of banks are at particular risk.

Image Of Whitney's Financial Calls:
Long – American Express (AXP)
Short – Citigroup (C), Merrill Lynch (MER) , UBS

Maria:
Who is most vulnerable for more losses of dividend cuts?

Meredith:
Believe it or not it’s Citigroup. Citi now has earnings problems, they have balance sheet constraints, they have further CDO writedowns, they have exposure to the monolines and they have the single largest concentration of exposure to high LTV [Loan To Value] mortgages.

Citi has over $50 billion in exposure to 90+% LTV mortgages are likely underwater now that housing prices have declined. So they will have the highest severity of losses with respect to those mortgages. I estimate that Citi is anywhere from $6 to $12 billion under reserve because of those exposures. There’s no place to hide for Citi.

Maria:
So you think Citigroup will have to cut the dividend again then?

Meredith:
Yes, Citi is capital constrained and they will be further capital constrained when they have to take more writedowns. ...

Historically payout ratios on dividends is under 50%. As Citigroup becomes earnings challenged, its payout ratio of dividends to earnings is 70% and that is imprudent for a board to authorize such payouts particularly when they are going to sovereign nations and borrowing at expensive rates.

Maria:
Will Citi have to raise more capital?

There is not a doubt in my mind that Citigroup will have to raise more capital. Collectively they raised about $20 Billion from sovereign wealth funds and smaller investors. I believe they raised what they could at the time. ...

Citigroup, Merrill, and UBS raised capital that diluted existing shareholders by 20%. That’s unheard of. And the fact they are going to have to go back and dilute shareholders even further makes my argument of a payout ratio even stronger.

Maria:
The monolines, Ambac (ABK) and MBIA (MBI) what is your prediction there?

Meredith:
There is no way the rating agencies can possibly know how much capital Ambac and MBIA need because no one understands what the end of the housing market decline is actually going to look like. There’s no way they can do it.

Maria:
And as far as things getting worse, how much of this scenario is priced in?

Meredith:
I think that the best case scenario is 15% downside in the financials.
I think that the worst case scenario is 50% downside in the financials.

Maria:
50% downside in the financials, worst case scenario. Meredith, good to have you. Thanks so much.

That was a good interview. But let's discuss bank lending a bit more. Yes, capital impairment is preventing lending. However, lending is not going to revert back to what it was even if the capital issues are solved. Psychology has changed and it's extremely unlikely to change back for a long time. A secular peak in lending craziness has been reached and the pendulum has far, far to go in the other direction.

The process has just started. More writeoffs are coming from commercial real estate and credit cards. Furthermore there is no reason for businesses to hire or expand given rampant over capacity everywhere. This recession is going to be far deeper and last far longer than anyone thinks.

Mike "Mish" Shedlock

[Feb 20, 2008] Welcome to PrudentBear.com

"Almost half of the U.S. homeowners who in the past two years took out subprime mortgages that now underlie securities would owe more than their property’s value if home prices drop an additional 10%."

Bloomberg, February 13, 2008  

[Feb 20, 2008] Fed official 2008 economy like 1991 recession - Feb. 19, 2008

Does this mean 4 years of slow growth means or recovery in 2012 ?  Is was dissolution of the USSR plus PC revolution (beginning of the dot-com boom, which later turned in bubble) that helped to overcome the headwind, was it ?

The slumping U.S. economy is reminiscent of the aftermath of the 1991 recession, according to the head of the Minneapolis Federal Reserve.

In a speech given Friday morning in Minneapolis, Gary Stern, the regional Fed president, said the current excesses in residential construction, housing market decline, and credit crunch all resemble the "headwinds" environment that prevailed 17 years ago. If that is the case, the economy may be in a slump for some time.

[Feb 20, 2008] Inflation Heats Up in January

No more Fed rate cuts ?

Inflation is showing renewed signs of life, much to the chagrin of financial markets and the Federal Reserve. A report released Feb. 20 showed that the U.S. consumer price index (CPI) rose 0.4% in January, while the core rate, excluding food and fuel, rose 0.3%. Markets expected tamer readings of 0.3% and 0.2%, respectively.

The headline CPI figure posted a 4.3% rate of growth over last year, up from 4.1% seen the month before. The core rate rose to a 2.5% year-over-year pace, from 2.4% seen previously.

[Feb 20, 2008] LBO Deals were Losers for Wall Street

The WSJ Deal Journal has an interesting analysis today: Leveraged Loans: The Hangover Wasn’t Worth the Buzz

Investment banks now face around $197 billion in exposure to leveraged loans used to back big buyouts in 2007, adding inestimable stress to their efforts to extricate themselves from the credit crunch. Was it worth it?

Not really, no.

The WSJ's Heidi Moore provides some analysis for several banks. As an example, for Citigroup she writes:

Citigroup ... earned only $856 million in fees from private-equity firms in 2007, even though the bank underwrote leveraged loans totaling $114.3 billion and still holds $43 billion in exposure. Oppenheimer analyst Meredith Whitney estimates Citigroup’s leveraged loan write-downs would be about $2.5 billion ...

And this doesn't count the opportunity costs.

[Feb 18, 2008] Signs may tell you economy is picking up, when to act by John Waggoner

This is just third month of the slump and too early to tell who long it will last and how low the stocks will fall.  IMHO end of the quarter sucker rally is a possibility but this is not a recovery: the situation is much more serious then it was with dot-com mess for which Greenspan was awarded  "Enron Prize for Distinguished Public Service"  and it will take longer to dissipate. Maybe Mr. Greenspan deserved that Enron Prize after all. 

BTW Sir Alan (aka Maestro Greenspan) really was instrumental in making  subprime mess a lot messier then dot com mess.  What is really funny is that used copies of his book are holding at the level $15.98 per share.  So total depreciation of the book from the moment of publication is 43% (the initial price on Amazon was $35 with 20% discount = $28, I think).   While I am surprised that the depreciation is so benign I think it might serve as an estimate for the depreciation of the stock market during this slump ;-)

USATODAY.com

In most cases, the first half of a recession is dreadful for investors. Corporate earnings drop. So does the stock market. But Wall Street looks ahead, and stocks often rally before the economy picks up. If you've been sitting on the sidelines, waiting for the economy to perk up, here are some indicators you should watch:

• The index of leading economic indicators produced by the Conference Board (conference-board.org). The index declined in December for the third-consecutive month. "It doesn't suggest we are in a recession yet," says Ataman Ozyildirim, economist for the Conference Board. It does suggest increased risk of recession, Ozyildirim says. The leading indicators typically go positive about four months before a recession ends.

• Interest rates. One of the leading indicators with the longest lead time is the gap between the federal funds rate, a key interbank lending rate, and the 10-year Treasury note yield. In good times, the fed funds rate is lower than the 10-year note yield. The funds rate is now 3%; the 10-year note yields 3.82%. That's a modestly hopeful sign. The indicator, on average, flashes about 11 months before a recession has ended.

• Housing starts. The downturn in housing has led the economic slowdown. A rise in housing starts would indicate a recovery in that sector, Wyss says — and, possibly, an economic recovery. Starts plunged 8.1% in December, the government says.

• Consumer spending. Because Wall Street is worried about the consumer, any signs of life in consumer spending might signal the end of a recession, Wyss says. Retail sales rose a surprisingly sharp 0.3% in December. Taking out volatile autos and gas sales, though, retail sales were fairly flat.

Typically, small-company stocks rally first at the end of a recession, because they feel the benefit of lower interest rates first, Johnson says. Technology stocks, industrial stocks and basic-materials stocks also fare well after a recession has ended.

Perhaps the most positive economic indicator for stock investors is the economic research bureau's official announcement that a recession has begun. By the time it's made such an announcement, the recession is typically more than halfway through, and stocks have started to rise again.

One major exception was the last recession: Had you bought the S&P 500 in November 2001, you would have lost 15%, thanks to the bursting of the tech bubble.

 is a personal finance columnist for USA TODAY. His Investing column appears Fridays. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com.

[Feb 18, 2008] Physician heal thyself  by Julian Delasantellis

Asia TimesIn the United States, many prominent economists, including Clinton-era Treasury secretary Laurence Summers, are proclaiming that the US economy desperately needs this assistance. In a January 6 opinion piece in the Financial Times, he laid out his argument as to why the US economy was in desperate need of aid.

Fiscal stimulus is appropriate as insurance because it is the fastest and most reliable way of encouraging short-run economic growth at a time when a serious recession downturn would pressure American families, exacerbate financial strains, raise protectionist pressures and hurt the global economy.

Like a drunk in a bar ordering another round because he’s heard that, since a glass of red wine a day has some purported health benefits, it’s logical to assume that a whole bottle of 120-proof Scotch must have even more, the Congress heard this wisdom, raised a glass to the fine Dr Summers, toasting, "I’ll drink to that".

... ... ...

But in the United States, the right to enjoy continuing and uninterrupted high levels of domestic consumption is so sacrosanct that, applied to the private consumption of housing, it forms the core definition of what is called the "American dream." The country can worry about paying for it later - preferably much later.

Hausmann brings up another point that must be obvious in most of the countries of the developing world. When it comes to dealing with economic crises, America’s attitude is definitely do as I say, not as I do.

The same voices that supported tough macroeconomic policies to deal with the excesses of spending and borrowing in east Asia, Russia and Latin America are today pushing for a significant relaxation in the US to deal with the so-called subprime crisis. Interest rates should be slashed quickly and $150bn put into taxpayers' pockets by April at the latest, they say.

Following upon the fall of the Soviet Union came a new American attitude as to how developing nations in economic distress should be handled. During the Cold War, these countries were treated gingerly, for the fear was that if these societies were pushed into deep penury they might be tempted to "flip" over to the side of the Communists. With the end of the Communist threat, that fear disappeared, as did the velvet glove. Out came the iron fist.

For about 20 years now, poorer nations in economic distress seeking assistance have had the misfortune to have been subject to what is called the "Washington Consensus."

The core mandate of the Washington Consensus demanded that the supplicant nations severely cut their government social welfare spending in order to generate budget surpluses. Also, the depreciation of these countries’ national currencies, and the Washington Consensus demand that the governments stop subsidizing prices of necessities such as imported food and medicine meant that the less fortunate in these societies were subject to substantial hardship in meeting their needs for the daily necessities of life.

Hausmann’s quip about the "same voices" advocating the stimulus package for America is a particularly pointed jab at Summers who, as Treasury Secretary, was the hanging judge who sentenced the poor unfortunate nations caught up in the East Asian financial crisis of 1997-98 to the Washington Consensus.

At its core, what is the entire subprime economic meltdown but yet another crisis of American overconsumption, in this case, the overconsumption and resulting misallocation of housing finance capital? The names and the faces may change, but, at its core, the song remains the same. The basic financial mendacity that displayed itself in the loans to the less-developed world in the early 1980’s, in the Savings and Loan fiasco in the late 1980’s, in the Long Term Credit Management hedge fund collapse in 1998, in the bursting of the dot-com bubble in 2000-01, is now being displayed again in the subprime sector.

Like an obese man not willing to change his lifestyle but still expecting his physician to heal him, unless America shows itself willing to address its real, core underlying problem, its never-ending desire to consume more than it produces, in another 10 years or so the country should expect to be precisely back where it is now.

Fiscal prudence and fiscal discipline may be all well and good for the wogs and gooks carrying the crosses of the Washington Consensus, but as for applying the same dour principles and policy prescriptives to the namesake nation of the Washington Consensus.

Well, American Protestant fundamentalists consider their country to be uniquely blessed and chosen by God, a gleaming city on a hill, a shining light onto all the nations. Good deal, if you never have any intention of paying the light bill.

[Feb 18, 2008] It's too early to be bullish - MSN Money

Lastly, Justin Mamis of The Mamis Letter recently noted that bear markets typically involve three legs: denial, realization and give-up. It's his view that we may have experienced the first leg but that the second one is yet to come. This realization leg occurs when people comprehend why the market is going down and sell stocks in response. As he points out: "A bear market can't end -- never has -- until denial turns into realization. . . . This is a long process, because the light bulb doesn't come on collectively but gradually. Some are quicker to catch on, or less dumb, than others."

As to the give-up leg, Mamis characterizes it as the culminating phase. So, given that we may have seen only the first leg, his eyes and his words are telling him that the process has a long way to go and stocks have a long way to fall

[Feb 18, 2008] Look who's buying now - Nouriel Roubini (7) -

FORTUNE

The debate is no longer about a soft vs. a hard landing, but how hard will the hard landing be. The recession train left the station in December. The recession will be severe because the U.S. consumer - whose spending makes up 70% of our GDP - is shopped-out, saving-less, and debt-burdened.

There is a rising risk of a systemic financial crisis. Avoid risky assets like equities, which could suffer a sudden market crash. You want to buy protection against this by buying options on the CBOE volatility index, known as the VIX, or on the S&P 500. Be careful with money market funds. Some could have meaningful exposure to securities backed by risky mortgages, or even auto loans or credit card loans, which are also high risk.

Finally, do not buy a home. The housing recession is not near the bottom and prices could fall by another 20% over another year and a half. If you buy now, you'll have a massive capital loss.

[Feb 18, 2008] Look who's buying now - Bob Rodriguez (9) - FORTUNE

Bob Rodriguez
 

CEO, First Pacific Capital and portfolio manager, FPA Capital and New Income Funds

I have 43% in cash. I'm looking to see what other shoes start to fall. The credit crisis is still unfolding, and all we've had are tactical, not strategic solutions. High interest rates didn't cause this credit crisis, so why should interest rate cuts solve it? Congress is hoping the stimulus will help kick start the economy, but single-event tax cuts have been shown to be highly ineffectual.

Several retailers with strong balance sheets have gotten hit pretty hard. Foot Locker (FL) is down in the $10 range, and Jo-Ann Stores (JAS) got down to $9 from about $25. Under normal circumstances, they'd be buys. But I don't believe we're in a normal environment. I want to see more pain and suffering before I think it's safe to start buying in a big way.