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Financial Skeptic Bulletin, December 2008

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December 2008

[Dec 31, 2008] naked capitalism Banking Industry Sinking Faster Than Government Can Bail

Yves here. Repeat after me: you need recapitalization AND price discovery. The near pathological avoidance of the latter by the officialdom would seem to support widespread suspicions that marking assets to market, or even a realistic notion of longer-term value, would confirm that the industry is insolvent.

Selected Comments

David said...

If people want to see what the US banking system will look like in a year or two, I suggest they look at Puerto Rico. PR banks are part of the US financial system and regulated by the FDIC and Fed. However PR has been in recession for several years now. Most of these banks have non-performing loan ratios between 10% and 20%. Yes that is not a typo. The situation seems much like the US mainland but rolled ahead by about two years. Residential mortgages and consumer loans were the first wave of trouble and are now recovering. But commercial loans starting blowing up last year and finally construction loans are blowing up now. If the US mainland follows the same path, they have several years of pain ahead of them.
wintermute said...
Yves you are 100% right (as usual!). Governments the world over a bailing out banks - but they are loathe to unravel their liabilities and enable price discovery.
This recession will last as many years as it takes to unravel the complex products built up over this decade. Governments must be looking for the easy way out - which is for QE to re-inflate underlying asset prices to a "reasonable" (2007?) level.

They are ignoring human nature. Now that lenders and consumers have been burnt by the events of 2008 they will be gun-shy for years now. Frugality is reborn.
This means that price discovery has to happen. The Japanese are only just coming to this conclusion - 15 years late.
Anonymous said...

CORPORATIONS want to delay the pain as long as possible so their EXECUTIVES can continue collecting perks and bonuses, and their SHAREHOLDERS collecting dividends, as long as possible.

As soon as you recognize this simple fact - that the CORPORATION is merely a legal document and an account balance but the EXECUTIVES and SHAREHOLDERS are the predators who loot it - you will begin to understand why a growing chorus of voices is saying, "Let them fail, consequences be damned!"
Better a quick crash than grinding down the economy for a decade or longer before an even bigger crash.
tbrown said...
I think one aspect of the recapitalization/price discovery/insolvency debate that is missed out is that of time. Assuming that a bank can actually make money this year from the existing loans they have outstanding, then the retained earnings will repair its equity base, potentially taking it back to a solvent position.

Obviously there's the bold assumption that banks will make money in '09, but please forgive me that one for now.

Suppose a bank has equity of 10, deposits/debt/wholesale funding of 90, and extended loans of 100, which are now worth 90, but have not been written down because someone's classified them as level 3 assets. Equity equals zero and the bank is insolvent, let alone within minimum solvency requirements.

Anyway, suppose the bank generates a ROE of 10% and earns 1 on Net income, which goes to equity...

the bank now has equity of 11, debt of 90 (probably not much of it wholesale any more, but let's ignore the details for the sake of this illustration) and the assets still worth 90, but priced at 100...

Anyway, it gets to the point where the bank has enough retained earnings that it can take the deserved writedown and still have enough equity to satisfy regulatory requirements. The bank is no longer insolvent and has saved itself.

So, given that it seems banks aren't going to go through the writedown to levels that the market believes realistic/recapitalization process, the questions I'd like answered are:
- can banks make positive interest spreads on the business they've already got on their books based on their new funding regimes? (Like Yves said, they're not extending much in the way of new credit)
- what are the ROE's going to look like, and how fast will this repair the capital base?

If the Fed, BoE etc are all guaranteeing bank debt for 3 years, then when the banks come to refunding themselves, they'll have 3 years of accumulated Net Income. That might fill a few holes, and we might get away with it.

mmckinl said...
"Yves here. Repeat after me: you need recapitalization AND price discovery. The near pathological avoidance of the latter by the officialdom would seem to support widespread suspicions that making asset to market, or even a realistic notion of longer-term value, would confirm that the industry is insolvent."

Exactly ... and why we need a nationalization with FDR's Bank Holiday. We cannot move forward with zombie banks that could implode at any time should their derivatives tank. As the economy cascades into negative growth, derivatives imploding becomes a more and more likely event.
wintermute said...
There is one problem with the Swedish model which means it can;t work now.
When their banks went bankrupt -they had "conventional" loans - not securitised loans. That level of indirection means that not only are banks insolvent -but the systemic ramifications of the general insolvency is unmeasurable. There are hundreds of non-banking "shadow-bank" institutions which need to come clean and participate in the price discovery.
This is too painful for governments within an electoral cycle - they choose QE, currency weakness and inflation instead.
Anonymous said...
There may be more than one issue here. Firstly the business models used by some banks over the last few years will need to be changed and revenue streams from those new models may be considerably lower. Admitting that to shareholders may be difficult.

Secondly the business model where you securitised and relied on bond insurance and ratings agencies assessments is broken. Banks have taken to hiding a lot of this securitised debt in their tier 3 assets, knowing the market values of these assets are lower than they claim. Some banks appear to be taking the step of deconstructing the securitised bonds into separate components. Other banks appear to be resisting this as the costs involved in properly assessing risks at the individual loan level would completely break their business model. Proper assessment of individual loans, costs money and any bank going down this business model route has to compete with the US Treasury who are not looking at costs or proper assessment, but just undercutting current prices.

The follow on question must be how much on the banks books is susceptible to revaluation during a significant downturn. Internally within banks and within the banking community this ought to be a known factor and banks have had ample opportunity to shift their riskiest portfolio on to the treasury. The treasury has its own stake in the game with the exact extent and liabilities it has accumulated being hidden, in a way that suggests the taxpayer is on the hook for far more than anyone realises.

Banks are playing hide the truth from shareholders, and stall changing there business models in the hope some aspects of the old model can be resurrected and the party for banks and their share holders will continue. The treasury hides the truth from the tax payer and stalls revealing liabilities in the hope that some aspects of the old model can be resurrected. If shareholders and taxpayers are unwilling to perform due diligence in their responsibilities then they deserve what they get. Treasury actions are preventing banking business model adjustments which need to be made and it seems inevitable to me that all US banks will eventually fail as a result. European and Japanese banks will be waiting in the wings to pick up some of the pieces.

[Dec 30, 2008] In defence of scaremongers by  Ambrose Evans-Pritchard

Inflation lags the cycle. It always spikes highest at the end. Central bankers have to look ahead.

Who pose the greater danger to the world economy right now? The prophets of the credit crunch, or the prophets of inflation?

Those warning is a very severe crisis Nouriel Roubini, Michael Panzer at Financial Armageddon, Doug Noland at Prudent Bear, Yves Smith's Naked Capitalism, and many others , are all serving a vital social role.

The bears are helping to strengthen the hand of Ben Bernanke at a critical moment. On this side of the Atlantic they are giving cover to the doves at Bank of England, the European Central Bank, et al, who sorely need it.

Am I wrong about inflation? Perhaps. It is a tough call at the turning point of the cycle. There is certainly evidence that we may be on the cusp of a wage-price spiral akin to the early 1970s. Commodities are flashing warning signs. Yet, I suspect that the greater danger lies on the other side, as Bernanke and Kohn clearly now believe.

Yes, 40pc of the world economy has an inflation problem. China (7%), Vietnam (15%), Russia (12%), Bulgaria (12pc) Romania (8%) Estonia (11%), The Emirates (12%) Qatar (14%), India (5). Some are of course importing inflation through dollar and euro pegs or dirty floats. Silly them.  Fed/ECB policy is totally unsuited to their needs. But this is changing. China is revaluing at an annual rate of 15pc. Hungary broke its euro peg last week.

Most of these countries are now tightening hard. As the effects of their collective monetary squeeze feeds through, it may compound the downturn already gathering force in the US, UK, Europe, and Japan. The Old Guard still make up 60pc of the world economy. Japan is at risk of tipping back into deflation as the yen surges (up 20pc viz the dollar since July). Much of the Atlantic sphere faces property busts of varying degrees.

As many readers point out, it is too early to judge whether the Fed Rescue has "failed". What I meant is that it has so far failed to normalize the debt markets. It has reached the point where counties in Alabama are unable to raise money.

Monetary policy takes a year or two to filter through so the 225 basis points in cuts since September will gradually work some magic.

It is true that the mortgage resets peak in March and that a big chunk of the adjustment has already occurred. But the impact on the housing market and on the default rate on CDO mortgage securities takes a long time to unfold. Nobody is evicted instantly. It takes months to exhaust the arrears process. The legal machinery drags on. It then takes months more to sell the house into a falling market. US property busts typically run for four or five years, according to a Fed study.

Yes, Wall Street has held up OK, although the S&P 500 is testing the lows around 1300 once again. Tokyo's Nikkei has come down much further, so has Shanghai, and most other emerging market bourses.

But be careful. Credit stress often precedes equity stress by five or six weeks, so there may be worse to come for Wall Street.  The currency markets are signalling trouble. The yen and Swiss franc are surging again.

My guess is that the Fed will have to cut much further. It will need a lot of help from the BoE and the ECB before we start to glimpse recovery. Warren Buffett said this week that he was waiting for shares to get a "lot cheaper" before jumping in.

One last point. I totally agree with those who blame the debt crisis on the irresponsible policies of the Fed and fellow central banks from 2003 to 2006, and indeed for better part of fifteen years. They stoked this bubble by artificially holding rates too low (by government fiat). The money leaked into asset prices, just as it in the US in 1920s, and in Japan in the 1980s. (Two other low inflation eras).

In effect central banks rigged the price of credit. In doing so they caused massive "inter-temporal misallocations", to use the posh term of the BIS.  Or put another way, they stole prosperity from the future. The future has now arrived.

Yes, one could call for a liquidation purge to clear the excesses. That would be ideologically purist. But we might ruin our democracies in the process. So first we must right the ship, even if that means moral hazard and a despicable bail-out for the credit villains. We must hold our noses. We settle scores later.

Von Hayek argued that governments themselves are the cause of extreme ups and down in the credit cycle. He said they should be stripped of their power to control interest rates, reducing central banks to the role of lender of last resort -  as the Fed was supposed to be in 1907 before the meddlers and micro-timers took over.

So let us have Hayek's catallaxy of competing currencies, set by market forces. It must be an improvement.

[Dec 30, 2008] Financial Armageddon Not Seeing that Small Is Big--and Hurting

Ultimately, as Charles Hugh Smith, publisher of the Of Two Minds blog and author of Weblogs & New Media: Marketing in Crisis, argues in "Trends for 2009: The Death-Spiral of Local Government and Small Business," their obliviousness will backfire--on them.

State and local governments are responding to shortfalls in tax revenues and spiraling pension costs by raising "fees" (a.k.a. taxes or junk fees) just as the backbone of the economy--small business--is struggling for survival. The more government employees demand "what was promised" in pensions, the more small businesses will fold, cutting government revenues in a death-spiral with only one end: state, county and city insolvency.

I am starting a new series today entitled "Trends for 2009" which will attempt to describe those trends which will be working beneath the MSM-induced "everything's gonna return to 2007 real soon" fantasy.

Let's start with the death-spiral of state and local governments raising taxes and fees to offset their collapsing tax revenues.

Contrary to the illusion created by glossy adverts and a corporate-owned MSM (mainstream media), huge global corporations are not the primary provider of jobs and taxes in the U.S.--that role is filled by small business, which also provides roughly 80% of the job creation and innovation in the economy.

The MSM tries to make a distinction between "marginal small businesses" and "small business," but all small enterprises are marginal in our high-overhead, high-tax, high-fixed cost economy. So guess what happens as revenues decline but fixed costs (rent, business license fees, utilities, health insurance, etc. etc.) stay high? Small businesses will close en masse.

Slump Batters Small Business, Threatening Owners' Dreams (WSJ)

Now put these two together: higher taxes/fees and small businesses on the precipice. Welcome to "death spiral 2009" in which public employee union demands for higher taxes to pay their bloated pension and healthcare benefits will kill off an ever-rising number of small businesses, further depressing tax revenues.

Note to politicos, government managers, public employees and their unions: we don't have to keep our door open. You seem to think we do, but we don't. When we can't pay ourselves and/or we get tired of the endless stress and grind of all your regulations and taxes and fees, then we'll close our doors and issue a big sigh of relief. We'll make do somehow without employees, storefronts, offices, permits, and all the other sources of income you, our governments' employees, depend on for your paychecks.

I have to chuckle (bitterly) when I hear some corporate or government manager complaining of stress. If you have a steady paycheck, you have never experienced full-court stress. (With the exception of emergency medical care staff and U.S. Armed Forces personnel in combat duty, of course; I mean "regular civilian employment.")

Small business owners have to wear more hats than any corporate manager or government employee, and they do so without pay as times get tough. Many tap their own credit cards to pay employees and fill orders for good customers. You want stress? Then do whatever job you do for a paycheck but imagine that you're doing so with only the hope of future paychecks--a hope that dwindles every week that the economy continues its free-fall.

This is why I have predicted that local and state governments are completely ill-prepared for the tidal wave of small business failures which are about to decimate their tax revenues. The average municipal manager is assuming everything will return to normal soon, as all those faceless small-business worker bees will persevere and keep paying their rent, taxes and fees regardless of the hardships, stress and rising debts.

Nobody can operate their business for long when they're losing money. I would guess that over half of small businesses in the U.S. are already marginalized in terms of survivability, and very little separates those from their "if we can just get through 2009 we'll make it" brethren who still have a bit of cushion.

As noted here before, an entrepreneur always has an alternative "Plan B" livelihood : whatever one used to do in a formal, high-cost way, then do it informally from home. Do it for barter, do it for cash; pay no office or warehouse rent, have no employees, pay no business taxes, and whatever net income is left, it will be so low that the income taxes will be negligible.

If the politicos and government employees think they're in trouble now, wait until the end of 2009. When the streets are lined with closed storefronts, the chain stores and malls have been shuttered, and the auto dealerships are weed-filled empty lots, then go ask the survivors to pay more taxes and fees.

Oh, and here's where some state/local tax revenues are going (link courtesy of Cheryl A.): Double-Dipping Government Employees in Florida.

Sadly, there won't be many left to hear your pleading for more tax revenue. But go ahead and raise taxes and fees anyway, and drive the survivors under. Then the last businesses you can try to load up with higher costs will be Wal-Mart and Safeway and the local branch of Citicorp/WAMU/BofA/Countrywide/Morgan/Chase or whatever it will be called.

You can try raising property taxes, but as homeowner net worth and equity continues sliding, you may find some resistance to higher property taxes. You can start charging $10 to use the county park, and guess what, you'll find nobody needs to go there now. You can charge $10 a month to use the library, and guess what, you will either face a citizen insurrection or few will enter what was once considered a sacrosanct civil institution--the public library.

Or you can take stock and realise that government is an enterprise, too; it too needs to live within its means--especially as those means diminish along with the economy which supports you. Unlike the Federal government, you can't print money to pay yourselves or fund your pensions. You might want to focus on helping the goose which lays the eggs--small business--survive rather than devote all your energy to strangling it with higher taxes and fees.

You can either keep the libraries open, or you can fund your pensions. But you won't be able to do both.

The more taxes and fees are raised, the less tax revenue will be collected as the pool of small-business survivors melts under the strain. It's called a death-spiral, and we will all have ringside seats as 2009 unfolds its dark wings.

Lest you think this is just some outlier attitude, please read this commentary from an astute reader. This was written in response to my essayProductive and Unproductive Capital (December 27, 2008), but it resonates with the death-spiral I describe today:

"I compare today to say America in 1832 to 1942, what we did, what we believed, how we lived with mostly independent agrarian life, no distances, no transit, only walking to the homecoming game with your pal and your gal at the school 3 miles away. I keep saying, "does that sound so bad?" Is it so terrible to work where you live, in small, modest shop of our own making small, modest profits?

Your last post was insightful in this, which has a near-absolute effect on people who control and deploy capital. If there's all risk and no return, why deploy it? This single change could probably do more than any other. I am one of those capable of deploying capital, but all my life I haven't even once: the legal maze is incredible, the taxes are near 100% of profits, and the risk is total loss of everything you own, and with liability and garnishing wages, everything you might ever own. This same math drove my father out of small business altogether, and that was the early 90s when the gov't (including Fed debt) was 1/4 of todays' size. Was it too small then?

For example, here in Rochester, NY, there are 12-BR Craftsman mansions, all woodwork, fireplaces, show homes, 20min from the city, already cut into 3 apts for, oh $220,000. That's like giving it away. Replacement cost would be in the millions. You know what? The return on that investment is zero; the rents + taxes + risk would take ALL the profits, every penny: to the state, the bank, and the insurance companies.

That's why the present owner is trying just to sell it at breakeven. He doesn't want it either.

That's what I'm talking about in deploying capital, although laundromats, farms, restaurants, are all the same math. You work entirely for the State. Any profits are more than overshadowed by the additional risk. So I do nothing; and neither does anybody else. Do we get anything for this cost and nuisance? No. At least 30 miles north, in Canada, they GET something for their equivalent taxload: universal health care, and a system that has no personal risk. The dole is easy to get on, and there's no real stigma or bother attached to it. In NY we don't even get good roads.

It's nonsense. Go back to how it was--let the roads go back to dirt for all I care, cancel health care and everything else--despite the promises we don't really get it anyway. Most people out here would agree with me.

If we steal from workers and savers to give to speculators and borrowers, then why should people work for themselves anymore? And I can attest that here in NY, they don't. The farms were economically firebombed years before the rest of the economy. There's now no work people wish to do--although astonishingly there's still a lingering work ethic. So we do nothing, and nothing gets done.

Money won't solve this problem. That's the real point. Only work in the real world will. To get that, we need to reverse the reward structure 180' and reward people who work instead of those who shuffle, actively prevent the work of others, or who speculate.

History shows that will happen and despite recent appearances, it seems this may even happen peacefully, if with great hardship. Time will tell but the American people seem to be avoiding that path by not getting riled even when VERY put upon. They seem to be content with simply playing out all the rope that the present system needs. When it is completely nonfunctional, it will more or less hang itself without our needing to get off the couch. That's unconscious, and it's giving great benefit to the people, but here in the country, people KNOW they're getting screwed into poverty every day--and I mean actual no-heat, lose-the-house poverty. It's not as they say in the suburbs: that people are fat and lazy and don't know. THey seem to know well enough here but still prefer to play out the rope. I think people are more or less terrified of the explosion that might occur if they allowed themselves to get angry and take action. History would show, I believe, that their common sense in this is correct.

I liked the reader who spoke of "living on the land"--he has the relaxed and patient method I wish I had, although he wasn't able to flesh out this important idea so thickly. Living in farm country, thick with turkey and deer I can agree--hunting in a Depression is a dangerous fantasy. It took from 1932 to 1990 for turkey to return here, and only when re-introduced. Deer were virtually wiped out until the late 50s. There are no fish now even in normal times. Imagining hunting might work is an excellent way to get killed. Far better to buy a few hundred in garden seeds and a shovel, something I intend to write on if I can clarify a plan before people are already inside the storm. But you just can't write a 100-word essay on growing food. It's like being a doctor or a mason, it takes decades to learn to do well, everything is a soft-case exceptions, and only experience can teach you.

It seems like that idea that non-edible savings itself is illusionary, and that money is useless compared to real work are ideas that need to be explored. I look forward to seeing what you discover."

Thank you, reader. Here are two ideas to start with: tax the heck out of unproductive capital and unearned income, not just to raise revenue but to drive that capital into productive uses, and lighten the tax burdens placed on small business. The more that survive, the more tax revenues you'll actually gather.

Selected comments

Politicians get big contributions from mega corporations & enact policies accordingly, huge global corporations  contribute nothing to the welfare of society on the contrary they destroy small business and given their power the trust is toward a complete monopoly of the markets & government. It is very naive to believe that this can be controlled without a complete change in a system of economic Darwinism.

[Dec 30, 2008] "World Economy in 2009- Three priorities for recovery"

While I agree with his three objectives, forestal deflation, rationalize the financial sector, and improve coordination, Munchau fails to acknowledge that the Federal Reserve and Treasury's actions suggest that they view keeping deflation at bay and reducing the size of the financial services industry to be in conflict.

As this blog and others have noted repeatedly, the authorities instead appear to be taking a page from the Japanese playbook, of trying to shore up the value of impaired assets rather than allow price discovery to occur (and a huge number of bottom fishers would wade in once they had confidence that was indeed taking place) and contain the damage via firm-specific liquidity measures and recapitalizations for ones that appeared viable, liquidation for the rest.

From the Financial Times:

It is easy and difficult at the same time to predict the economy in 2009. It is easy to predict it will be an awful year for the US, Europe and large parts of Asia...

The difficult part of the forecast is to predict whether policymakers will succeed in preventing the recession turning into a depression and lay the foundations for a sustainable recovery in 2010. What I can predict with near certainty is that policy will matter a great deal next year.

We know that the current driving force behind this downturn is “deleveraging”...There is no chance of a sustained economic recovery until that process is almost complete.

We are still some way from that point. For example, on my calculations it will take a total peak-to-trough decline in real US house prices of some 40-50 per cent to get back towards long-term price trends and for price-rent ratios to return to more sustainable levels. We are about half-way through this process. The good news is that most of the nominal adjustment will have taken place by the end of 2009 or early 2010.

I am a lot less optimistic about the financial sector. While it is also reducing its leverage, it will not achieve a sustainable position quickly without a lot more government capital. But this would require deep restructuring and would take time.

On the basis of this admittedly brief sketch, I arrive at three policy priorities for 2009. The first is for central banks to avoid deflation. If ever there has been a need for a central bank to target price stability, it is now. I mean this in the European sense of the term, meaning a small but distinctly positive rate of inflation, say 2 or 3 per cent annually. I assume that central banks will succeed in this endeavour, given the full power of policies deployed. I worry, though, that the US will try to raise inflation afterwards, which would reduce the real level of US debt but create massive distortions in exchange rates and financial flows and produce another global financial and economic crisis.

The second priority is to shrink the financial sector. A disorderly collapse would be catastrophic, but it is neither desirable, nor possible, to maintain the financial sector at its current excessive size. Take the market for credit default swaps, an unregulated $50,000-$60,000bn casino that serves no economic purpose except to enrich its participants at massive risk to global financial stability. I would be in favour, as a matter of principle, of regulating any financial activity on the basis of its economic purpose. Since a CDS constitutes insurance from an economic point of view, we should treat it as such and subject it to insurance regulation (which would kill it of course).

In particular, we should try to avoid the temptation to regulate too much in detail. This is a game regulators will lose. The financial sector is good at deploying existing instruments, and creating new ones, to circumvent any inflexible rule set. We should instead focus on breaking up too-large-to-fail banks and reducing the size of the financial sector in relation to a country’s GDP. In particular, we should not try to guarantee the obligations of a banking sector several times the size of our economies.

Third, and perhaps most important, we need to co-ordinate the policy response at global level, since this is a global crisis with many global spillovers. What I would like to hear from US President-elect Barack Obama’s economic team is not a narrow-minded discussion about whether the stimulus will be $700bn or $850bn, or which programmes it will be spent on. What I want to know is how they intend to co-opt the Europeans and the Chinese into a joint strategy.
John Christian Falkenberg said...
A very good piece, although he gets the (minor) point on CDS market wrong: the figures he's giving are about gross, not net exposure - and even that has been greatly reduced in the last few months through netting procedures. IMHO it's one thing to worry a bit less about while focusing on other, most deeply-rooted problems. I think Munchau's right to the point when he urges not to put blind faith on regulation and government spending as a cure-all, especially when aimed to an industry that specializes in capturing regulators and to a bureaucracy and political class that doen't know where and how to stop spending.
S said...
Talk of nominal adjustments putting us close to the end of housing is fantasy. Inflation is not happening in wages. Period. It is quite the opposite. So this myth that inflation is going to help house prices is bordering on retarded. Why is it so hard to understand that printing money that doesn’t seep into a wage price spiral does nothing for debt service ratios? The current course assures destitution for middle class as things you need explode at some point. Please help me understand how the word “nominal” is remotely part of the housing discussion?

Bloomberg has a thought experiment regarding the $9T in cash and short term investment sitting on the sidelines (See Mish re sideline Cash). What if the appetite for paper assets fails to reignite and that cash says no to equity / bonds and starts chasing things. Just a thought, but it is one that sends a shiver down the spine.

Deleveraging and shrinking the financial complex are diametrical forces. The Fed and the likes of Krugman and his Keynesian sheeple seriously intellectually believe the size of the US economy (and their bizarre potential constructs) was/is real. Why they can be cold blooded realists about the housing bubble but not the one in GDP is intellectual gimmickry fit only for academia. And when the argument is distilled down to the fundamental truths, the examiner is attacked with The Hoover moniker (see Krugman today, threats of collapse, emergency law, expropriations, etc. )

Russia devalued again today -12th time in past few weeks. The idea that the rest of the world will be so bad that they have to run to support the US is too cute by half. Real conflict is coming in response to the economic warfare the Fed is conducting. It is the height of irony that the pious Fed judges itself world savior in driving rates to zero and printing money under the guise of we had to destroy you to save you.

Do we really believe the rest of the world - far more accustomed to sacrifice - will be so quick to grant absolution?

Call me skeptical.
Anonymous said...
@BG 2:07........If you speak historically, heroin was the commodity of the East Indian Company, hence England and not China.

I think China will evolve faster than many think. They have the benefit of a looking glass into the history of the Western/Eastern Markets and now are making real progress with Taiwan. Imagine those two healing old wounds and coming together, if only in economic partnership. Now plop Russia on top as they are in bad need of friends and China and them go way back.

Consumer spending is a dry lake and the Governments attempts at rain making will require clouds to form first, no cloud, no seeding it. All I see is people trying to survive or pay off large debit, before they spend on any thing but the necessity's. Case in point. Just got back from Noosa Bch Qld for family holiday, out of the 20 people their. All lost 40% to 60% of their net worth/retirement portfolios, for half it was a large amount of money. All are down sizing by 3/4, selling hard assets and stocks except the blue chips. One who is in the mining equipment business is selling their historically listed massive house, located intercity (rarity/established long term value) and looking for a average home to live in.

So try as they may (Governments/Markets). I see no return to significant consumer spending till individual debit is paid off, not just down. This may take awhile as wages will go down and job losses mount.

skippy, the happy one.
S said...
ciccocicco said...

consumption will fall but let's not forget that the current account has two sides imports and exports. You assume one will fall disproportionately to the other. Not a safe assumption. Also, by definition the current account deficit has to be offset by a capital account surplus. Your statement that the ROW has o where else to go is arrogant and short-sided.

One only has to go back to early 20th century Britain to read similar sentiments. While the GS designated BRICs are sure to disappoint the lofty expectations - China is probably already in the low singles - the US has arguably the bigger challenge: to try and preserve a hollowed out economy at a totally unsustainable level.

While Krugman and his ilk believe that substitution is the approach (and inflation) it papers over the reality that the US economy is realistically a shadow of itself. Count on it that the rest of the world has done the math and arrived at the same conclusion.
Making relative arguments is the last bastion of the scoundrel. Ironic isn't it: wall street jettisoned as insufficient relative arguments with the growth of absolute return alternative investing. Now the economic scoundrels drag out the discarded laundry to to bolster their flimsy arguments.
I do not argue that the US is without options, but exercising those options will have equally draconian ramifications. At this point, it is not beyond the realm of possibilities that the government is actively wishing and working toward a "market driven" devaluation. The outcome here is foretold, it is just a question of how we get there.

[Dec 30, 2009] Revisiting Expectations for 2008: WallStrip 12-7-0 By Barry Ritholtz

December 29, 2008 | The Big Picture

As a follow up to the Bad Forecasts for 2008, a reader sent this in — I had pretty much forgotten what I said. Its not too shabby.

Revisiting Last Year’s December Interview:

Lindsay sits down with Barry Ritholtz, editor of The Big Picture and CEO of FusionIQ, to discuss how to fix the economy and why most free-market economists are communists in disguise

[Dec 30, 2009] Worst Predictions for 2008 By Barry Ritholtz

 December 29, 2008 | The Big Picture

In case you missed it, here are several different collections of the worst predictions of the year:

The 10 Worst Predictions for 2008 (Foreign Policy)

The Worst Predictions About 2008 (Businessweek)

Those two above have been cited all over the web. Here are a few others worth mentioning (did I miss any?)

How wrong they were (Salon)

The web’s worst predictions (Daily Mail UK)

Worst Tech Predictions of 2008 (C/NET)
(See also: Top 10 worst tech predictions of all time)

• The Most Inane Punditry of the 2008 presidential campaign (Media Matters)

Not predictions, but real time errors in assigning  casting, via MarketBeat:

2008 Lookback: The Blame Game

Bonus! Not a forecaster, but the person who consistently gets the present wrong:

Media Matters’ 2008 Misinformer of the Year

[Dec 29, 2009] Should Investors Bet on Gold in 2009 - BusinessWeek

Most economists and strategists, however, expect economic conditions to deteriorate further in the first part of 2009 as unemployment rises and consumption weakens. If the recession worsens on a hiccup in commercial real estate or some other market—or because the stimulus doesn't have the desired effect—Sperandeo expects gold prices to come down in concert with stocks "until the Treasury throws something else at it to make things better in the future."

[Dec 28, 2009] Obama Approval Poll

Many including Bill Rogers expect "presidential bounce" to materialize...

The Big Picture

“An Obama job approval rating of 79 percent — that’s the sort of rating you see when the public rallies around a leader after a national disaster. To many Americans, the Bush administration was a national disaster.”

- Bill Schneider, CNN’s senior political analyst, on a poll indicating overwhelming approval for Barack Obama.

Any dead enders want to challenge this thesis?

Poll: 79% approve of way Obama is handling transition
Paul Steinhauser
CNN, December 9, 2008

  1. Ventura2012 Says:

    Wow they are putting alot of faith in Obama, after all his democratic Congress has a lower approval rating than the Bush administration.

  2. KJ Foehr Says:

    “To many Americans, the Bush administration was a national disaster.”

    Ha! Well said and so true. But to be fair we need to add the economic / financial disaster as a major reason for the high rating.

    Unfortunately, O has nowhere to go but down.

  3. debreuil Says:

    Like the Onion said, “the economy continues to campaign for Obama”…

  4.  mhm Says:

    The fault of Bush’s administration was to give in to the neocons and the transformational doctrine imposed on the armed forces. Runsfeld, Wolfowitz and Cheney are the guys to blame while Bush was a puppet. Now, who here thinks Obama is not a puppet too raise your hand… oh boy, 79% of you did.

  5.  usphoenix Says:

    I was a huge fan of Barack, and always considered Bill and Hillary and GW and McCain for what they are. So I really had no hope. There just was no hope among the other choices.

    IMHO Americans are desperate for something to believe in or hope for. A rallying cry. JFK Camelot. We shall overcome. WWII was by far the best unifying rallying cry in the last xxx hundred years.

    Barack is completely and totally capable of providing the needed leadership. (The great Solon)

    Washington, D. C. is completely and totally solvable, by someone that has core values and convictions beyond question. And the moxie to deal with reality. And the data support. And the ability to frame every question as to who benefits. But the corruption has to go. Since when do million dollar government contracts become billion dollar contracts? Ask Ralph.

    He could erase fewer than 100 people from the D. C. scene and improve the situation by a factor of 10. (erase means eliminate from their socio-economic control posts).

    Does anybody remember the head of the GAO resigning in disgust. Where is he on Barack’s list of cabinet members? OK. So let’s go inside, and get the real dirt, including the inside the Beltline truth about Hillary. How about Reid Hundt, Uncle Billie’s choice for the FCC until he violated the Lincoln bedroom rental rules.

    When Barack rolled over on the legislation that granted AT&T immunity and sustained the surveillance rules, after having taught constitutional law at the University of Chicago, and having promised to filibuster the act, he lost me as a believer. Once again Dr. Faustus sold his soul. And I told him that in his blog.

    Unfortunately, more of the same. I am reminded of how many view Lincoln as such an ideal, including Barack, but students of history know how corrupt America was back then. And Abe was blind to it.

    So, I guess my assessment is if anybody can juice the situation to prop up stocks, they will. But plan for a major let-down when spin and hope don’t quite get it done.

    My smart friends say look for a boost of less than a year, and after that a hopeless collapse.

  6.  Gabriel Says:

    The country has been completely FUBaRred in the last 8 years, in more than one way: socially, politically, economically, educationally and so on. No Messiah, including Jesus Christ himself, can turn it around in the next 4 years. It will be a miracle if Obama can even halt this sinking Titanic, let alone turn it around. I’m already mentally prepared to say goodbye to my expectations of social security checks when I get to that age, however, guberment is still milking my paycheck to pay for off some lucky bastards in the ponzi scheme.

[Dec 26, 2008] Palatable Ugliness

Dec 23, 2008 | Financial Armageddon

Admittedly, watching and reading about the slow-motion economic train wreck that has been unfolding since last year can be downright depressing.

However, there are a few commentators who know how to use their various talents -- a sense of humor, literary eloquence, a nose for what is important -- to transform the ongoing ugliness into something more palatable.

Among the best is Jim Kunstler, author of World Made by Hand and The Long Emergency, who serves up all sorts of interesting commentary at his website,

In his latest weekly column, entitled "Legitimacy Dwindles," Kunstler casts a cynical eye on several recent developments.

Zounds! Public sentiment toward the accelerating economic fiasco has shifted, seemingly overnight, from a mood of nauseated amazement to one of panicked grievance as the United States moves closer to an apparent comprehensive collapse -- and so ill-timed, wouldn't you know it, to coincide with the annual rigors of Santa Claus. The tipping point seems to be the Bernie Madoff $50 billion Ponzi scandal, which represents the grossest failure of authority and hence legitimacy in finance to date in as much as Mr. Madoff was a former chairman of the NASDAQ, for godsake. It's like discovering that Ben Bernanke is running a meth lab inside the Federal Reserve. And out in the heartland, of course, there is the spectacle of Illinois governor Rod Blagojevich trying to desperately dodge a racketeering rap behind an implausible hairdo.

What seems to spook people now is the possibility that everybody in charge of everything is a fraud or a crook. Legitimacy has left the system. Not even the the legions of Obama are immune as his reliance on Wall Street capos Robert Rubin, Tim Geithner, and Larry Summers seem tainted by the same reckless thinking that brought on the fiasco. His pick last week for chief of the SEC, Mary Shapiro, is already being dissed as a shill for the Big Bank status quo. In a few days we'll discover what kind of bonuses are being ladled out by the remaining Wall Street banks with TARP money and a new chorus of howls will ring out.

This is very dangerous territory. In dollar terms, the numbers being applied to the various problems are so colossal -- trillions! -- that the death of our currency seems assured. And in defiance of congress's express intentions, none of the TARP "money" has been applied to its targeted purpose of buying up "toxic" (i.e. fraudulent) securities hidden in the vaults of banks, pension funds, and municipal portfolios.

George W, Bush's personal bailout of General Motors and Chrysler is designed solely to postpone their bankruptcy and mass job layoffs until after the holidays. Otherwise, the $17.4 billion will probably be used by the companies to underwrite the extensive legal work required for the moment they must declare bankruptcy -- when Mr. Obama is in the White House. Meanwhile, the President-elect has ramped up his job-creation target overnight from two to three million, and some observers are catching a whiff of Soviet-style economic engineering ("...we pretend to work and they pretend to pay us....").

The years since Jimmy Carter have produced an astoundingly flaccid public, sunk in various addictions and distractions, but this is about to change. The darkling mood of political protest and violent activism that saturated my own young adult years is scudding up again on the horizon. Mr. Obama's pick for attorney general, the mild-looking Eric Holder, may be the key figure in the early months of the new government. If he doesn't commence some aggressive investigations and prosecutions -- beginning with Henry Paulson for insider trading when he was in charge of Goldman Sachs and shorting his own company's mortgage-backed securities -- then the whole Obama enterprise could fall under suspicion of illegitimacy. The bums who ran the US banking sector into a ditch have to account for their turpitudes. They can't be allowed to hide under a TARP.

Unfortunately, the legal system, and probably the legislative system, will be so buried in procedural bullshit from the unwind of countless enterprises and institutions, and the sorting out of the remnants, that it remains to be seen whether this generation of people-in-charge can even embark on a fresh start of anything connected to real everyday life in America. All this is starting to alarm the tattered residue of the middle classes, and from here it's a very short path to them being really pissed off.

When legitimacy erodes, anything goes. Nothing is respected including rules and personalities. The center doesn't hold and the new vacuum there is a tumultuous place. The same crisis of authority and legitimacy is spreading from nation to nation now. Soon, China will contend with a discontented army of the unemployed. Greece has been in an uproar for two weeks. Belgium's government just collapsed. Trade barriers are going up. Exports are falling away. The world's energy markets are not immune to these disorders. I would expect problems with the currently seamless supply lines that bring America two-thirds of the oil we use. Even a mild disruption of oil supplies could attach an anvil to the ankle of an economy already falling off a cliff.

Right now, the overwhelming sentiment is to get this country back to where we were, say, ten years ago, when everything was humming nicely: Clinton nostalgia. We're definitely not gong back there, though. It's an idle wish. And any set of policies designed to lead in that direction will prove very disappointing. Our destination is a land of much smaller-scaled local economies. We could retain our federal ties if the federal government can scale back appropriately from the bloated, feckless enterprise it has become. Otherwise, it might only get in the way and make matters worse, and the public in one region or another of North America might reach a decision that they are better off without it. That would be what's called a revolution.

[Dec 26, 2008] Stiglitz: We Need Bold Action

Economist's View

Joseph Stiglitz doesn't think policymakers are likely to support a stimulus package that is large enough to avoid a "vicious negative spiral":

The dismal economist’s joyless triumph, by Joseph E. Stiglitz, Project Syndicate: ...Economists are good at identifying underlying forces, but they are not so good at timing. The dynamics are, however, much as anticipated. America is still on a downward trajectory for 2009 — with grave consequences for the world as a whole. ...

[E]ven if Obama and other world leaders do everything right, the US and the global economy are in for a difficult period. The question is not only how long the recession will last, but what the economy will look like when it emerges.

Will it return to robust growth, or will we have an anemic recovery, à la Japan in the 1990’s? Right now, I cast my vote for the latter, especially since the huge debt legacy is likely to dampen enthusiasm for the big stimulus that is required. Without a sufficiently large stimulus (in excess of 2 percent of GDP), we will have a vicious negative spiral: a weak economy will mean more bankruptcies, which will push stock prices down and interest rates up, undermine consumer confidence, and weaken banks. Consumption and investment will be cut back further.

Many Wall Street financiers, having received their gobs of cash, are returning to their fiscal religion of low deficits. It is remarkable how, having proven their incompetence, they are still revered in some quarters. What matters more than deficits is what we do with money; borrowing to finance high-productivity investments in education, technology, or infrastructure strengthens a nation’s balance sheet.

The financiers, however, will argue for caution: let’s see how the economy does, and if it needs more money, we can give it. But a firm that is forced into bankruptcy is not un-bankrupted when a course is reversed. The damage is long-lasting.

If Obama follows his instinct, pays attention to Main Street rather than Wall Street, and acts boldly, then there is a prospect that the economy will start to emerge from the downturn by late 2009. If not, the short-term prospects for America, and the world, are bleak.

Selected Comments

Anonymous said...
Thank you Robert for talking about the elephant in the room. The system is broken and unless we really look at fundamental change on ideas such as unlimited growth, we will be back here again, but only worse. I hope that this wake up call to America that serious change is needed in our financial systems, but our thinking as consumers in general. We cannot expect to have a thriving social system, a healthy environment, when the focus is solely on our financial goals. We are smarter than this, we know better. We need to ask more questions and demand better answers… if it doesn’t make sense, do not doubt yourself. We all have intuition, we have to use it. If the deals being cut prop up the status quo and keep the fat cats fat…. Might not be the best for our society as a whole.
Seve said...
Robert, now you're sounding like one of the common folk. are we converting you?

i sense a real uprising against run away CEO pay and how these rich morons can trash so many lives. and these are people controling every day elements of the country that we never voted into power.

there should be a cap on CEO compensation. all of it. for public companies to allow so much of our invested money to go to these few self apointed kings is criminal.

and to see everything topple with no one held accountable is also criminal.
Wednesday, 24 December, 2008  
Jeff said...
The bailouts were "supposed" to change thing structurally? I don't think so. They were designed to be a finger in the dike. If conditions make the dam break, then we will see some painful structural changes. If the dam doesn't break and the cycle turns upward quickly, there well be no structural change.

The debate amongst smart people like yourself does not matter at this point. Events will decide the general direction of reform.
Wednesday, 24 December, 2008  
 thoughtchallenge said...
Looks like banks, car makers and real estate developers are going to have to sit out the upcoming recovery. Farmers and other exporters will make the big money this time around.

Wednesday, 24 December, 2008  
Spencer said...
Jeff is right - if they can stay in power, they will. It will only be structural if the "structure" falls apart!

Of course it is "cyclical" because those in power are trying to make it so. They control everything so as long as they can continue the ruse, they will. The funny(?) thing is, the more they talk taxpayers into plugging the dyke, the closer we move to a structural collapse. That will only occur if the dam is so backed up that it collapses. We'll see if $700 billion, a trillion or so more in wasteful government spending does the trick...

I'm betting it will sometime in 2009 - if it hasn't already...
Wednesday, 24 December, 2008  
Anonymous said...
I too , am a Boomer. Can't believe what I'm seeing with the Wall Street Mafia still stealing more and more of our retirement and our future. I thought the Mafia could be taken out and shot ???? Will that still work on the Wall Streetmafia???? Of course NOT, they are protected by Congress.
Interesting times ........
Wednesday, 24 December, 2008  
Rob Perhamus said...
Nice argument Robert. I think you might agree that making a profit is a good thing, if the company uses profits to assure both the short term and long term survival of the company.

Peter Drucker fell out of favor with many on Wall Street, based on his argument that CEO compensation should be no more than 20 times that of the average employee. This did not include factory workers, who already viewed the CEO as a crook, but to the middle management who would become ineffective based on the inequitable distribution of
This policy would limit compensation to more sustainable amounts, and plow profits (from things like SUV's) back into the company for long term development and innovation. As Tom Collins-Good to Great, etc. has summarized from his research-"Drucker was right"

So, the responsibility for assuring the cap on pay, should fall on the board of directors. It is apparent, that the board has become puppets, and devoid of integrity and character. The witch hunt should focus on the board members for wall street, the big 3, and others who have messed up.
John Lawrence said...
Wall St and the Big 3 want a return to the old economy where everyone went into debt and gladly paid their debts with interest so Wall St and investors could make out like bandits. As Dr. Reich has pointed out in "Supercapitalism," this served investors and consumers well. The model was that tons of money could be made off the indebtedness of the American public. Only problem is Americans have become less able to afford to go into debt to purchase stuff because their wages haven't kept up. In fact as deunionization has continued apace, wages have declined. So Wall St's model which continued for awhile due to increased middle class indebtedness has now become completely impractical.

So the good old Wall Steeters who want to return to the good old days are out of luck. There will be no cyclicity because the middle class is busted. That leaves structural reforms as the only possibility for a return to prosperity. If corporations and lobbyists fight structural reforms and want to perpetuate a laissez faire model of capitalism that served them so well in bygone days, the economy will turn into a prolonged malaise.

And there should have been a Wall St Czar to oversee the bailout because those creative types would only find workarounds to get around any restrictions placed upon how they spent the bailout money. Of course there weren't any, but a bailout czar could have stepped in in real time to say "no" to anything Wall St came up with that wasn't the intended purpose of the bailouts. A czar should ride herd on any future bailouts. This gives government a veto over the shenanigans of any bailout beneficiaries in real time.

I have no doubt that Wall St and the auto companies and other beneficiaries of government spending will do all they can to game the system in their self-interest. That's why there is an ongoing need to fine tune the conditions of any government spending on infrastructure, green energy job creation or anything else.

Joe Biden has said that the next bailout is not supposed to be a Christmas tree. It shouldn't be loaded with pork barrel spending. Let's hope there is a commission to oversee just that. Congress persons should not be able to bring pork home to their districts. Instead the bailout should be structured and overseen in the best interests of the country as a whole.

In the meantime government spending needs to alleviate the widespread suffering caused by layoffs, foreclosures, homelessness, hunger etc. 10% of American citizens are now reliant on food banks in order to eat. How pathetic! And all the corporate types can think about is how to keep feathering their own nests with millions of dollars in perks and bonuses.

The power brokers all better get real and as Arianna Huffington said yesterday in an excellent post, laissez-faire capitalism should be deader than a doornail. We shouldn't even be having a discussion about recycling it.

[Dec 24, 2008] Robert Reich's Blog The Debate to Come over Wall Street, Autos, and Everything Else Cyclical or Structural

First prediction for 2009: A widening gap between the public's view of the bailouts of Wall Street and Detroit, and the views of the direct beneficiaries. The public believes the bailouts will permanently change these industries, but industry insiders don't really want to change.

Exhibit one is Goldman Sach's CEO Lloyd Blankfein, who says the firm's business strategy doesn't need to change.

What? Goldman got $10 billion of taxpayer money precisely because it and other big banks were so over-leveraged they threatened the whole financial system. I can understand why Blankfein doesn’t want to change. He took home $54 million last year. (He has foregone a bonus this year and is taking home a piddling $600,000.) But the public expects real reform for its $10 billion at Goldman and tens of billions more in other major banks.

Blankfein isn't alone. I've heard the same thing from CEOs and directors all over the Street. They see the problem as cyclical, not structural. "The economy stinks," they tell me, "but it'll turn around in 18 months, and then we're back to the same business."

Or take the Big Three. They've agreed to become far more fuel efficient, as a condition for their bailout. But they promised this before -- during the oil crisis of the 1970s, when Congress threatened higher fuel-economy standards. But after the crisis passed, they never delivered. Why? Because their biggest profits were in gas guzzlers that consumers wanted to buy as soon as the first oil crisis was over.

Will history repeat itself? Now that gas prices are half what they were six months ago, consumers who can afford it are suddenly less interested in fuel efficiency. They're buying fewer hybrids and showing renewed interest in SUVs. So why should we think Detroit will revolutionize itself?

I'm not so cynical as to accuse anyone of bad faith. It's just that both Wall Street and Detroit earned big bucks from their old strategies, before the bottom fell out of the economy. So it’s natural they’d view the bailouts as ways to hold on until the economy rebounds. And it's clear they see their problem as cyclical, not structural.

Right now, Wall Street and Detroit are willing to say whatever they need to say to keep the taxpayer money coming. But when the economy begins turning up, my betting is that their Washington lobbyists will push back hard against any major restructurings the government wants to impose on them. New regulations of Wall Street will be watered down and circumvented; new requirements on the Big Three for green technologies will be resisted.

Yet the bailouts have been sold to the public as means toward fundamental change in finance and autos. If the bailouts are to do what they're supposed to – stop Wall Street from wild risk-taking with piles of borrowed money, and push the auto industry into making fundamentally new products that conserve energy -- Washington will not only have to set strict standards now and in the months ahead when the bailout money flows, but also hang tough when the economy begins to revive.

The emerging debate over Wall Street's and the Big Three's ongoing obligations to reform themselves is but one part of a much larger national debate we'll be entering upon in 2009 and beyond -- whether the economic crisis we're experiencing is basically cyclical (in which case, nothing really needs to change over the long term, after the economy gets back on track) or structural (in which case, many aspects of our economy and society will needs to change permanently).

Selected Comments

Anonymous said...
Thank you Robert for talking about the elephant in the room. The system is broken and unless we really look at fundamental change on ideas such as unlimited growth, we will be back here again, but only worse. I hope that this wake up call to America that serious change is needed in our financial systems, but our thinking as consumers in general. We cannot expect to have a thriving social system, a healthy environment, when the focus is solely on our financial goals. We are smarter than this, we know better. We need to ask more questions and demand better answers… if it doesn’t make sense, do not doubt yourself. We all have intuition, we have to use it. If the deals being cut prop up the status quo and keep the fat cats fat…. Might not be the best for our society as a whole.

[Dec 23, 2008] U.S. Economy: Home Prices Fall Near Depression Pace (Update1)

401K investors need to be very conservative in 2009 as this might be a multi-year slump  
Dec. 23 | Bloomberg

Sales of single-family houses in the U.S. dropped in November by the most in two decades and resale prices collapsed at a pace reminiscent of the Great Depression, dashing speculation the market was close to a bottom.

Purchases of both new and existing houses dropped 7.6 percent from the prior month, the biggest decline since January 1989, to an annual rate of 4.43 million, government and industry figures showed today. A 13 percent drop in the median resale price from a year earlier was the most since records began in 1968 and was likely the largest since the 1930s, the National Association of Realtors said.

“Housing is still in a freefall,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts.

The figures were worse than economists had forecast and signal that the battered housing market that led the economy into a recession may be taking another lurch down. Sliding property values mean more Americans will be under water on their mortgages, destroying household wealth and undermining consumers’ purchasing power.

President-elect Barack Obama plans an unprecedented economic stimulus to restore growth, and pledged on Dec. 13 to limit foreclosures. One tenth of U.S. families who own a home are in financial distress, Obama said.

“We need desperately to get this economy moving,” Vice President-elect Joseph Biden, who is leading the incoming administration’s initiative to bolster the middle class, told reporters before a meeting with Obama’s economic advisers today. Transition officials are “getting very close” to an agreement with lawmakers on the size of the stimulus, Biden said.

[Dec 23, 2008] US economy shrinks at fastest rate since 9-11 - Times Online

The US Commerce Department said that gross domestic product (GDP), which is used as a measure of economic health, declined by 0.5 per cent in the July-to-September quarter.

This is the sharpest fall since the third quarter of 2001, in which America reeled from the 9/11 terrorist attacks.

Analysts believe that GDP has fallen even faster in the last quarter of this year and could drop by as much as 6 per cent in the three months from October to the end of December.

This would be the biggest fall since a 6.4 per cent plunge in the first quarter of 1982.

The National Bureau of Economic Research (NBER) said last month that the US fell into recession in December 2007. As well as the usual rule that two consecutive quarters of falling GDP equals a recession, the NBER takes into account data such as job losses.

The US has seen falling employment every month since January this year, with the unemployment rate now at a 15-year high of 6.7 per cent.

GDP fell by 0.2 per cent in the fourth quarter of 2007 before rising for two consecutive quarters, up 0.9 per cent in the first quarter and 2.8 per cent in the second quarter.

Nariman Behravesh, chief economist at IHS Global Insight, the economics consultancy, predicts that GDP will fall by 4 per cent in the first quarter of 2009.

He said: "Assuming that the incoming Obama administration does enact [its] $850 billion (£574.5 billion) financial stimulus package quickly, it will do little to stop real GDP growth from dropping like a stone in the first half of 2009 but could help turn things around in the second half and provide a basis for sustained growth in 2010".

Today's misery was compounded by a survey revealing dire sales in the final weekend before Christmas, in which the lowest number of people in six years turned out to the shops.

[Dec 22, 2008] The Mess That Greenspan Made Conventional wisdom regarding gold

It's probably fair to say that, with what the central banks around the world have been doing over the last year or so, gold owners who are now worried about the recent downward trend in the consumer price index are few and far between
And while inflation isn't apparent today, stimulus packages and bailouts mean much more money in the system. That is classically inflationary. Moreover, despite efforts to sop up this liquidity later, the effects of unintended consequences might mean some portion of the trillions added to the Fed's balance sheet are likely to "stick around" to fuel inflation, says Axel Merk, who recently increased gold exposure in his Merk Hard Asset Fund and personal portfolio.

Says Malcolm Southwood, commodities analyst at Goldman Sachs JBWere in Australia, "I'm telling clients that the environment over the next five years is extremely constructive because of the inflationary risks further out."

Near-term gold could still demonstrate some weakness as the last of the panic trade peters out. And if the European Union cuts interest rates, as some expect, that could boost the dollar's value, which could undermine gold. And U.S. and European Central banks could sell gold to raise cash to pay for bailouts, which would be bearish for gold prices. But Mr. Southwood suspects Asian central bankers looking to diversify reserves would grab that supply, seeing the sales as "an alarm signal about the dollar."

And what if deflation does hit? Even that doesn't necessarily spell doom for gold, as some think. During the deflationary Great Depression, "gold preserved its value," says Matt McLennan, a lead manager at First Eagle funds, which runs a gold fund. "It preserved its purchasing power."
Selected Comments
Chuck Ponzi said...
Great information: I basically agree that the premise of today's monetary inflation will translate into asset inflation in the future.

However, there are some stunning misinformation in there. I'm no historian, but my limited memory reminds me that Gold was pegged to the USD... so Matt McLennans assertion that "It preserved its purchasing power" during the GD would have been either a misquote, or incredibly poorly informed. (as a manager of a gold fund, I'd have to err on the side of saying he must have been misquoted). Of course it retained its purchasing power; it was pegged to a deflating currency.

But, gold looks quite richly valued at the present time. Which, I would estimate has to be more due to it being a security play. I wouldn't be surprised to see prices fall quite a bit in the medium term as the crisis abates, as other commodities have. It's historical relationship to other precious metals has been completely eroded. Either everything else is badly mispriced or Gold is. I have seen no credible reason why we have a decoupling.

Don't take my investing advice, I'm probably wrong.

Chuck Ponzi

[Dec 22, 2008] The year in review By Lionel Barber

There was an ominous fragility about the world in 2008. In mid-September, the financial system came close to collapse. The failure of Lehman Brothers, the 158-year-old Wall Street investment bank, triggered panic in markets. The authorities in New York, Washington, London, Frankfurt and Tokyo looked on helplessly. For a few nerve-wracking days and nights, the world appeared to be hurtling toward financial Armageddon.

The crisis was far from over when another assault on the senses took place, this time in Mumbai. Terrorists, laden with plastic explosives, grenades and assault rifles, killed at least 192 civilians across India’s financial capital and laid waste to the luxury Taj Mahal Palace hotel.

By singling out symbols of Indian opulence and power, the perpetrators consciously aped the September 11 terrorists who targeted the Twin Towers in New York.

[Dec 22, 2008] Discussions and pollsOverpaid CEO Award

It went to Dick Fuld but there are a lot of executive suckers who compete with him both in the level of harm inflicted on their corporations as well as the level of compensation...

A worker has needs whether he is a lavatory cleaner or a CEO. If we talk about democracy, there must be a relationship between the pays of the two. So how many times do we pay more to a CEO than to a cleaner? Ten, hundred, thousand times?

Most CEOs are pompous fatcats often with very little ability and vote to each other huge packets behind closed doors. If someone wants to earn big money, he should go out on his own, but most CEOs could not operate a newspaper kiosk successfully.

Only governments can curb the greed and top their salaries at 150,000 pounds.

[Dec 22, 2008] JPMorgan's Bizarre Potshot, Federated Will Have Last Laugh Financial News - Yahoo! Finance

Federated is the only public pure-play money manager.  If you think money is going to remain more valuable than equity, then Federated will continue to grow.  If you still have difficulty with the concept of growth in financial services consider this: retailers went down but Wal-Mart went up.   

As of November 30th, investors poured $1.1 billion into Federated Funds.  While Mr. Worthington is contemplating the hypothetical effects Federated taking in real money.   ETFs that have products similar to Federated are also seeing these benefits.

In November, the third largest increase in ETF assets occured in the long-term bond category, almost $1 billion.  Recently, in the 3rd week of December, iShares iBoxx $ Invest Grade Corp Bond (NYSEArca: LQD - News)  grew 14%, adding $804 million in new shares.  Tantalizingly,  iShares iBoxx $ High Yield Corporate Bd (NYSEArca: HYG - News) added $345 million new shares, an increase of 32%.

The resurgence in higher yield corporate debt will be a boon to Federated and, of course, JP Morgan. You can find more detail under reports at

[Dec 22, 2008] Blaming Bush for the Wrong Things By Barry Ritholtz

December 21, 2008 |  NYT

The Sunday New York Times has a front page article more or less blaming Bush for the housing and credit crisis. Its part of their “The Reckoning” series, and it is in some ways, off base. The long article (written by 3 people) comes close to some real truths, but it veers off, focusing on some minor and irrelevant elements.

One side note: Critics of newspapers never seem to understand that headlines are not by the article’s author(s), but by an editor.  Hence, why the headline focus is sometimes misplaced or emphasizes the wrong issue.

This discussion is very nuanced, so if you get most of your news and information from talk radio or any of the Faux channels, well, you shouldn’t bother reading any further. Pursuing this will only hurt make your brain hurt, or make you angry, or both.

Let’s start out with a brief excerpt from Bailout Nation:

From Reagan to George W. Bush, each President of the past 25 years bears some responsibility for contributing to the belief that we can let markets govern themselves.

Of the four Presidents over that period of time, President George W. Bush is the one with the seemingly greatest culpability. Not just because this crisis happened on his watch — although that is reason enough to give him a fair share of responsibility. More significantly, the basis of his culpability is that he shared Greenspan’s and Gramm’s radical belief system — that markets could police themselves, and that all regulation was inherently bad. This philosophy colored all of the President’s appointments to key supervisory positions, as well as his legislative agenda.

That philosophy, and the executive, administrative and legislative acts, including political appointments, is where we should focus our ire at the soon the be former-President Bush. The belief system that leads to the conclusion that really bad behavior in the corporate world needs no proscribing is where you should look to place blame.

That Bush had as a goal increased home ownership is, quite bluntly, irrelevant. It is a worthy goal, and certainly one that could be achieved without forcing the collapse of the financial system.

Indeed, as the chart at right shows (source: NYT), home ownership has increased every year since 1994. Funny, from that year and for each of the next 10 years, there was no collapse. You have to ask yourself why. No, the 1997 Tax Break, did not, as the NYT implied yesterday, Help Cause Housing Bubble. Home ownership was rising years before that went into effect.

What Bush did differently than prior Presidents was that he genuinely believed that regulations proscribing bad corporate behavior were unnecessary. It was that ruinous belief system, one he shared with other key players, that led to the crisis.

In fairness to Bush, many of the really bad policies that led to the boom and bust of Housing, and the collapse of credit, were in place before he was sworn into office. In particular, the repeal of Glass Steagall (Gramm-Biley-Leach Act), and the Commodities Future Modernization Act (CFMA), were both heavily lobbied for by the industry, sponsored by Phil Gramm, and passed by a Congress that didn’t bother to read them. They were both signed into law by Bill Clinton. That set of legislation is where you begin to find answers to The Reckoning.


“Former Presidents Clinton, George H.W. Bush, and Reagan all have some responsibility, but far less. Bush Senior is probably the least culpable. Reagan did not reappoint Fed Chair Paul Volcker, and replaced him with Alan Greenspan. Regardless of other actions, this alone haunts his legacy, and gives the Gipper some degree of responsibility.

While some partisans have tried to paint the crisis a purely Republican debacle, history informs us otherwise. Yes, the GOP did control Congress from 1994 to 2006. However, President Clinton, a Democrat, bears a significant amount of responsibility too. He and his Treasury Secretaries, Robert Rubin and Lawrence Summers, each supported very limited regulation of free markets. Clinton, Rubin and Summers are one step behind W. in the hierarchy of proximate causes of the debacle.” (Bailout Nation)

  1.  larster Says:
    December 21st, 2008 at 10:13 am

    The Fannie/Freddie meme must be a staple of talk radio and Fox News, as every Repub that I know states it like the gospel truth. Everyone wants a simple explanation, which is why this propoganda works. Watch and see if they are successful in touting the Bush record of job growth. During the legacy tour Bush relentlessly touts his record of job growth, which you have consistently shown is simply not true.

  2.  km4 Says:
    December 21st, 2008 at 10:23 am

    Bush has created a new hypertext linkage definition of kleptocracy* and massive US financial ponzi scheme to keep the bullshit US economy going where credit must flow like a raging river or America’s house of cards goes bust trumps everything else.

    Mission accomplished and BOL to 98 or 99% of Americans for next ? years.

    *government by those who seek chiefly status and personal gain at the expense of the governed.

[Dec 22, 2008] What Does Regulation Regulate? By Barry Ritholtz

December 22nd | The Big Picture

Here’s one of the simple truisms that gets lost in the political (i.e., bumper sticker) discussions.

Don’t regulate the free markets! Don’t interfere with innovation! Don’t stifle incentives!

What bullshit.

One of the best ways to win a debate is to control the language used. This was one of the elements George Orwell was discussing in 1984, and why the language in the novel was degraded to phrases like “double plus good.” All nuance was dismissed. He who controls the language controls the political economy is what Orwell was saying. In modern times, its done not with boot-jacks and guns, but with catchphrases and clever marketing. Its not as heavy handed, its just more insidious.

When we discuss “Regulations,” we are talking about regulating human behavior. And that behavior can range from following misplaced incentives to falsifying accounting data to overtly legal but destructive actions — like putting people into loans they knew (or reasonably should have known) were likely to default.

What a terrible sham the no “regulation cry” has been. It is really a vote for no rules against illegal and/or criminal behavior . . .

Selected comments
  1.  Scott F Says:
    December 22nd, 2008 at 6:59 am

    Nineteen Eighty-Four’s title, its terms, its language (Newspeak), and its author’s surname are bywords for personal privacy lost to national state security.

    “Orwellian” denotes many things. It can refer to totalitarian action or organization, as well as governmental attempts to control or misuse information for the purposes of controlling, pacifying or even subjugating the population.

    “Orwellian” can also refer generally to twisted language which says the opposite of what it truly means, or specifically governmental propagandizing by the misnaming of things; hence the “Ministry of Peace” in the novel actually deals with war and the “Ministry of Love” actually tortures people. Since the novel’s publication “Orwellian” has in fact become somewhat of a catch-all for any kind of governmental overreach or dishonesty and therefore has multiple meanings and applications.

    Deregulation = Free markets = Economic Collapse

  2.  Marcus Aurelius Says:
    December 22nd, 2008 at 7:03 am

    Regulations are laws, and laws, regulations. A society without laws? Yes, let’s try that.


  3.  Mark E Hoffer Says:
    December 22nd, 2008 at 7:07 am

    “He who controls the language controls the political economy is what Orwell was saying.”

    and, we need its Twin:

    “He/That which controls the Currency controls the Financial Economy”

    in order to decrypt our present circumstances..

  4.  VoiceFromTheWilderness Says:
    December 22nd, 2008 at 8:23 am

    Absolutely, couldn’t have said it better. The breakdown in honesty, and clarity of thinking that accompanies the succesful introduction of lies into public discourse is a hallmark of this age. The plethora of people walking around chanting slogans from ‘economic-religions’ without having the slightest bit of personal insight into the validity or lack thereof of these slogans is staggering. The fact that most think they are saying something that is ‘there own idea’ and not something that has been planted in their heads for the purposes, and benefit, of others is equally staggering.

    The imputed glory of ‘the market’ would be hilarious if it wasn’t such a nasty con. I site again the case of Leo Farnsworth — the inventor of television who died penniless (and dreaming of fusion power as a comeback) — his hardwork, and personal vision of the birth of a great and wise age of learning and knowledge brought on by television stolen from him (after he made it work) by David Sarnoff at CBS. ‘The Market’ is full of pickpockets, con artists, and overpowering force used in pursuit of personal profit, left to itself it will rapidly (astonishingly rapidly) collapse into free for all with a very few emerging victorious, ready for the battle the next day.

    Too bad in their desperate need for more they destroyed the most well balanced economy in the world, and the most open society in the world.

    Think Hank Paulson can order us up a new golden age? Think he’s even trying?

  5. dead hobo Says:
    December 22nd, 2008 at 8:37 am

    Are you asking about regulation that is protectionism or about regulation that prevents people from doing bad things to you. [BR: this has nothing to do with protectionism -- it is about deregulating the banking and financial markets]

    Most people don’t like protectionist regulation, unless they are the ones receiving income as a result of the protectionism. Government imposed monopolies are pretty good for business if you are in the protected class. They suck royally if you are paying higher prices because competition isn’t allowed.

    Predators will always be among us and poorly written regulations regulation prevent them from doing what makes them feel best. Slick con artists will find lazy and ignorant politicians who promote ‘freedom from excessive government’ as a mantra and the predators will support their efforts to make the world safe for said predators.

    People are basically stupid. One way to convince an angry mob that predators need protection is make an outrageous claim and say ‘you’re next if they get us’. For example, ‘pulling a gun from a cold dead hand’ can be equated to the need for free markets to allow 30 or 40 to 1 leverage with OPM and high management fees.

    In fact, the current SEC can be used as the poster child for the concept of Lazy Stupidity and Empty Suit Management. GWB is the new high water mark for that concept and will be tough to beat … unfortunately somebody will eventually. The current Republican Party has been and will continue to be the party of the predator and continue to celebrate institutional laziness, only it will be done with eloquence and wedge issues. The media will act impartial and embrace institutional stupidity because some advertisers support wedge issues and all day news cycles require a lot of hot air to fill up. Also, people like to be told how to feel, not encouraged to think.

    Predators and institutional laziness will always be here. You are naive and dreaming if you think real changes are coming. TARP trickle down economics is another government grant to exploit. Anecdotal stories abound about the lack of credit keeping the economy down, yet several oceans of money intended to free up credit have only created a minimum state of liquidity. Executives are protecting themselves. Uncle Stupid is failing to put the cash where it needs to actually be. The lower price of gas and other second level effects of lowered commodity prices are having a greater effect, I would argue.

    Regulation is really a tool for the creative and ambitious predator.

  6. debreuil Says:
    December 22nd, 2008 at 8:50 am

    I totally agree, no regulation is essentially saying ‘no laws in the bank robbery industry’ — at least for those who have a key to get in.

    “like putting people into loans they knew (or reasonably should have known) were likely to default”

    I am slowly working up a theory here (so start your BS meters!). One thing that has certainly happened is that while productivity has been increasing fairly rapidly, wages have been stagnating or worse. Normally that would cause at least a lot of labor unrest, more likely a bidding war for talent. This time though, the gains were given to people, but in the form of debt. This resulted in people not complaining (they ended up having a boat and a second car anyway), and yet not actually sharing in the gains in productivity. I don’t know if this was planned or not (I doubt it), but by this logic, a lot of that debt that the average person is carrying should really have been gains in wages. So instead of a gain, it is like a double loss (you pay the loan plus the interest, which gets killer as you close in on default — plus the stress of ruin!).

    For the record I’m not in debt, so this isn’t some way for me to try and get a free lunch : ). I was one of the stupid people who saved and went without things I couldn’t afford. Now that I’m faced with helping pay for it all (along with everyone else here), I’m just wondering who’s getting all the loot. Any time there are huge gains in productivity that translates into money for someone — that is what money represents at the end of the day after all.

    I’d like to blame the person with the mortgage they can’t afford, but something just doesn’t smell right about that. I know a lot of people in that situation, and they generally work hard and don’t seem to have a lot more that they ‘deserve’ given what they do. I think the natural workings of the ‘wages market’ has really been corrupted by easy credit, which is a fancy way of stealing from people.


  7. dead hobo Says:
    December 22nd, 2008 at 9:12 am

    debreuil Said:
    December 22nd, 2008 at 8:50 am

    One thing that has certainly happened is that while productivity has been increasing fairly rapidly, wages have been stagnating or worse. Normally that would cause at least a lot of labor unrest, more likely a bidding war for talent. This time though, the gains were given to people, but in the form of debt.

    Excessive credit is a root cause of inflation, as in too much money chasing too few goods. The printing press is not the only form of monetary creation. Low credit standards are a symptom of excessive credit. Excessive credit creates rising prices for things that people can borrow money to get. It caused high real estate prices, high commodity prices, high demand for big ticked appliances, and more. Excessive and inflationary credit has no relationship to wages, unless you are a commission salesman and you are profiting from inflated asset prices.

    Nobody forced anyone to borrow to excess. Nobody can cry ‘It’s Not My Fault’. I took advantage of low credit and refinanced THE OUTSTANDING BALANCE ONLY on terms that just keep getting better and better (see previous posts for details). I didn’t go out and buy tons of crapola that still needs to be paid for and may not even exist any longer. As I said above, people are stupid. They believed that they were getting something for nothing.

    Rising productivity in a labor market that has high employment means employers have at least one bright spot to look at. High unemployment and fear for one’s job tends to calm a lot of labor unrest. Also, the idea that hard work improves one’s chances of not losing the current job motivates higher productivity for a while.

  8. Barry Ritholtz Says:
    December 22nd, 2008 at 10:10 am

    I am referring to “radical deregulation” — allowing the players in the markets to operate without oversight, supervision, or reasonable constraints on leverage.

    I am not discussing ordinary regulations …

[Dec 22, 2008] Has Beggar Thy Neighbor Started

naked capitalism
In a very good Financial Times piece, Wolfgang Munchau in passing mentions "unsynchronised monetary policies" and suggests that the Fed's aggressive move to quantitative easing (oh, we don't dare call it that, the Fed insists its flavor is different) will force the ECB to follow suit to a fair degree. Munchau does not consider this to be a plus:
I am sceptical about the benefits of the Fed’s new policy of quantitative easing. We do not have a liquidity crisis, but a solvency crisis, which expresses itself in large spreads and dysfunctional money markets. I cannot see how adding more and more liquidity to the system solves this problem.

Instead of propping up each bank, and swamping the market with cash, we need to restructure and shrink the banking system, as a first step to a sustainable solution to this crisis. Quantitative easing without deep structural financial reform could cause lot of trouble in the long run.

I think, however, there is a case for temporary interest rate cuts in Europe, but only on condition that this policy would be forcefully reversed once credit markets start to recover, and once the economy emerges from the slump.

But we should not delude ourselves into thinking that monetary policy can save the world. It can play a useful role, especially since we do not have the stomach for an optimal fiscal policy response. But it will not prevent the worst slump of our generation.
Selected comments
Brenda Rosser said...
Yves Smith said: "How smart is it to advocate open trade when some countries stack the deck by having artificially cheap currencies? That is tantamount to an export subsidy, but we haven't done much except jawbone China very late in the game..."

And vice-versa, of course. The US government has pursued an artificial 'strong dollar' policy for a long time and this has served American global corporations extremely well. Including those operating in China and exporting to the US.

"Half of the world's 500 billionaires and a third of the 27 million millionaires call the USA their home. Five of the top ten banks are US, six of the top ten pharmaceutical/biotech companies, four of the top ten telecommunications companies, seven of the top information technology companies, four of the top gas and oil companies, nine out of the top ten software companies, four of the top ten insurance companies and nine of the top ten general retail companies. The concentration of economic power is even more evident if we look at the top ten companies in the world: 90 percent are US owned; of the top 25, 72 percent are US owned; and of the top 50, 70 percent are US owned. Within the inner circle of the biggest companies, the US has an overwhelming presence and dominance. Africa and Latin America are absent from the list. And the so-called Asian Tigers have three companies among the top 500, less than 1 percent. World markets are divided up among the 238 leading US and 153 European companies and banks. 80% of the leading oil and gas companies are US and EU owned. These sales earn high profits and are used to payoff or buy up allies and the armed forces in strategic regions. The US spends more than $400 billion on defense - about half the world total.."

Facts on the US Economic Empire
by etra Jaimers. Eat the State. Volume 7, #3 October 9, 2002

[Dec 22, 2008] Wage Deflation Underway

naked capitalism

Price deflation isn't necessarily a bad thing if it is short-lived and does not lead to downward pressure on wages. But falling wages produces a nasty spiral. Not only do consumers have less to spend, but worse, even if they keep their jobs, they can be legitimately worried about even lower pay packages down the road.

Of course, wages may simply fall in correspondence with prices, purchasing power could be maintained. But with memories of gas and food price rises still fresh (and I am still seeing meaningful food price increases), workers have good reason to be concerned that their standard of living could fall. And that does not include the nasty factor that most consumers are carrying debt, both mortgage and personal which is unlikely to deflate in line with a reduction in earnings (although Bernanke is doing everything in his power to engineer that)

And even if that wage earner squeeze is illusory (ie, deflation is symmetrical enough that his standard of living is intact), he is exposed to commodity price increases. Fed policy is indifferent to the dollar; in fact, Bernanke would probably like to see it considerably lower, since the 1934 devaluation played a big role in putting the US back on the growth path (policy errors in 1937 put the recovery in reverse). But, say a 30% to 40% fall in the dollar means considerably higher energy and food prices, which hit the vulnerable particularly hard.

Fedex is cutting pay 5%. In the UK, tens of thousands of workers are having an extended Christmas holiday as employers shut down through Jan. 19 to conserve cash. Cerberus has offered its New Page (coated paper mills acquired from Mead WestVaco) union employees a four-year contract with no wage increases the entire time, benefit cuts, and reduction of overtime. That's tantamount to a pay cut.

The New York Times gives more examples of pay reductions, generally in the form of short workweeks or unpaid vacations. However, the Times candy-coats this development, presenting it as a "win-win" that saves jobs, as opposed to a further grinding down of workers who have had stagnant real wages since the mid-1970s. Admittedly, so far employees have reportedly gone along with these moves. But I must cynically note that everyone quoted in the article is either a manager, an expert (a consultant or academic) or if a worker, was presumably interviewed with management's knowledge. And let's face it, labor has no bargaining power in the US. Acquiescence is the only option.

Selected comments
Anonymous said...
Yves, I was surprised to see you write that Bernanke is doing everything in his power to engineer a symmetric deflation in consumer debt to that of their wages.

While he may want that, it seems quite clear that his focus is almost exclusively on his paymasters in the financial industry.

The most glaring and recent example is the scheme (scam?) to lend money to hedge funds (no recourse and at near zero interest) so that they'll buy securitized consumer debt. Now, pray tell, if the goal is to help consumers why not use banks merely as service providers for a low fee (to be bid out?) Instead the hedgies get huge markups with no risk.

As you've noted quite a few times, the Fed is also trying to push more debt as a solution to the insolvency of many consumers, while the fat cats get sweetheart deals.

I wouldn't be surprised if the Fed governors have convinced (rather, deluded) themselves that the best way to help the country is to help the people who got us in this mess (with the Fed's active help and acquiescence, of course.) That is of no comfort - the result is the same: resources that could go to productive uses are going to prop up and paper over well-earned insolvency.

It's a crying shame that even after the recent historic election, all the signs so far point to more of the same.
I'm sure you're among the very few that even noticed that deflation is not always and necessarily a bad thing as well as that some prices are still rising. Not to mention one of the few who pay more than lip service in expressing concern about "main street" and to call out those responsible.
Yves Smith said...
Anon of 1:26 AM,

I believe that Bernanke genuinely thinks he is doing the right thing, and is completely blind as to how his world view has been distorted by both ideology (the idea that financial innovation is every and always a good thing, for instance) and by being overly reliant on Wall Street for information (the inevitable consequence of opaque markets becoming hugely important). When Willem Buiter accused the Fed of "cognitive regulatory capture" at Jackson Hole, they reacted like stuck pigs.

I am NOT saying that what Bernanke is doing will work; I have expressed considerable doubts elsewhere.
mmckinl said...
Wage deflation is underway because aggregate demand is crashing and there is no way around it. Our economy needs to be entirely restructured to meet our new paradigm. That new paradigm is that we spent too much over the last 30 years amassing 350% of GDP or $50 trillion in aggregate U.S. debt and that debt bubble has been popped by this banking crisis.

The new paradigm is a lower standard of living for all which is why the well off will have to be asked for much more in the way of taxes. The taxes must be used to build a platform under the public including Medicare for All, longer unemployment benefits and much higher wage cutoffs for food stamps, housing and day care. It may even go so far as a shortened work week from here on out.

A public utility banking model will address funding new and extended programs as well as set the stage for a sustainable economy.

What is important is that the suffering is shared across the board.
kevin de bruxelles said...
In my profession, architecture, where some firms have already laid off 40-50% of junior-to-mid level staff, requests are being made for mid-to-senior level people to take real pay cuts (not just a decline in hours). A month ago, I was invited to submit to a 20% haircut. Thanks to my ability to survive without working and my unique situation where it would cost much more to replace me, I politely called their bluff. But most people in my profession don’t have my situation and they are quietly submitting to similar requests. And why not; if you need the income to survive then taking a 20% cut is better than the alternative, a 100% layoff into a flooded job market. The managing partners are currently doing a triage of who is desperate and who is not. If the partners can get away with it, those mid-to-senior employees who stand tough (and have no immediate project commitments) will be shown the exit (they will nail me the first chance they get!). Those who submit to less pay will almost certainly be asked for further concessions in the coming months.
DownSouth said...
mmckinl said...
"What is important is that the suffering is shared across the board."

That's what happened with the decline of the Dutch and English empires, according to Kevin Phillips in his book "Wealth and Democracy." There were 90% tax rates and similar inheritance taxes, devastating the wealth of the upper classes, but instrumental in cushioning the impact of the decline for the majority of the people.

That outcome is not assured as the American empire declines, however. As Phillips points out, advocates of free market ideology in the United States have conflated "free" markets with democracy, falsely portraying them as one and the same. Unless the confusion between economics and society is cleared up, plutocracy is also a possilbe outcome.

our economy really less dependent on bank loans than in the 1930 (see claim of 5th paragraph from end of article)? every time you use a credit card to purchase something for which you don't have cash, you're essentially taking out a bank loan - and often at a much higher interest rate. from this perspective, i'd posit that we're actually more bank-loan-dependent than in 1930. obviously, unsustainable consumer activity is at least partly to blame for our current crisis - including consumers electing administrations (starting with Reagan) that deregulated how Wall Street could profit from consumer ignorance. A stint in the WPA Conservation Corps is lookin' pretty good right about now!


Swing and a miss. Someone below says we are less dependent on banks. He misses it. The 1920's was also characterized with corporations getting into the lending business. What we are seeing now is the fact that once the crisis hits, there isn't enough liquidity to get back to cash. You can't get to cash without the banks. The Fed is expanding its balance sheet because there flat out right isn't enough cash to keep the out of banking system liquid. The use of credit cards is either the creation of another bad loan or an extraction of money out of the system through factoring charges. Bernanke is an idiot who read the wrong book. There are a lot of lies about the depression to cover up the fact that credit has no mathematical solution and once debt gets deep enough, it carrying charges outweigh the capacity to create new debt


Systemic fraud in the banking and investment coming on the heels of wide spread corporate fraud, along with the dubious track record of the Bush administration in being able to deal properly with anything, has left the public bereft of trust in anything intangible.

I pulled all my money out of stocks a year ago and I was only 25 per cent invested since 1995 when it became apparent that what the media was reporting and what my eyes were seeing were two different realms.

The lies of the media along with the lies of the government, such as is represented by the Iraq war, a meaningless waste of American lives and treasure over a business deal gone bad within the Bush family, have certainly been like gasoline on the fires destroying hope and trust.

The wholsale destruction of domestic manufacturing along with the importation of poisoned, unregulated and uninspected food, toys and drugs have done nothing to raise the hopes and trusts of the people.

We no longer have the skill sets to be self sufficient, it is no wonder so many live in fear of this depression that is unraveling the curtain of myths woven so skillfully by the liars in the government and the corporate media.

This world is dead, we can't go back, we can only build a new one on the ashes of the old.


You have the same people who got us here, trying to "fix it?” We gave 1.7 trillion dollars to the greediest group in all of capitalism. Without guidelines, investigation, without oversight, or rules.

Here boys take this blank check and do what ever you see fit. What congress is asking the big 3 to do should have been the min. of what was asked of the banks and Wall Street. OR use the 1.7 trillion to forgive debt of the people who are drowning in it. Pass laws on the percentage of debt anyone can have.

Mortgage 25%, unsecured debt 10%. Let the real estate market fall until people can afford it with only 25% of one income, so someone could raise the kids besides cable TV and paid childcare.

You see all of this is related to all of the other problems we have increasing, Crime, Drug use, teen pregnancy, violence, low test scores, the list goes on and on. Greed is at the heart of it all, greed for power, greed for money, greed for control.


The Fed and the Treasury have the power to be honest now and say that the monetary system is dead. Feeding it as they have done with these cash infusions is prolonging the anxiety and agony. The Derivative Debacle and its' gambler/investors can not be saved and will bring the whole world down if we try to. They are not men enough to say "Save Yourself". The banks have to be put into bankruptcy proceedings, and start operating as National Banks. In a depression, production slows or stops. In order to protect the population, Farm/Food production must be doubled, stop the foreclosures, housing must be preserved, water harvesting and supplies must be monitored and increased where needed. Health facilities must be fully equipped and staffed. Are you getting the idea where we are going now? High paying jobs must be introduced into the economy ASAP. We can work our way out of this, however ALL DELUSIONAL BS must stop now.

This is still the land of the free and the home of the brave. In a country that supposedly has a free press, be free to tell it like it is. We have the power to do the right thing and save ourselves and the rest of the world.


My concern is that one of the results of the Great Depression of the 1930's was the rise of political extremism, which unfortunately led to a world war. Are we headed for another world war because of this economic collapse?


Raymond posted, "Are we headed toward another war due to political extremism?"
All wars are economic. Country A wants a resource from Country B and the allies jump in. Banks make a fortune lending governments money for armaments, supplies and GI salaries. Taxpayers are stuck with the bill--check your income taxes; those with cash "invest" in war bonds...
Political extremism merely works due to evolution's tribal impulse embedded deep in our limbic system and some people don't have the sense, the awareness, or discipline to control it.
Political and religious leaders and demagogues love it.
Now, as for economics. We need a New Deal badly. Best start is on national green projects, green cottage industries and public project infrastructure (not to mention massively funding our educational estblishment; finally, fund anything to stop dependence on oil companies and Detroit, once and for all. This is the 21st Century folks.

[Dec 21, 2008] There is no playbook

naked capitalism

But the article nevertheless has some quotes near and dear to our heart, such as:

“This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,” said L. William Seidman, who advised Republican presidents and led the savings and loan bailout in the 1990s. “To make the market work well, you have to have a lot of rules.”
Selected Comments
Anonymous said...
Seidman unwittingly exposes the fundamental contraction at the root of the "free market" construct" for markets to work well enough for parties to deal with each other on a transactional basis (ie, no or limited pre-existing relationship), there HAS to be some level of regulation.

Or maybe not unwittingly. I've heard Seidman say similar things on bubblevision before. I think he "gets" this kind of regulation, even though he doesn't like regulation out in the real world all that much. I think most other conservatives (and absolutely all libertoons) fail to understand that less trust means higher "friction" and thus a weaker economy.
Anonymous said...
"That is more than a bit of revisionist history. If you don't believe in oversight, pray tell how are you going to assess the quality of decisions being made?"

You know Doc, you're over-analyzing again. I see only reflexive responses by the sedate, possibly unconscious Mr. Bush.

I believe you own a dog, and likely (as with most dog owners) you've engaged in long, deliberative criticism and conversation with the beast over its habits.

When it barks, do you attribute the sound to a reasonable, rational response? Or does the dog toss you the same answer every time? Does the dog really care?
December 20, 2008 11:49 PM
Fraud Guy said...
As a dog owner, also, I firmly believe that I get a better, more rational, and more self-aware response from my dogs than from this administration.
December 20, 2008 11:56 PM
Anonymous said...
I think it's pretty kooky to blame this mess mostly on Bush, especially his "philosophy". The policy of encouraging home ownership has existed for decades. Bush had nothing to do with the monetary policy of Greenspan, nor did he create Fannie and Freddie, or the ratings agency cartel. Nor did he oversee the repeal of Glass-steagal, another favourite cause-du-jour for the econostrologist-left; that was done on Clinton's watch. Oh well, whatever, it's fun to take pot shots at doofus on his way out the door - and don't come back!
December 21, 2008 12:23 AM
Jim DeSantis said...
Figures don't lie but liars can figure.

It's human nature to cheat whether one is cheating in a suit or in blue jeans.

This is a lesson that we must re-learn over and over no matter who is in the White House or on Wall Street or on the factory floor.

Who is innocent among us?

Jim DeSantis
December 21, 2008 12:49 AM
ndk said...
I think it's pretty kooky to blame this mess mostly on Bush, especially his "philosophy". The policy of encouraging home ownership has existed for decades.

And then some. I'm apolitical in our current goofy regime, but admit to a soft spot in my heart for many of America's founders.

Washington tried. Oh well.

They serve to organize faction, to give it an artificial and extraordinary force; to put, in the place of the delegated will of the nation, the will of a party, often a small but artful and enterprising minority of the community; and, according to the alternate triumphs of different parties, to make the public administration the mirror of the ill-concerted and incongruous projects of faction, rather than the organ of consistent and wholesome plans digested by common counsels, and modified by mutual interests.

Why am I not surprised to see that what ought to be viewed as a failing is instead spun as a virtue?

I don't see it as a failing at all. These are extraordinarily uncharted waters by any definition, and we have only bad theories by which to navigate. I'm far more concerned about the excellent playbooks some claim to have, those playbooks that indicate the perfect policy that will solve all our problems. Instead, this admission could be a step towards rational thought and creativity. Let's see if we can get some of the strident Keynesians and quantitative easing fans to do the same.

Seidman unwittingly exposes the fundamental contra[di]ction...

I don't believe it was unwitting for a moment. Seidman is quite savvy on all levels.
ndk said...
I think it's pretty kooky to blame this mess mostly on Bush, especially his "philosophy". The policy of encouraging home ownership has existed for decades.

And then some. I'm apolitical in our current goofy regime, but admit to a soft spot in my heart for many of America's founders.

Washington tried. Oh well.

They serve to organize faction, to give it an artificial and extraordinary force; to put, in the place of the delegated will of the nation, the will of a party, often a small but artful and enterprising minority of the community; and, according to the alternate triumphs of different parties, to make the public administration the mirror of the ill-concerted and incongruous projects of faction, rather than the organ of consistent and wholesome plans digested by common counsels, and modified by mutual interests.

Why am I not surprised to see that what ought to be viewed as a failing is instead spun as a virtue?

I don't see it as a failing at all. These are extraordinarily uncharted waters by any definition, and we have only bad theories by which to navigate. I'm far more concerned about the excellent playbooks some claim to have, those playbooks that indicate the perfect policy that will solve all our problems. Instead, this admission could be a step towards rational thought and creativity. Let's see if we can get some of the strident Keynesians and quantitative easing fans to do the same.

Seidman unwittingly exposes the fundamental contra[di]ction...

I don't believe it was unwitting for a moment. Seidman is quite savvy on all levels.
December 21, 2008 1:39 AM  
Yves Smith said...

I do think Seidman is smart, but anyone who invokes the term "free markets" is endorsing an intellectually bankrupt, oxymoronic construct. He lost cred by his very use of that phrase.

Note I am NOT saying that there are not good uses for markets, merely that the idea of "free markets" falls apart under serious scrutiny.

And I do fault Paulson for not having a playbook. He and Bernanke have been reactive. They have not attempted to address the fundamental problem, that we have too much debt and a way oversized finance sector as a result. Both need to shrink. But instead of figuring out how to do that, both are seekingto keep asset prices aloft and avoid price discovery (that was one, but not the only, motivation for the TARP). Similarly, Bernanke's intervening in credit spreads is focusing on symptoms, not the underlying malady.

Macro efforts without underlying microeconomic reforms (regulations, institutional arrangements) are likely to have either limited or distorted effects. Neither Paulson or Bernanke have focused much time or energy on this issue. Admittedly, they have been pretty busy, but that is the sort of thing that could have been delegated (to staff, outside consultants, perhaps several routes to get a range of recommendations).

Roger Ehrenberg gives a mini-rant on short-termism.

[Dec 21, 2008] Robert Reich's Blog Greenspan and Democracy

"Mr Greenspan, even the most amateur student of capitalism knows the natural tendency toward oligopoly and anticompetitive behavior."

Alan Greenspan, writing in the current issue of the Economist, argues that in the future banks will need more of a capital cushion than they needed before the crisis because holders of bank liabilities will require them to hold more capital. "Today, fearful investors clearly require a far larger capital cushion to lend" to financial intermediaries. In other words, there's no need for additional regulations requiring banks to have more capital. The financial market will take care of itself. Greenspan has learned nothing at all.

In 2004 and 2005, when many economists warned that a speculative bubble in home prices and home construction posed a risk to the financial system, Greenspan brushed aside such worries, saying housing prices never declined. Before that he had resisted calls for tighter regulation of subprime mortgages and other instruments which allowed people to borrow far more than they could afford. He had also opposed tougher regulation of derivatives. Almost a decade earlier, Greenspan had urged Congress to knock down the regulatory walls that separated investment and commercial banks, thereby inviting investment banks to place huge bets with other peoples’ money.

 DanyBoy said...
Robert as always you are too polite. Ever the gentleman.

Permit me to articulate some outrage:

<<"This crisis has turned out to be much broader than anything I could have imagined.">> -Alan Greenspan.

Well Imagine THIS:

-America's wealth has been looted by conspiratorial financial executives working to suck the marrow out of public companies and leaving them bankrupt, tarnished and wards of the state!

An article from the New York Times published today tells the tale of criminal looting of what was once America's premiere banks, "Bullish on America" respected as a financial powerhouse for over a century now reduced to whimpering into the skirts of Mother Government.

On Wall Street, Bonuses, Not Profits, Were Real

"In all, Merrill handed out $5 billion to $6 billion in bonuses that year (2006)
But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.

Unlike the earnings, however, the bonuses have not been reversed."

They destroyed their own companies!
Or rather, they looted them and left the garbage for us to deal with.

Mr Greenpsan, even the most amateur student of capitalism knows the natural tendency toward oligopoly and anticompetitive behavior. Holy smoke the country spent the better part of a century undoing the ills of unfettered free market capitalism culminating in the break up of empires of the Rockefellers, Carnegies, Vanderbilts and the like. Laws governing business had to be put in place to avoid having kickbacks, rebates, price fixing and other collusions.
And the New Deal was only partly about fiscal stimulus and the WPA. Once again a Roosevelt working with the supreme court had to dismantle Empires, this time Financial ones. The nation's wealth had become concentrated in the hands of a few who hoarded cash, worsening the financial crisis and deflation.

Mr Greenpsan, you have indeed learned nothing at all and worse, you have allowed the once bottled genie of corrupt capitalism back out of the bottle and into our lives.

I contend that the damage to America's financial health is irreperable for at least a generation. No matter what hokus pokus numbers they throw at us and no matter how many times they try to pull a rabbit out of a hat, WALL STREET NO LONGER EXISTS!!
It is so unthinkable, horrid and sad that EVERY once mighty Ibank either has vanished, no longer exists as an independant entity or else has been forced to change it's business model under threat of insolvency!

It is so sad to realize that one of the jewels in America's crown since the beginning is missing, vandalized. Americans under 20 have been robbed of the future they were promised. Americans over 40 have been robbed of retirements they were promised. We have all suffered a loss that was so big we have not fully realized it yet. But we will.
Thursday, 18 December, 2008  
 Angry Citizen said...
Of course Greenspan hasn't learned anything; he is probably nearly incapable of it. People who so embrace rigid ideologies have a hard time stepping outside of them. In order for Greenspan to realize the error of his ways, he'd have to first reject his economic philosophy. On a psychological level - since his ideology is so tied to his identity - such a philosophical rejection would amount to a rejection of himself. It's no wonder he hasn't learned anything. He is protecting himself.

Have Larry Summers and Tim Geitner learned a lesson? That's a question I'd like to have an answer to seeing as how their lessons learned or lack thereof will have an immediate impact on all of us. What about all of the politicians who voted for deregulations time and time again? Have they learned? Do they feel even a shred of responsibility? Do they feel any sense of guilt for selling out to the banksters and corporate crooks at the expense of the security and well-being of the very people they are supposed to serve as public servants ?

I think that our leaders have forgot what it means to be public servants. Few of them seem to have any concept of honor. Those who do (e.g. Dennis Kucinich) are mocked and treated as less-than. The dollar signs that fill their eyes blind them and steer them away from their responsibilities. Throughout the years, it has sounded like most of them don't even bother reading legislation that they vote on. Not many read the Patriot Act. So what in the hell is the point of hiring them to begin with if they don't even see fit to read effing legislation that affects all of us so profoundly?

It feels an awful lot like we're inching closer to authoritarian capitalism now. And Lord knows we have authoritarian leadership.

The majority of us are against the war, have wanted Bush impeached, are against torture, don't want to be wiretapped, were against the Wall Street bailout, want nationalized health care, and support unionization. How come a national consensus on so many issues are ignored by our leaders? We don't have a say. They ignore us. They decide what they want to do, what garbage they want to impose on us, and what is done in the name of this country. That is authoritarian.

If we win the battle and become temporarily more egalitarian as a nation, it won't last long. Capitalism deadens our souls. Capitalism leads more fortunate people - and even less fortunate ones who aspire to the capitalist definition of "successful" - to become narcissists and oppressors, just like those at the top of the social ladder. Reinventing ourselves as a people is as necessary as reinventing capitalism. But how do we do that when frauds and narcissists rule our country and control all of our institutions?

If the big-time gloom-and-doomers are right and we're on the verge of losing our currency, it's hard to imagine that we'll be able to maintain democratic capitalism - provided that we move in that direction to begin with.
Thursday, 18 December, 2008  
 John Lawrence said...
Despite all the chaos in the financial markets, I still don't see any prominent person calling for significant reregulation such as reinstating Glass-Steagall, outlawing derivatives, outlawing speculation in the commodities markets, outlawing credit default swaps etc. etc. Meanwhile, we're treated to the spectacle of CalPERs, the world's large pension fund losing billions of dollars becaused it leveraged itself up to 80%. In other words it used public tax money to borrow even more money to invest in shaky investments. Now it has lost a ton of money and says it will have to tax the public more in order to make up the difference. REALLY! Is the public in a position to put restraints on CalPERs' investment strategies? This is part and parcel of the larger problem. The financial system has become so volatile, unstable and OVERLEVERAGED, it's like an electrical system with positive feedback. No regulation = positive feedback. Regulation = negative feedback. Stable systems have negative feedback.

When there is positive feedback, no one understands what to do when something goes wrong. People go running around like chickens with their heads cut off (Bernanke and Paulson) while other chickens are coming home to roost - the lucky ones that didn't get their heads cut off. Paulson demanded $700 billion of taxpayer money, a huge sum, and then didn't know what to do with it. In hindsight, Congress never should have given it to him and made it part of the national deficit and debt. As we've seen the Federal Reserve has given out 3 to 5 times that amount in secret. The Federal Reserve should have handled the whole thing from Day 1 making Paulson's $700 billion as unnecessary as it's become irrelevant to solving the problem (but not irrelevant to adding to the deficit and debt.) The Fed's function is to stabilize the banking system. Why did Paulson get involved? Stabilizing the economy has turned about to be a whole separate problem from stabilizing the banking system. Witness: there has been little or no benefit to the economy while banks have used bailout money for mergers and acquisitions and continue the odious practice of giving out bonuses (with bailout money furnished by the taxpayers.)

As for bonuses for executives, they should be outlawed. Just because these guys make millions of dollars a year, they deserve a bonus? Where's my bonus for working hard and making $30,000 a year as a self-employed contractor. There's no bonus here. Do teachers get a bonus? firemen? policemen? Why is it "normal" that Wall St executives and employees who have screwed the public royally still get bonuses? Let's have bonuses for painters, handymen, carpenters, appliance repair persons, window cleaners, gardeners, janitors and mechanics. Where are their bonuses? These guys make me sick. Taking bailout money and using it for bonuses.

And as for the price of a barrel of oil hitting record lows just after a hitting record highs a few months ago, is there any doubt that these price swings are caused by speculators and not the law of supply and demand? Speculators drove the price up; now they are driving it down by shorting it. Just like currency speculators drive the price of a currency down thereby causing whole countries to fail (e.g. Iceland), oil commodity speculators who caused untold damage to the American driving public by driving gas to over $4.00 a gallon are now causing the Arabs to sweat by driving the price of oil to unheard of lows much to the amazement and approbation of the American driving public. Again these kinds of price swings could be gotten rid of and sanity restored to the markets just by making certain trades and financial instruments illegal.

And that's not the worst of it. Wait till the hyperinflation that's coming to the US by virtue of Bernanke's bringing the interest rate down to zero. Then we'll be treated to the spectacle of the speculators making a run on the dollar just as they did on the Icelandic currency. Think it couldn't happen? Don't bet on it. Alan Greenspan thought everything that has already happenend to be "unimaginable." What next that the so-called experts never imagined could happen? A few rich people on the planet cornering all the world's wealth?

Never understimate the venality of the human race.

Check my blog at Will Blog For Food.

Forget Japan, America Could Soon Look More Like Zimbabwe - Contrarian Stock Market Investing News - Featuring Bargain Stocks

Quantitative Easing

Ben Bernanke is a big fan of going for the gusto too. The Fed is now embarking on an aggressive campaign of “quantitative easing,” much like Japan did earlier on – but with some important differences.

Stephen Jen and Spyros Andreopoulos of Morgan Stanley point out that, for the U.S. Federal Reserve, “quantitative easing” means three broad strokes:

The first two elements are already underway. The third has been all but promised by Ben Bernanke. Part of the reason treasury yields dropped to record lows – and prices soared to record highs – is because Bernanke has openly stated that the Fed may buy treasuries outright, targeting long-term as well as short-term interest rates.

Use It or Lose It

You can think of the Fed’s quantitative easing as a form of friendly blackmail to force savers out of cash and treasuries and back into productive lending and investing activities.

For banks, consumers and businesses alike, the strong temptation is just to hunker down amidst all this turmoil. Safe government bonds and money in the mattress – i.e. three-month Treasury bills and other cash equivalents – are the way to do that.

But if everyone hunkers down, the economy stays in the tank.

So the Fed in effect says, “We are going to penalize all you hunker-downers for holding onto T-bonds and cash. If you keep your money in dollars, you’re going to get burned as we flood the system with dollars. If you try to buy bonds, we’ll be in there buying too… pushing bond prices ridiculously high and long-term yields ridiculously low.”

It’s basically a question of “use it or lose it.” As we have stated before in these pages, inflation is a form of hidden tax. Through aggressive pursuit of inflationary monetary policies, the Fed seeks to tax the daylights out of dead money in order to get things moving again.

[Dec 21, 2008] So Now We Are Trying to Emulate Japan's Lost Decade-

US economists have relentlessly harangued the Japanese for their supposed mismanagement of their post bubble era, which has lead to nearly 20 years of low growth, borderline deflation, with a not-much-discussed, robust export sector.

Along with others, we complained in the early days of the Fed/Treasury emergency response that they were taking one of the worst elements of the Japanese playbook, namely, trying to prop up the value of dud assets, rather than figuring out how to do more price discovery and ameliorate the attendant reaction (not damage, mind you, the damage was already done when the bad loans were made). Yes, the Treasury has made some capital injections into banks, but without cleaning up the balance sheets, the benefits are limited. Even with supposedly more aggressive action on realizing losses, our banks act a lot like their Japanese pre-writedown zombie counterparts.

So in yet another "putting lipstick on a pig" initiatives, the authorities, having unwittingly copied the heretofore-seen-as-failed Japanese playbook, are now trying to reposition Japan as a source of valuable lessons.

Trust me, you would never have seen anything along these lines two year ago, starting with the title of the New York Times story "Japan Offers a Possible Road Map for U.S. Economy." Pretty soon, we'll have our very own Ministry of Truth (I kid you not, read the article).

From the New York Times:
The Bank of Japan kept rates near zero for most of the last decade in an effort to end a long economic stagnation, and raised them only two years ago. Many economists say they believe that the zero interest-rate policy finally worked in Japan after regulators took aggressive steps that succeeded in restoring faith in Japan’s financial system and Tokyo’s ability to oversee it.

Now, with the Fed and President-elect Barack Obama turning to the same sorts of unconventional policy tools to battle the worst global economic crisis since the Depression, economists and bankers say they hope that Japan’s lessons are not lost on Washington. They say the United States needs to take the same kinds of confidence-building steps, and much more quickly than Japan did....
Yves here. Why does this remind me of that phase of the Iraq war when the US claimed the problem was not how the war (notice how we never say occupation?) was going, but the perceptions of the war within Iraq, and launched a PR campaign? That was such an astounding success that it gets nary a mention these days.

Back to the article:
Economists and former Bank of Japan officials say the biggest lesson they learned was that cutting rates alone has almost no effect when the financial system has fallen into a crisis as deep as the one Japan faced in the 1990s.

Japanese banks simply refused to lend in an environment where borrowers could suddenly go bankrupt, saddling lenders with huge, unforeseen losses. The Bank of Japan tried even more extreme measures, like using its powers to create money to essentially stuff cash into the nation’s commercial banks in hopes they would start lending again.

Exasperated central bankers found that commercial banks just let the money pile up instead of lending it out.

Economists say the United States faces a similar situation, after the sudden collapse in September of Lehman Brothers created fears of additional failures. Economists also fault Washington for its inconsistency in dealing with the financial crisis, leaving the impression that it does not have a clear strategy for dealing with ailing lenders.

In Japan’s case, economists and former bankers say, credit began to flow freely again only after 2003, when regulators adopted a tough new policy of auditing banks and forcing weaker ones to raise new capital or accept a government takeover. Economists said the audits finally removed paralysis in credit markets by convincing bankers and investors that sudden failures were no longer a risk, and that the true extent of problems at banks and other companies was finally being revealed.

Economists say Washington needs to do something similar to make banks and financial companies more transparent, and reassure investors that there were no more collapses like that of Lehman Brothers on the horizon.

Yves here. The need for writedowns along with recapitalization was the lesson of the widely-touted Swedish approach, in the wake of its early 1990s financial crisis. But Sweden went even further. It nationalized dud banks, replaced management, spun out bad assets into an independent company. That entity was deliberately overcapitalized, It was able to do triage on borrowers, liquidating ones that were goners, but more important, restructuring loans and often extending new credit to ones who looked viable.

Back to the Times, this time for comic relief:

Economists and former central bankers said another lesson from Japan’s experience was the importance of consistency. This became apparent in 2000, they said, during one of the bank’s more embarrassing episodes, when it raised interest rates, and lowered them back to zero a year later when the economy faltered.

It's a little late to worry about consistency....

Selected Comments

Stevie b. said...
Further real food for thought here:

December 20, 2008 3:03 AM

 ndk said...
FWIW, I imagine Sweden's problem was way smaller than ours; if their approach were feasible in our current situation, hopefully Geithner and Paulson would've utilized it despite ideology. Right? ...

Anyway, I'd like to see more nuanced discussion about the situational differences and similarities rather than these broad-brushed, oscillating statements.

Since I'm cross by nature, I focus on the most interesting contrasts I see between the U.S. and Japan, which include domestic savings, current account balances, and the external climate. Because the contrasts are so significant, I hesitate to draw excessive parallels between our zombieconomy and their zombieconomy.

On the policy side, the US' interest rate moves are actually not dramatically faster than Japan's were, and have been proven largely irrelevant anyways. The real policies tested here will be quantitative easing and fiscal stimulus -- again. While Japan tried both with mediocre results, their reflationary efforts were very small by comparison. Still, very little evidence was found for any successful transmission in the Japanese case, beyond lower short- and medium-term nominal interest rates. Just check their land price charts.

"While the transmission channels cannot be specified, analyses find that the QEP had the effects of dispelling the funding concerns of financial institutions.... The results show limited effects on raising aggregate demand and prices, despite realizing more monetary easing than from merely reducing the uncollateralized overnight call rate to zero percent."

Second verse, same as the first; a little bit louder, and... ? Back to the NYT:

Many economists say they believe that the zero interest-rate policy finally worked in Japan after regulators took aggressive steps that succeeded in restoring faith in Japan’s financial system and Tokyo’s ability to oversee it.

I don't buy it. First, there was only a brief recovery in '05 and '06. Secondly, there couple external factors that may have helped temporarily reflate Japan, factors known as their export sector matrixed against global tech and commodity bubbles and consumerism.

They're falling back into the pit as I type, and the BoJ's recent monetary policy meeting ran way long, which I find both hilarious and more encouraging than our uniform consensus.


December 20, 2008 3:14 AM

 Yves Smith said...

I differ with you 100% on Sweden, It was barely getting any mention in the media or academic/economic blogs until very late in the game, which I am pretty sure is indicative of the attention it was getting in policy circles.

Paulson has been unwilling to impose ANY meaningful restrictions on banks relative to the TARP, which is as close as we have gotten to Sweden. He gave a conference call (for analysts, not media, but it was recorded and posted) and he made clear that even the modest restriction in the bill were mere cosmetics that were not meaningful in operation. That was clearly seen as a good thing.

And even if Paulson had been willing to nationalize banks (highly unlikely), Bush would not have backed it. Particularly pre-election.

I've read a lot of Geithner's speeches, he is the textbook example of Buiter's "cognitive regulatory capture." Constitutionally unable to see that the industry needs to be leashed and collared, for its good as well as the public's.

December 20, 2008 3:32 AM

 Michael said...
Ha! I just read the NY Times article and said to myself, "What a load of CRAP! I wonder what Yves has to say about it..." And lo! Thanks for reaffirming my well-placed faith in you to continue to talk sensibly in this otherwise fog of nonsense.

December 20, 2008 3:32 AM

 bg said...

you raise the question that has been gnawing at me from the beginning. I built my belief system on the propaganda of the past: the Japanese were unwilling to write off their post bubble assets because the government was too close to the business community (Japan Inc.)

I really believed that the 'anglo-saxon' model was a modern equivalent of economic darwinism.

So it seemed so utterly obvious to me that we would let the bastard assets fail. I had to learn (from you and others) that government had a role in crisis, and thus the swedish model came as the most anglo-saxon form of this socialist deal with the devil.

But something went really wrong. You do an excellent job of shining your flashlight on the evidence (now the NYT is carrying who's water?) but that is not scratching my itch.

Why? Why? Why?

I am not buying into the conspiracy theory of regulatory capture/Goldman sachs borg government. (Although it is the best standing explanation).

My best hunch is that war plan is obsolete upon first contact with the enemy, and that warriors quickly move to the solutions with the fewest unknowns. In this case they are simply hoping to put humpty dumpty back together by pouring cash into failed businesses. Everything else is too murky for them to comprehend.

I actually would prefer a conspiracy explanation. At least then I could be angry at somebody.

December 20, 2008 3:37 AM

 Yves Smith said...

Sorry for sounding cranky, I am SO upset with how the officialdom has comported itself that I overreact when its conduct is defended.

They really were massively behind the curve (not to abuse that cliche). They made NO effort to get a grip on the nature and depth of the crisis (it would have taken a full bore effort, with lots of data gathering and analysis, given how many opaque OTC markets were involved).

Instead, they had emergencies, went into emergency response, and assumed everything had been solved until the next crisis erupted. They were not considering large-scale, systemic responses until the Sept. 2008 meltdowns.

December 20, 2008 3:39 AM

 Yves Smith said...

One of my favorite sayings is "Never attribute to malice that which can be explained by incompetence."

We had the Bushies, not exactly known for high executional skills, and a Fed full of otherwise bright people badly blinded by ideology. A toxic combination.

December 20, 2008 3:42 AM

 bg said...
yes, I would be happy to blame it on bad group think, except:

1. Obama picked Geithner (which feels eerily like FDR rebranding Hoovers experiments as the new deal)
2. Krugman is on board.
3. There is no screaming from the economists at Harvard, Chicago...

December 20, 2008 3:50 AM

 ndk said...
I differ with you 100% on Sweden, It was barely getting any mention in the media or academic/economic blogs until very late in the game, which I am pretty sure is indicative of the attention it was getting in policy circles.

It wasn't trotted out publicly as a solution, you're right. You ascribe that to pure ideology, and there's a strong foundation for that. But there was some real noise. It's such an obvious analogy that it can't have been dismissed out of hand. We also had our own RTC, which was under Bush the Elder. There's no way it wasn't considered at all. It may have been rejected for cultural reasons, and Paulson has had pretty strong control. No way to know.

But I think there's a lot to Rogoff/Reinhart's "only more so". We're unable to put FNM/FRE on Treasury's balance sheet. Why, when they were created by the USG? Is that just cognitive bias too? Could we really put C/JPM there, beyond the extent to which we've already implicitly done so?

I still think a strong reluctance to endanger the Treasury and create an upward impulse to interest rates is a more important factor than anyone admits.

December 20, 2008 3:51 AM

 ndk said...
Sorry for sounding cranky, I am SO upset with how the officialdom has comported itself that I overreact when its conduct is defended.

I come here explicitly for cranky. Please, feel free to unload. :P

"Never attribute to malice that which can be explained by incompetence."

I'm also very cautious about assigning incompetency to others who have much greater data, resources, and knowledge than I do, regardless of bureaucracy or prior demonstrations of idiocy. There are often very good reasons for doing transparently stupid things.

?! is my favorite chess annotation, by far.

yes, I would be happy to blame it on bad group think, except:

1. Obama picked Geithner (which feels eerily like FDR rebranding Hoovers experiments as the new deal)
2. Krugman is on board.
3. There is no screaming from the economists at Harvard, Chicago...

You missed the memo, bg. We're all Keynesians when running massive fiscal deficits to our benefit is a plausible argument.

December 20, 2008 3:58 AM

 Anonymous said...
cognitive regulatory capture to cognitive media capture to cognitive capture of political representation to cognitive academic capture to...

Not exactly an enormous leap of admittedly fallible logic. We've had enormous bust-outs, naked breach of contract, misrepresentation, price-fixing/collusion, concentration, war profiteering, influence-peddling...

To speak of officialdom as "behind the ball" is gross understatement. To say as BG does that it is merely a move to a solution that requires the fewest unknowns (a valid, but limited explanation) is generous.

Further to the point, if "Never attribute to malice that which can be explained by incompetence" holds true, would one ever properly attribute malice? Would the temptation to adopt a more cognitively-resonant, career-friendly conclusion guarantee the result?

Oh how I yearn for the days of partisan, subscription-funded papers. At least we could be certain of press malice.


December 20, 2008 4:07 AM

 Yves Smith said...

I still keep coming back to one basic point (and forgive me for harping): there was NO effort to get a comprehensive view what was afoot. Having frequent chats with interested parties is NOT the same as a Brady Commission style investigation. And as I have groused before, the 1987 market meltdown was a piece of cake, analytically, compared to this mess.

You cannot make competent decisions lacking a good understanding of the situation at hand (at best, you might get lucky). Instead, we have treatment by analogy (to the Great Depression and Japan) without even much consideration that the situation of the US now differs markedly on important axes from either situation. And that's before we get into how different the financial markets and institutional arrangements are.

What they did was tantamount to launching a war without having even a map of the terrain or doing reconnaissance.

December 20, 2008 4:08 AM

 ndk said...
What they did was tantamount to launching a war without having even a map of the terrain or doing reconnaissance.

They may have tried to map out general implications of explicit Swedish action, and judged the risks there to be less than those of the other route.

A cursory understanding of the shape of the blob is possible, but who can possibly understand our financial system's opaque and convoluted internals? I hate to drudge up the past, but do you feel confident anyone could know ex-ante what would happen with a LEH bankruptcy? I sure didn't anticipate such carnage, and despite some protestations that they had no buyer and few options, I suspect the Fed and Treasury didn't either.

Fear of unintended consequences, particularly after encountering unintended consequences, is an excellent way to found a zombieconomy. I have no idea what would happen if the Treasury officially blessed FNM/FRE with full-faith-and-credit.

So, I don't blame our overlords for not having a good map of this terrain. I certainly blame them for letting the terrain get this fluid and warped in the first place. Regulators and policymakers royally f'ed up for at least 10 years solid leading up to this and probably longer than that. A regulator utterly losing control of the situation is truly inexcusable.

December 20, 2008 4:23 AM

 bg said...
so we have it down to three arguments:

YS: They didn't even try, because they already had an ideologically based framework.

BG: They had to do something, so they did the simplest thing.

NDK: They know something we don't.

"there was NO effort to get a comprehensive view what was afoot"
- that is consistent with all 3 theories.

"We're all Keynesians when running massive fiscal deficits to our benefit is a plausible argument."
- that sounds consistent with my argument (simplistic)

I feel group decision making, organizational intellegence and historical memory are poorly studied, and we the same patterns of decision making that got us into the crisis are continuing despite clear understandings of the consequence. (this is why I dislike my hypothesis)

If economies are naturally unstable, so must be societies.

December 20, 2008 4:32 AM

 Anonymous said...
Imagine if Paulson and Bernanke were planning the Normandy invasion. The Allies would be doomed. They can't even plan 2 weeks ahead. What is their plan for all rest of the big players that are insolvent? Do you think they really have a plan? The good news is that if we keep lowering the bar enough, we are guaranteed to suceed! :-)

December 20, 2008 4:33 AM

 Yves Smith said...

Lehman is the poster child of the Fed/Treasury's failure to do adequate information gathering.

The reason they let it go was they assumed that it has only a $10 billion hole in its balance sheet, and was not a big CDS writer (like Bear) and therefore could be sacrificed.

But Lehman also nearly went under when Bear did. Morgan and UBS were next on the watch list. The Fed and Treasury went through a mad weekend scramble trying to figure out where Bear stood and came up with a very crude number. At first, everyone though JPM did a great job of snookering the Fed with the $29 billion backstop. Dimon later (six weeks or so later, when the dust started to settle and he had spent some time with the operation) told everyone who would listen that he regretted buying Bear.

I don't think this was to divert negative press about the backstop. The media had moved on. I think he found the losses were worse.

Regardless, having been put through that weekend, knowing other banks were vulnerable, it should have been top priority to get a better grip on the real solvency of these banks.

The reason that Lehman produced such nasty knock-on effects was it had a $100 billion hole in its balance sheet, not the $10 billion that the market, and the authorities assumed. As far as I am concerned, its public financial statements were a fraud and Fuld should be in jail. The regulators were COMPLETELY asleep at the switch, and after the Bear meltdown, this was INEXCUSABLE.

The Treasury did send teams (subcontracted from Morgan Stanley) into Fannie and Freddie. There are independent boutiques who do forensic work on trader frauds (including ones involving derivatives) could have done the same for Lehman (and you'd have to to GS and MS to keep from tainting Lehman).

December 20, 2008 4:38 AM

 bg said...

"I hate to drudge up the past, but do you feel confident anyone could know ex-ante what would happen with a LEH bankruptcy? "

I remember that weekend like it was yesterday. Time slowed down like it would in a car crash.

Look into the history. Yves said 2 things (I paraphrase):

1. she predicted Paulson would let LEH fail.
2. she predicted armegeddon(not her words), but admittedly was not very specific about which buildings would get destroyed by which tornado.

I think there were plenty of people in the know about the interconnectedness of the financial system, and how the dominoes would have to fall - worldwide. Besides Yves, there is Roubini, Krugman, Buiter, Evans Prichard.

I was actively short Lehman based on writings from the above list, and was incorrectly trying to fill in the gaps on the order of the chips falling. (I must have missed the AIG memo.)

There was an active cohort who understood the train wreck unfolding.

keep listening to them. I am.

December 20, 2008 4:46 AM

 ndk said...
Lehman is the poster child of the Fed/Treasury's failure to do adequate information gathering.

The reason they let it go was they assumed that it has only a $10 billion hole in its balance sheet, and was not a big CDS writer (like Bear) and therefore could be sacrificed.

I think the Fed and Treasury were much less cavalier than you do. Here's some excerpts from a contemporaneous account:

Policy makers fear its losses could ripple through the financial industry at a time when banks and securities firms are trying to overcome $500 billion in write-downs.

One observer briefed on the situation described the session as a “game of chicken” between the government and the heads of the major banks....

If there are no bidders for Lehman Brothers, these banks say they can collect their collateral and liquidate the troubled firm’s assets.... Mr. Geithner, who led the session, firmly stood his ground. He told the banks that this was about fixing the system and preventing the crisis from worsening.

Even back in October it was clear that the hole was an order of magnitude larger than $10b.

I can't believe based on this information -- and you know I'm no defender of Geithner nor his bailouts -- that the Fed didn't have some inkling the situation was really bad. I think they still underestimated the degree of bad, and the others in that process underestimated it far more.

December 20, 2008 4:55 AM

 bg said...
"The reason that Lehman produced such nasty knock-on effects was it had a $100 billion hole in its balance sheet, not the $10 billion that the market, and the authorities assumed"


It was commonly known the extent of LEH level 3 assets, and also the mark-to-market rate that most of those assets were getting in the market (thanks to MER). I did simple math then that the hole was bigger than Bears, and the $30B was the likely size of Bears hole.

I know that I am not as smart as that last paragraph sounds (i.e. I really had no special knowledge of the particulars). I also remember that there was still an active dispute about whether mark-to-market represented value or distress.

People in the know HAD TO UNDERSTAND that 10B was not the size of LEH hole. Of course there are lots of people who believed Madoff and Fuld, but Paulson had access to provable data. he had to.

December 20, 2008 4:56 AM

 ndk said...
I remember that weekend like it was yesterday. Time slowed down like it would in a car crash.

Look into the history.

Yep. She had the best coverage by far, bg, and did an excellent job. That's why I raise her coverage old posts as the best example that it really wasn't possible to judge what would happen at that time.

Nevertheless, it's quite clear that Fed and Treasury were fighting the hardest to make something happen. The banks were the most cavalier, and as you note, anyone with any clue could see things were quite a bit worse than $10B.

December 20, 2008 5:09 AM

 Anonymous said...
I don't acccept the incompetence theory. Nor regulatory capture. What I think makes most sense and explains everything past, present and future is public purpose, which by definition is the reverse of private (you, me, and every other non-state actor). Minus the Treasury backstop and Bear would have been wound up without hurting JPM. Minus the bailout and AIG's criminal fraud would have crashed the CDS pyramid. Minus the full faith and credit scam, GSEs would not have enabled the MBS nonsense.

We're at the stage where all the bridges have been burned. There are no private actors left standing. We turned Swedish or maybe Labourite British. Next stop nationalization, starting with GM.

December 20, 2008 6:51 AM

 Lim said...
Yes, thank you very much Uncle Sam for saving the world by using your balance sheet to pay for the bills chocked up by players at the poker table. And by the way, in case you do not know that your bankruptcy is drawing closer, you might want to just start spending the other $3 trillion that you do not have.

December 20, 2008 7:09 AM

 Anonymous said...
so we have it down to three arguments:

It's probably a confluence of factors. But I think ideology was and is the primary driver. The original TARP proposal is the best evidence. There was not even the least pretense to sharing the pain in the text, or holding anyone responsible, or being subject to any kind of oversight. It was not the proposal of a group of people who believe in good governance, just raping the taxpayer.

I had some hope that the Obama administration would apply the "Swedish model" to current situation. But the group of insiders he has assembled for the economic team has pretty much eliminated it. It's important to have people who are familiar with the system in the mix, but some less conventional thinkers (or more conventional as "innovation" is what got us in this mess) are need at this critical time.

My outstanding question is still whether or not Bernanke really believes in the general approach taken so far, or if he has just been trying to do whatever he can within the context of the Bush administration.

December 20, 2008 8:06 AM

 donebenson said...
A wonderful post and comments by Yves and BG especially. Thanks very much.

The only way I might differ a little is to wish they had let AIG go under along with Lehman, then nationalize the banks [but too big a philosophical step] and write off all the bad assets, and start fresh. I have to agree with Yves that we are following in Japan's footsteps.

December 20, 2008 8:07 AM

 Anonymous said...
Japan's lost decade is the best possible outcome for the US and probably the best that can be hoped for. Zombie corporations and government supported industries sucking the life out of profitable real economy. Cronyism, corruption, money printing, and impoverishment of the working class.

December 20, 2008 8:08 AM

 Sandi Rubinspan said...
Beware the Treasury-Financial Industrial complex. The hallmark of the swaggering government of Cheney/GWB/Greenspan is the delusion that these guys are industrialists who arrived just in time too save America from the socialist tendencies of the FDR America. Of course, these phonies owe their wealth and power to their status as bureaucrats, who were purchased by industry.

This idealogy has been carried into the rescue operations, where the banks are seen as the fundamental, wealth creating cornerstone of the economy, repeating the Japanese mistake. The value of the banks extends only to their ability to be a super trustworthy conduit of efficient money allocation to the real, consumer and saver based economy.

Supply side economics should, by now, have been exposed as idealogically bankrupt. The credit bubble was the Fed and Treasury response to the worst of the Japanese mercantilist exports to the rest of the world, deflation. The toxic combination of mercantilism and credit has created hyper-leverage through the carry trade.

The deflation of the trade deficit has overwhelmed the income, and now the accumulated wealth, of the US consumer. Keynes recommended stimulating consumer demand in the trade surplus countries, savings and austerity in the deficit countries, and depreciation of the deficit currency to reverse the import/export imbalance. The trade imbalance must be addressed.

The idealogically-based battle to delay inevitable equilibrium rebalancing of the twin deficits is the fundamental underpinning of todays economic plight. The fertile ground of ten years of fiscal, monetary, and regulatory stimulus has spawned a malignancy so powerful that it is bringing the world economic system to it's knees.

We are back to trying to recreate the "new deal" which began with disinfecting the putrified banking system, instituting financial regulation that protects the industry from itself, powerful progressive taxation to protect the wealthy from themselves, and restoration of middle class income and savings wealth, the true foundation of American and world wealth.

Thank you, Yves.

December 20, 2008 8:22 AM

 Anonymous said...
Is this discourse the narrowing of focus, to define the actions of all involved and assign a value to them. I feel, it is just as important to define the personality's both individual and group/culture in this case. There seems to have been quite a few enablers to the effect, finance markets and the political landscape are experiencing. Almost as if they were of the same family and shared genetic/environmental pre-dispositions.

To me this is much more than a monies matter, which is just a side effect of the actual disease.

Wall St and DC are very small towns and as some know, there are very few secrets in a small town. So what was the impetus to play small time with the coming calamity. All the indicators were out there for all to see many years ago, yet all that had the power/influence looked the other way or only gazed at it obliquely. I can only conclude that they knew but, decided to rake as much in as they could, to be stored away as lifestyle retention.

I see very little in common with Japans condition and ours. Their landmass/population create a completely different set of problems than ours, not to mention history/culture. So i find little help in looking that way. We need to find our fix, designed not only to remedy the banking sector but, to reinvent the way we view our selves (unity/common cause). Kennedy understood this concept sans the Russian component. Why not go to Mars now or set up the moon base and build infrastructure. It would require large factory's, science MBA/PHD and skilled workers, hint Auto industry. Also this would help off set the decline in the Military industrial sector. The human spirit is a funny thing, if it is allowed to whither in a climate of detersive self-ism it has no direction. Where if given the chance to see a goal that all can contribute in will grow and enrich life for all. Lets get outside the box in a big way. We can do infrastructure and go to Mars. Bring everyone in China, Japan and Europe, everyone. We are the original explorers you know, its in all of us.


December 20, 2008 8:48 AM

 Anonymous said...
As long as they keep playing with currency, interest rate, core asset pricing, nobody will know what the actual market sustained price of those thing. As a result

a) everybody has to prepare for wild price gyration. (look at currency and loan cost) That means draining even more cash from already weak sale. Or worst: people simply wait it out.

b) nobody can calculate what is the price of anything (fuel, shipping, currency, raw material, etc)... Are they going up? are they going down by a lot? What will my competitors do? Will market able to absorb the price fluctuation?

I think what they should have done:
1. Let price of base asset/banks falls to real market supported.

2. close down those scam hedge funds and CDs.

3. Give workers temporary relief while price reequilibrate.

4. Once things equilibrate. Then start "bailing" out. because at this point the system is stable and we know who need what precisely.

December 20, 2008 10:10 AM

 a said...
"Once things equilibrate. Then start "bailing" out. because at this point the system is stable and we know who need what precisely."

Exactly! Let the dust settle and then start bailing. Much less effort and resources are wasted. What we have now is a defense of the interests of the bailers (to stop bailing now would be an admission they were wrong hitherto) and the elite (who want to protect their particular place in the sun).

December 20, 2008 10:28 AM

[Dec 21, 2008] New York Times Pulls Punches On Wall Street Bubble Era Pay

naked capitalism

Why is no one willing to call things by their proper names, and instead resort to euphemism and double-speak?

A New York Times story today, "On Wall Street, Bonuses, Not Profits, Were Real," makes its most important point in its headline, and managed to get some good data points on how rich investment bank compensation was in the peak years, but otherwise glosses over the fundamental nature of what went on.

It was looting, and it is high time the media starts describing it in those terms.

Let us turn the mike over to Nobel Prize winner George Akerlof and Paul Romer. From the abstract of their 1993 Brookings paper:

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

Bankruptcy for profit occurs most commonly when a government guarantees a firm's debt obligations. The most obvious such guarantee is deposit insurance, but governments also implicitly or explicitly guarantee the policies of insurance companies, the pension obligations of private firms, virtually all the obligations of large or influential firms. These arrangements can create a web of companies that operate under soft budget constraints. To enforce discipline and to limit opportunism by shareholders, governments make continued access to the guarantees contingent on meeting specific targets for an accounting measure of net worth. However, because net worth is typically a small fraction of total assets for the insured institutions (this, after all, is why they demand and receive the government guarantees), bankruptcy for profit can easily become a more attractive strategy for the owners than maximizing true economic values...

Unfortunately, firms covered by government guarantees are not the only ones that face severely distorted incentives. Looting can spread symbiotically to other markets, bringing to life a whole economic underworld with perverse incentives. The looters in the sector covered by the government guarantees will make trades with unaffiliated firms outside this sector, causing them to produce in a way that helps maximize the looters' current extractions with no regard for future losses...."
Re-read the key phrase: "pay themselves more than their firms are worth and then default on their debt obligations." This has happened en masse in what formerly were investment banks who have now become wards of the state.

But no one is willing to call this activity for what it was. In fact, some are still urging that we not squelch "financial innovation," which Martin Mayer described as
... a way to find new technology to do what has been forbidden with the old technology....Innovation allows you to go back to some scam that was prohibited under the old regime.
But we digress. Dick Fuld reportedly spends much of his days allegedly wondering why he didn't get a bailout. He should instead be thanking his lucky stars he is not in jail. Bankruptcy fraud is criminal, and fraudulent conveyance is subject to clawbacks. How could Lehman possibly have been producing financials that showed it had a positive net worth, yet have an over $100 billion hole in its balance sheet when it went under? No one has yet given an adequate answer on where the shortfalls were.

Commonwealth countries have a much simpler solution. If a company is "trading insolvent," that is, continuing to do business when it is in fact broke, its directors are personally liable.

We have said repeatedly that one of the triggers for the crisis was permitting investment banks to go public (prior to 1970, no NYSE member firm could be listed). We had dinner with one of our long-standing colleagues who was responsible for Sumitomo Bank's investment in Goldman Sachs and had (and continues to have) close and frequent dealings with the firm. He said that the change in the firm's behavior after it went public was dramatic. Before, it would deliberate (one might say agonize) important business decisions,. Waiting two years to enter a new field was not unheard of. But after the partners cashed in and were playing with other people's money, the firm quickly became aggressive in its use of capital in expanding the size and scope of its activities.

[Dec 17, 2008] How efficient markets theory gave rise to policy mistakes By Sushil Wadhwani

"Clients frequently tell me they are puzzled that policymakers allowed such a significant crisis to develop. Their incomprehension is deepened by the recognition that, in recent years, many countries made their central banks independent, and these are typically run by people with formidable reputations as academics. I wonder whether a common thread running through many of the policy mistakes is a belief in the efficient markets hypothesis (EMH). "
December 17 2008  |

Clients frequently tell me they are puzzled that policymakers allowed such a significant crisis to develop. Their incomprehension is deepened by the recognition that, in recent years, many countries made their central banks independent, and these are typically run by people with formidable reputations as academics.

I wonder whether a common thread running through many of the policy mistakes is a belief in the efficient markets hypothesis (EMH).

Over the past decade, while the bubbles were emerging, it was frequently argued that central bankers had neither more information nor greater expertise in valuing an asset than private market participants. This was often one of the primary explanations for central banks not attempting to "lean against the wind" with respect to emerging bubbles.

As I argue in my recent National Institute article, it is likely that, had central banks raised interest rates by more than was justified by a fixed-horizon inflation target while house prices were rising above most conventional valuation measures, the size of the eventual bubble would have been smaller. At least as importantly, because of the fear of being seen as "market-unfriendly", fiscal and regulatory policy did not lean against the wind either. Our economies would plausibly have exhibited greater stability if tax policy had been used in an anti-bubble fashion (eg a counter-cyclical land tax) and if regulatory policy had been more activist (eg a ceiling on loan-value ratios) and contra-cyclical (eg time-varying bank capital requirements).

Once the recent bubbles burst in 2007, some central banks (including many of those in Europe) were surprisingly slow to cut interest rates, and this policy mistake may well lead the current recession to be longer and deeper than it might have been. One reason for their reluctance to cut interest rates was the significant rise in commodity prices. In relying on the EMH yet again, policymakers used longer-dated futures prices for these commodities in preparing their inflation projections. Their failure to allow for the then widely discussed possibility that a "bubble" had developed in the commodity markets thereby led them significantly to overestimate prospective inflationary pressures.

Recently the Nobel laureate George Akerlof has, with Robert Shiller, argued that Keynes's explanations for excessive financial market volatility and depressions relied importantly on the possibility that individuals can act irrationally and for non-economic reasons. However, modern-day "Keynesian" models of the economy typically ignore this essential insight and can therefore be a deficient tool for setting policy. Personally, I find this neglect of Keynes surprising as at least some fund management companies (including the hedge funds I help manage) assign an important role to this insight in their investment process.

This failure to incorporate the role of what Keynes described as "animal spirits" might well have permitted the naive belief that recapitalising the banks would lead them to lend again. Once "confidence" has evaporated, banks will not lend however well-capitalised they may be. Unsurprisingly, governments are now having to explore other ways of making banks lend, and one has to wonder whether they might be driven to full-scale nationalisation.

Of course, because of "animal spirits" one can find that monetary policy becomes surprisingly ineffective in slumps. Hence, although it is laudable the Bank of England has cut UK interest rates significantly in recent months, we should all have been much better off if it had reduced rates more pre-emptively. Now we will need so-called quantitative easing - with, perhaps, the Treasury guaranteeing assets acquired by the Bank.

This financial crisis should not have surprised anybody: financial history is littered with examples of bubbles, manias and crashes.

The main lesson is that our monetary, fiscal and regulatory policies must be designed to protect the many innocent people in the rest of the economy from the consequences of excessive financial market volatility.

(The writer is chief executive of Wadhwani Asset Management and a former member of the Bank of England's monetary policy committee FT Syndication Service)

[Dec 17, 2008]  Made Living in fear of layoffs

The Mess That Greenspan Made

One of the nice things about having exited the rat-race, no longer toiling for "The Man" as one long-time friend commented upon my departure from the work-a-day world almost two years ago, is that living in fear of layoffs is no longer an issue.

If there was one career-long complaint over my 23-years as a cubicle-dweller, it was that the threat of layoffs was almost always there.

For probably 16 or 17 of those 23 years, there were either reductions in force, salary freezes, salary cuts, furloughs, or some other action taken by the company to deal with changing business conditions.

First it was the end of the cold war in the late-1980s when Southern California aerospace companies slashed payrolls and sent thousands to the unemployment lines as the first Southern California housing boom was peaking.

Cutbacks in defense jobs went on for most of the 1990s, but never did anyone come knocking on my door to give me any bad news. At one time I was told I had nothing to be concerned about - when your boss tells you they'll be handing you the keys to lock the door behind you when you get laid off, you have a pretty good idea that you're not high on the list.

That doesn't stop you from worrying, however, after the guy next to you is shown the door.

In the late-1990s, things got so bad that, after hearing about others doing this sort of thing, I actually volunteered for a layoff and was granted the request (along with the generous severance). I was able to save the job of a nice 70-something fellow who, for whatever reason, didn't want to stop working.

The ink on the layoff paperwork was still drying when I began work for a technology company just in time to be granted stock options at now-laughable prices. Soon after, a whole new round of cutbacks associated with the bursting of the internet stock bubble began

... ... ...

The threat of being let go surely makes some employees work a little harder so their value to the company is made more clear, but at the same time, living in fear is not an optimal way to go through your career.

On the other hand, the sense of entitlement becomes all too common, particularly for those marginal workers who have stuck with a company for decades with the perception of their value to the company gradually parting ways with the views held by management over time.

In these cases, a little fear might do some good.

Anyway, a whole new wave of layoffs is now underway.

Thankfully, there's no need to worry this time.

[Dec 17, 2008] The dollar is in freefall

"The bigger one is that the Fed is misleading investors into the biggest bubble of all time. Bernanke is making what learned economists call a “time-inconsistent” promise to hold interest rates at ultra low levels for an extended period."
FT Alphaville

That’s just what Ben Bernanke needs - a full scale panic out of the dollar. That would indicate the outside world believes the policy of quantitative easing will fail.

At moment’s like this we like to consult John Kemp, the former Sempra economist who has installed himself at Reuters as a columnist. He doesn’t disappoint:

Like the sorcerer’s apprentice, Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan have unleashed a series of ever-larger asset bubbles they cannot control. Now the Fed’s decision to cut interest rates to between zero and 0.25 percent, coupled with a promise to keep them there for an extended period, and the threat to conduct even more unconventional operations in the longer-dated Treasury market risks the biggest bubble of all, this time in U.S. government debt.

Kemp notes that there are four parts to the Fed’s “unconventional” monetary strategy:

What can be learned from the banking crisis vox - Research-based policy analysis and commentary from leading economists by Hans-Werner Sinn

December 17,  2008 |

This column says the core of the crisis lies in the legal provisions of limited liability. Europe and the world need stricter rules for financial traffic which are vital for the functioning of the financial capital markets.

Now that the countries of the west have agreed to a three-trillion dollar bailout programme to rescue their banking systems, it is time to look forward and to draw lessons from the crisis. To do this we must understand the causes of the crisis.

The claims that the model of American capitalism has self-destructed are just as misguided as putting the blame on the greed of investment bankers and other groups in society. They only touch the surface of the problem.

The core of the crisis lies in the legal provisions of limited liability. Creditors of corporations have no claims against the personal assets of the owners (shareholders) of these corporations. These liability constraints lead to a systematic disregard of disaster risks – occurrences with only a slight probability bring about gigantic losses. Investors that opt for high-risk projects with high potential gains and losses instead of safe projects with similar average profits can expect to gain, since they only have to bear a portion of the possible losses. If things go well, investors reap the full profit. If things go badly, at worst their losses would be limited to the stock of equity invested, because claims against private assets have been ruled out. This asymmetric situation encourages bold behaviour and risk-taking.

The conclusion that the limited-liability constraint should be eliminated would be too rash, however, because risk-taking also has its merits. Limited liability was introduced in the nineteenth century in the US and Europe in order to avoid uncontrollable burdens being placed on equity holders and to enable entrepreneurs to make enterprising economic decisions that they otherwise would not have had the courage to make. It brought about the productive forces that have created the wealth of today’s generations.

In times of great economic insecurity, however, limiting liability can become a problem because it induces entrepreneurs to become gamblers. As always it is a matter of weighing up the advantages and disadvantages and finding the proper middle ground. The problem of gambling is particularly serious when corporations are allowed to determine the extent of their liability themselves by choosing the ratio of equity to business volume as they see fit. Then they tend to operate with too little equity and distribute to their shareholders too large as fraction of their profits as dividends. The five large US investment banks, of which three have already fallen victim to the crisis, unscrupulously pursued this strategy, their motto being that you can’t lose what you don’t have. The risks created incentives to minimise the stock of equity kept inside the firms, and the small amount of equity capital in turn created incentives to pursue overly risky operations. The interplay of these incentives is the actual cause of the crisis – and this is where reform must begin.

The privilege of limited liability is not a creation of the market; it was granted by the legislator, and because this is the case, the legislator himself must define his real intention. He cannot allow the beneficiaries themselves to make this definition. If they can, they will define the limitation in such a way that they assume almost no liability, as we have seen. US investment banks, which were not subject to American bank supervision, practised their business with equity-asset ratios in the region of 4%, which is much lower than the rate at which private commercial banks operate. In addition, they carried out very complex credit operations outside of their balance sheets, placing them thus away from investor control.

Some may point out in defence that gambling is prevented by the rating agencies. They argue that rating agencies give poor ratings when risks are excessive, forcing the banks to pay higher interest for the money they themselves have borrowed. In this way, so the argument, the market corrects itself and creates the proper amount of caution. The miserable failure of the rating agencies during the present crisis shows, however, how illusory this reasoning is. The agencies did not give sufficient warning, and their AAA ratings were only withdrawn when there was no other alternative. Since they live on the fees they collect from the financial institutions they rated and were dependent on their good-will, they could not afford to tell the truth. The nearly bankrupt major customers of the rating agencies in America were glamorised while comparably robust but smaller customers in Europe were downgraded. This is also how the credit packages with claims against American homeowners, which were already in risky territory, were offered to the world far above value.

The best proof that the rating agencies and other information channels do not function and are not able to reliably inform purchasers of bank bonds and credit packages about the true circumstances lies in the fact that on the capital market equity capital is always more expensive than debt capital. If the purchasers of bank bonds had been correctly informed about the true repayment probability, they would have demanded adequate risk premiums on interest or sufficient reductions in the prices of these bonds, which would have made these liabilities just as expensive for the banks as equity. Finance theory designates this finding as the Modigliani-Miller theorem, after its authors. But this theorem fails to match reality. Everyone uses the leverage effects of debt capital up to the limit that the rating agencies establish in order to achieve higher yields from equity capital. Whoever does not do this and instead raises his equity-asset ratio to increase repayment probability is not rewarded for his virtue by the capital market.

Bank bonds and securitised risks are entwined in a cascade of interlinked legal claims at whose end there is somewhere a real investment project. These are products that even specialists cannot properly appraise. The purchasers are almost never able to assess the true repayment probabilities correctly. Only the sellers that assemble the securitised packages have some idea of what they are selling. In the language of economists, these bank products are lemon goods, that is goods whose quality can only be partially assessed by the customers at the time of purchase and for this reason are usually offered at inferior quality. The sellers exploit the customers’ lack of information by reducing their costs at the expense of quality, knowing that the customers are not able to punish them by refusing to purchase or by demanding price discounts. Quality declines below the quality that would prevail in a market of informed customers. In order to prevent lemon markets, most countries have, for example, food regulators who set the lower limits for quality in food in the form of upper limits for unhealthy ingredients. In the case of pharmaceuticals, quality is safeguarded by the licensing procedures. The loans given to homeowners in the US – and that ended up as mortgaged-backed securities and collateralised debt obligations – are lemon products. In America higher rates of indebtedness are more common than in Germany. But the banks do not have the same claims to the private assets or income of homeowners than in Germany. If a low-income US homeowner chooses, he can hand over his house keys to the bank and has no repayment obligation. Conscious of this limited liability, US homeowners were much too cavalier in taking on real-estate which they could only afford if housing prices continued to rise. The real-estate bubble that began to burst one and a half years ago and that gave rise to the banking crisis arose this way.

Since the Reagan presidency a quarter century ago, Americans have increasingly become indebted to foreign creditors and have made a good life for themselves. They financed their investments from the capital streaming in from foreign countries and instead of saving relied on the increasing value of their real-estate. The deficit on the current account balance, that is the surplus of imported products and services over exports, reached a peak of 5.5% of GDP. This was financed with increasingly more sophisticated investment products that were certified with the stamp of the rating agencies – in the end even the last investment manager of the German state banks noticed what junk was being sold here. The wheeling and dealing has now come to an end. No European bank escaped the painful experience that the expensive value-at-risk models of the investment bankers were just as worthless as the agency ratings.

Politicians must finally face the task of defining legal liability limitations for corporations by establishing strict minimum standards for equity capital requirement for the various business models of the banks, both in America and in Europe. Stricter rules are not a disadvantage for the economy, since the apparently so much more expensive equity capital, whose use is thus made compulsive, is not economically more expensive than debt capital, as shown by the burdens that the taxpayers must now bear. Furthermore, no scarcity of funds would arise as a result, since the savings of the world just suffices – independently of such rules – to finance the investments.

The necessary steps are as follows:

  1. The US must finally participate in international agreements on the harmonisation of banking supervision. These agreements can be based on the Basel-II system, which must be under government control.
  2. Europe needs a common system of financial supervision. Every state must pay for the losses of its own banks.
  3. Investment banks, hedge funds and private equity firms must be subjected to the same rules as commercial banks.
  4. Personal liability limitations for mortgages and other real-estate loans must be lifted in the US and wherever else they exist.
  5. Conduits and other constructs for the shifting of investment banking business from the bank balance sheets should be limited in such a way that the risks that the banks take on are transparent in the bank balance sheets.

Free market advocates that argue against these remedies, without which a market economy cannot survive, confuse the market economy with anarchy. The market economy can only function when it is subjected to traffic regulations. Civil codes in many countries are full of rules that limit private contracts. Only a portion of the contracts that an uncontrolled market economy would develop is allowed, and because of this the system functions. Europe and the world need stricter rules for financial traffic. Such rules do not constitute a systemic break. They are vital for the functioning of the financial capital markets.

Hans-Werner Sinn Professor of Economics and Public Finance at the University of Munich, President of Ifo Institute for Economic Research and Director of CES

Editors’ note: Published originally in German as „Ende des Verwirrspiels“, WirtschaftsWoche, no. 42, 13 October 2008, p. 64-65.

This article may be reproduced with appropriate attribution. See Copyright (below).

WTF is Going to Happen Today The Big Picture#comments#comments

  1. BG Says:
    December 17th, 2008 at 6:11 am

    Me too exactly!!

    These are truly “interesting times”, if for all the wrong reasons.

    Sadly, there are a lot of great companies that deserve to live that will not get the chance. We are not currently in any kind of environment where a business can assess future risks, future prices on input costs or customer demand. Maybe our Government can survive for a while with no planning; but, no business I know of can survive for very long with no planning and that is exactly what we have right now. You tell me, how the hell can anyone make any kind of viable business plans in this environment. You can’t do it!!

    One last thing. The commodities market was created to aid in this very thing; but, it has since been transformed into a means of making money for people who never take ownership of anything. Funny how that happens, isn’t it? Now, it is practically useless as an effective hedge against anything due to the speculation in the markets. Ever wonder why, rules were never put in place to force players to at least pretend to actually use the commodities market as it was originally intended?

    We only need to look in the mirror for answers. We are our own worst enemy. It is time for the good people in this Country to step up and take this Country back and start prosecuting these reckless freeloaders. Let’s skip the accountability BS and go straight to the illegality!

  2.  danm Says:
    December 17th, 2008 at 7:03 am

    I’m convinced we’re pretty close to peak oil but I also think we still have enough energy for a few decades. Thus, we’ll see more fits and starts which will keep the masses deluded.

    I also believe that our infrastructure/way of life was built on easy energy (50 barrels for every 1 used to find it instread of 2 for 1) and we’re heading for a long decline. I think this 4000 square foot house phenomena was the culmination of our oil-centered way of life.

    I further believe that most people have never even sat down and done the math, they have NO idea what is coming up. So this downturn will be entirely blamed on bad management and not on the culmination of a way of life.

    That lack of awareness is what scares the $?&!!!??&? out of me! Because it comes with a sense of entlitement that will quickly turn into anger. And instead of working together, more energy will be wasted to manage the crowds.

    I’ve been expecting all of this since Greenspan lowered the rates to 1%. For me the only morning surprise is WHO’s THE FIRST to get caught with their pants down.

    And when I see all the blaming going on, it only confirms my fears: we’re going to miss the Big Picture, we’re going to do everything to try and keep the status quo. And this will just make us all poorer.

  3. Bruce in Tn Says:
    December 17th, 2008 at 7:42 am

    Well, today I don’t know so much about…yesterday was what was interesting. People like me gladly sit on the sidelines and wait for all this to be over. The trader mentality wins on days like yesterday…where cutting rates to ZIRP, which to the thoughtful was cause for alarm, produces a 400 point up day. Tomorrow I am also very interested in, because of the initial claims numbers.

    I also thought about where we are going last night. Our stimulus program may be offset by the numbers of troops that are retired from the military if Obama gets out of the mideast, as I think he should. I also see that because of the Somalia pirates, China is sending 4 warships to the area to patrol, something that would have been unthinkable 20 years ago…little brother is growing up.

    And I think, even if the Fed is successful, that this ends badly…I have heard the same propaganda that everyone else here hears, that the taxpayer will make money on these various and sundry bailouts…a load of pure manure…and I think that two bad things could happen…one almost certain, the other I am not so sure of…we will have oppressive debt, either paid with higher taxes or defaulted on…and we may have very bad inflation at some future time, although I am much less convinced of that, but I usually walk down the road with both eyes open.

  4. danm Says:
    December 17th, 2008 at 8:44 am

    The Fed has printed truckloads of money, but nobody is unloading the trucks
    Instant gratification, nobody can ever seem to get beyond it. Everybody thinks that since the Fed has printed money and it has not yet hit the markets, that deflation will continue.

    Bernanke basically just “got permission” to now inject money directly into the economy and not through banks. If you are expecting future growth to come from banks you are probably looking in the wrong place.

    Government is going to spend. People are going to get fresh money in their hands. Capacity is going to shrink (because government is crowding out the private side).

  5. Moss Says:
    December 17th, 2008 at 10:14 am

    Be careful with bonds.. corporate that is. What may happen is that bonds collapse next year since no one will provide default insurance. This will cause rates to increase and prices to decline. The only bonds that one should consider now are government backed.

[Dec 15, 2008] Beat the Press Archive by Dean Baker

December 14, 2008 | The American Prospect

More Fantastic Stories in the Washington Post Outlook Section

The Washington Post Outlook section, which just three months ago told us the economy was doing great, features another gem today. James P. Moore Jr. gives us five "myths" about the U.S. economy.

Among the myths that Mr. Moore refutes is the claim that the U.S. is about to be eclipsed by China. He tells us that China's GDP is just a bit more than $3 trillion, while U.S. GDP is over $14 trillion. While this is an exchange rate measure, a purchasing power parity (PPP) measure, which applies the same set of prices to the output of both countries, puts China's GDP at $7.1 trillion.

Even this measure could be an understatement. The World Bank's old PPP measure would put China's GDP at more than $10 trillion presently. One reason to be suspicious of the new measure is that if apply the IMF's growth figures to the current measure, it implies that China was poorer than almost every country in Sub Saharan Africa in 1980. That one seems unlikely.

Mr. Moore also tells us that the U.S. still leads the world in manufacturing in part because of its dominance in pharmaceutical manufacturing. The U.S. is arguably the world leader in pharmaceutical research, but there is not much value added in the process of manufacturing pharmaceuticals.

Mr. Moore also told readers that "the United States attracted more than $2 trillion worth of foreign direct investment last year." You could probably only get this fact in the Washington Post, since the Bureau of Economic Analysis puts the amount of foreign direct investment last year at $237.5 billion. So what if they're off by an order of magnitude.

Finally, Mr. Moore tells readers that the United States is still the engine of world growth because of its enormous trade deficit. Yes, and Iceland was pulling far more than its weight until recently because of its trade deficit. I'm not sure that this should make anyone feel good.

--Dean Baker

[Dec 15, 2008] 5 Myths About Our Sputtering Economy - by James P. Moore Jr.

December 14, 2008 | Washington Post

For months now, the nation's economic obituary has been splashed across the front pages of nearly every newspaper in the country. Journalists and pundits alike have warned that America's long-running global dominance has come to a screeching halt, eclipsed by growing markets in such places as China and India and frittered away by our own mismanagement, excesses and myopic approach to the future. We're long past due for a reality check. The United States and the incoming Obama administration face formidable challenges, but the country is by no means on its last legs. Here are a few key myths that need to be dispelled.

1. The United States has lost its competitive edge.

Not by a long shot. By almost any measure, the United States continues to outperform other countries around the globe (including rising giants China and India) in such areas as innovation, technology, higher education, worker training, the ability of the labor force to move from job to job, and more. Just this fall, the Swiss-based World Economic Forum released its latest global competitiveness report, and once again, the United States easily topped the list. The study noted that despite the current financial turmoil, the United States is blessed with strong productivity and can "ride out business-cycle shifts and economic shocks" better than other countries.

2. The United States long ago gave up its global lead in manufacturing to China.

Not yet. Yes, U.S. production plummeted this fall, and yes, the domestic auto industry -- the poster child for America's aging manufacturing infrastructure -- will never return to the output it could manage a decade ago. But even with all this grim news, the United States has held onto its manufacturing lead -- particularly in such key sectors as pharmaceuticals and aerospace, in which it produces almost 25 percent of the world's output, according to the World Bank. China produces roughly two-thirds that amount, the bank notes, and the global downturn has badly hurt its manufacturing sector over the past several months. Sure, China and India have been closing the gap, but with a little bit of creativity, vision and determination on the part of U.S. industry, the Obama administration and Congress, we can hold our own.

3. The U.S. economy is about to be eclipsed by China's.

Not for some time to come. The World Bank estimates that global GDP last year was more than $56 trillion dollars. The United States contributed almost $14 trillion (or 25 percent) of that amount. China's total economy amounted to a bit more than $3 trillion.

Of course, China and other countries such as India and Brazil are growing far faster than the United States, but then again, we were wealthier to begin with. Let's be realistic. The turmoil in the financial markets will reduce U.S. GDP in 2008 and 2009, but China's economy will contract too. No matter how you calculate growth projections, realistically, it will be decades before China is within striking distance of the United States.

And as for those other budding economies now coming on line, don't expect them to outstrip us any time soon, either. Despite its strong growth rates, Brazil has an economy that's approximately the size of Florida's and Illinois's combined. Russia, which spans 11 time zones and has vast natural resources, had an economy that was on a par with that of Texas last year. Even India, a bright spot on the global stage for almost a decade now, still has a GDP that's less than half of California's. These countries will be formidable indeed at some point, but they still have a long way to go.

4. The United States is no longer the economic engine of world trade.

Not true. For three decades now, we have amassed staggering trade deficits, amounting to several trillion dollars (and growing), but U.S. consumers have still helped add substantially to the growth of most countries around the world.

When it comes to imports, of course, the United States buys far more products from overseas than either China or Germany. But in terms of exports, all three countries are closely bunched together, at just over $1 trillion each. There is simply no country, now or in the immediate future, that can replace the United States' sheer global buying power.

5. The United States is no longer an attractive market for investment.

Hardly. Investments here are transparent, well protected and have a long track record of healthy returns. So even with Wall Street reeling, the United States is a compelling place to invest. Of course, today's liquidity crisis originated here, but the value of the U.S. dollar has risen dramatically over the past few weeks, and foreign investors have flocked to U.S. investments and financial instruments as a (relatively) safe haven amid global uncertainties. No wonder the United States attracted more than $2 trillion worth of foreign direct investment last year, according to the World Bank and the International Monetary Fund. (The United Kingdom, Hong Kong and France -- the next three top finishers -- each registered just over $1 trillion.)

So where does that leave us? As Warren Buffett put it recently, the U.S. economy has gone from springing a few leaks to spewing one big gusher. But given our history and unique ability to adapt, we are anything but down and out. The world has changed, and the United States must respond more nimbly to the hard realities of global interdependence. But as "the sage of Omaha" reminded us, this is a fine time to buy into the long-term future of America -- not out of blind patriotism but because it makes good, sound business sense.

James P. Moore Jr. is a professor at Georgetown University's McDonough School of Business and the director of the school's Global Leadership Initiative. He also is the creator and continuing inspiration behind the American Prayer Project

See James P. Moore, Jr. - Wikipedia, the free encyclopedia

[Dec 15, 2008] Economist's View Fed Watch What If the Analogy is Wrong

It looks like what Fed are doing is devaluation of the dollar, but under a different name...
Tim Duy is worried that "the Fed the Fed and Treasury are setting the stage for a disorderly adjustment of the Dollar":

What If the Analogy is Wrong?, by Tim Duy: I say this with no exaggeration: The picture painted by the data flow of the past two weeks is deep into the left tail of any of my reasonable distribution of probable economic outcomes. The die is now cast – fiscal stimulus will be too late to prevent the snowballing that will occur throughout the first half of next year. In this environment, policymaking will become increasingly desperate.

The free fall in economic activity reported by the ISM in both the manufacturing and nonmanufacturing sectors yielded the worst for the labor market. There is no way to candy coat the November employment report. It was simply dismal; downward revisions to the previous month boosted the sense of dread that emanated from the BLS release. And the damage to labor markets appears to be accelerating, with the rise in initial jobless claims last week pointing toward a December job loss of 600k or more. Expectations of rising headline unemployment rates can be tempered only by defections from the labor force; I would not be surprised to see the broad U-6 measure of unemployment coast through 15% before the first quarter is over.

With the labor market in disarray, the Fed will feel compelled to do more, as only they can deliver stimulus in the near term. The FOMC begins a two day meeting tomorrow, with a further 50bp of rate cutting almost certain. Also almost certain is that no one believes that the last 100bp has much stimulative power to offer. The rate cut itself, thus, is largely irrelevant. What is relevant is the statement – will the Fed more explicitly define their apparent policy of quantitative easing? Federal Reserve Chairman Ben Bernanke’s recent speech set up expectations that such a shift was coming. Failure to follow through would be yet another communication failure.

I am torn on the wisdom of this move. On one hand, using the Great Depression as a guide, the appropriate policy direction appears clear – flood the markets with liquidity, coupled with massive fiscal stimulus. This is the track the policy train is on. I completely understand this policy in a closed economy suffering from insufficient demand relative to supply. But when faced with a large open economy with a substantial current account deficit, the back of my mind screams “caution.” It is an itch I can’t scratch.

In my view, policymakers tend to see the current account deficit as almost an unimportant residual, something that just falls out of the global economy, but tells you little about the economy itself. I tend to view it as representing a fundamental imbalance. I believed that as part of the adjustment of the past year, a combination of import compression and export expansion would eliminate the imbalance, and that the appropriate role of policy was to facilitate and cushion that imbalance.

In nominal terms, high oil prices in the first half of the year stalled that adjustment and forced an intensification of import compression by undermining consumer spending. This triggered a more intense adjustment than I would prefer (obviously), but I could see that the expected improvement of the current account deficit would provide room for aggressive policy response. This was especially the case given collapsing oil prices. And if domestic saving rose enough as households and firms restrained spending, the federal government could have a very significant gap to fill.

But then a funny thing happened…global trade appears to be collapsing, undermining US exports and leaving the nominal current account deficit stable, meaning that the US still remains very dependent on capital inflows. Brad Setser scared me straight last week on this topic:

The US trade data surprised on the downside — and while it is far too soon for the dollar’s recent rise to really have an impact on the trade data, the rise in the deficit perhaps did remind the market that over time a rising dollar would tend to maintain the still large trade deficit not bring it down. Macro man was far more surprised by the rise in the non-oil deficit than I was; it was always going to be race down between imports and exports.

Simply a race down, or a race to the bottom? My challenge is that lacking an adjustment of the external imbalance, I can easily see that the current policy path becomes a dead end. Emphasis on “dead.” Yves Smith lays out an alternative scenario that reminded me of old concerns:

Now to my doubts about the proposed remedies, namely monster stimulus and monetary easing. First, as mentioned before, the analogy is to the US in the Depression, which we have said repeatedly before is questionable. The US in the 1920s was the world's biggest creditor, exporter, and manufacturer. Our position then is analogous to China's now. Indeed, Keynes in the 1930s urged America to take even more aggressive measures, and argued that it was not reasonable for the US to expect over-consuming, debt-burdened countries like the UK and France to take up the demand slack. So even though most economists are invoking Keynes, it isn't clear he's prescribe such aggressive stimulus for the US and UK now.

If Yves is correct, the coming massive US policy response is a desperate attempt to maintain a global economic structure that is fundamentally broken. This is a story I have long championed, but, in recent months, one I was willing to discount given my expectations of an improvement in the current account. Indeed, this seemed consistent with the strengthening of the Dollar. But recent trade data suggests I may have become too complacent with regards to the external dynamic.

The threat, of course, is that the Fed the Fed and Treasury are setting the stage for a disorderly adjustment of the Dollar by ignoring the imbalance. Without the external adjustment in place, pushing rates to zero, flooding the economy with money, and pumping out hundreds of billions of new debt threatens to all pull the rug out from under the Dollar. Even more worrisome, however, is that surplus nations respond with competitive depreciations as they also seek to maintain the fundamental imbalance. We all race to the bottom together.

The recent stability of the US Dollar has almost certainly put to rest any worries on the part of policymakers. But it is looking like the Dollar has peaked. From Bloomberg:

Speculation that the dollar has peaked gained steam last week as the currency plunged 4.9 percent against the euro to $1.3369, its biggest drop since Europe’s common currency was created in 1999. It weakened 1.75 percent versus the yen.

“We’re at a turning point in terms of dollar dynamics,” said Jens Nordvig, a New York-based strategist at Goldman Sachs, the biggest U.S. securities firm to convert to a bank. “The dollar shortage has been addressed and we’ll see people start to focus on other things and those are all dollar negative.”

With delivering induced flight to quality largely complete, the stage is set for underlying factors to come into play. And those factors do not appear to be supportive of Dollar denominated assets. One would think that near zero rates would stem the allure of the Dollar (one would also think that domestic savers rethink keeping their money anywhere but a safe deposit box). Indeed, that appears to be the case versus the Yen.

But to be a real Dollar rout, we would expect to see Treasuries come under severe pressure, which has not exactly been a recent trend. So perhaps there really is nothing to fear. Indeed, I have argued that that if the stimulus is too excessive, that excess should reveal itself in the Treasury market, and policymakers can simply back off. No problem – ease away. Build those bridges.

This assumes that policymakers back off. What if rising Treasury rates encourage the Fed to double down, expanding quantitative easing to hold rates low and stimulative. What if years of research on the Great Depression have left even the best and the brightest with tunnel vision such that they could not accept that they were wrong?

Bottom Line: The Fed is headed to the zero mark, with another 50bp almost certain this week. It is widely expected that they will give some guidance as to their next steps, pointing us in the direction of an explicit policy of quantitative easing. Fed policy, as well as fiscal policy, assumes that the Great Depression is the most accurate analogy. This assumption ignores the external position of the US, which stubbornly refuses to adjust. If that failure to adjust is relevant, then recent Dollar stability was simply a head-fake. We should see pressure on the Dollar and, ultimately, Treasuries. Policymakers could adjust, but would they? With pursuit of the Great Depression case as the baseline scenario, it seems prudent to keep in mind the risk that this is not the relevant analogy for the US, and that policymakers are not prepared to accept such a possibility.


a says...

"But when faced with a large open economy with a substantial current account deficit, the back of my mind screams “caution.” "

Hurray! Before blowing a couple of trillion - money which the U.S. does not have -, a little caution is in order. Instead we get the same "This is a crisis!" mentality which railroaded the nation into the Iraq War.

Posted by: a | Link to comment | December 15, 2008 at 01:36 AM

Gegner says...

Right in one again 'a' and I predict this will not end well.

It boggles the mind to witness the scope of proposed alternative out there that rely so heavily upon 'wishful thinking'. Case in point is this piece from Robert Schiller in Yesterday's NY Times.

Would the renewed ability to roll over our debts indefinitely solve anything?

Not that it would happen, but the implications of such a move, even on a temporary basis, are chilling.

Posted by: Gegner | Link to comment | December 15, 2008 at 02:07 AM

mmckinl says...

Unfortunately the Fed probably knows all of this but is pursuing, at any cost, the underwriting of insolvent (Member) banks and unserviceable debt (CDS and derivatives).

The Fed and Treasury have to a fault put a It is the only way to get our arms around the entire financial situation, analyze the consequences of various scenarios and move forward.

Until the banks are audited, books are cleansed and the banks fully capitalized the mistrust remains and the financial markets remain traumatized.

Posted by: mmckinl | Link to comment | December 15, 2008 at 02:15 AM

hari says...

The dollar/euro (fx) rate is plumetting...can it be the signal BB/Fed is on 1929 warpath - disregading that even qantitaive easing won't dent the fall in dollar value any more.

Posted by: hari | Link to comment | December 15, 2008 at 02:43 AM

Easy Money says...

There seems no way to avoid the next act in this slow motion train wreck. Helicopter Ben was the one who first sounded the liquidity-at-any-cost bell with his printing press speech. That speech may have been the key enabler of the record credit bubble. Now he gets to deliver on what was promised, helicopter drops. Fat chance the politicians or much of the public will display any caution to slow down the drops.

Massive inflation is the inevitable end game of all attempts to prop up the imbalanced ponzi economy. But unlikely the powers that be will ever look that far ahead. Look out below!

Posted by: Easy Money | Link to comment | December 15, 2008 at 02:50 AM

bakho says...

Why should monetarists think that monetary policy has a solution for every economic situation?

Should monetarists better explore the "limits of monetary policy" and come up with a better model that informs governments in advance that fiscal stimulus is going to be needed? Politicians (not just American politicians) spouting pop ideology need to be told the truth that monetary policy will NOT fix our current problem.

The trade deficit may be going up somewhat, but for the short run, expect overall trade to drop as global recession takes root.

Lowering the interest rate further has negative as well as positive effects on the economy. This is one of the reasons why it loses traction. For all the reasons stated, monetary policy may as well stay where it is. The fix this time is fiscal policy that puts our domestic labor back to work in productive endeavor.

Posted by: bakho | Link to comment | December 15, 2008 at 04:19 AM

jodie says...

Given the massive the massive Debt to GDP ratio in the US it is inevitable that the dollar would need to be devalued. Deficit spending / quantitative easing is devaluation without calling it that.

Posted by: jodie | Link to comment | December 15, 2008 at 05:28 AM

Richard H. Serlin says...
"Even more worrisome, however, is that surplus nations respond with competitive depreciations as they also seek to maintain the fundamental imbalance. We all race to the bottom together."

If the US does print a ton of money, forcing the dollar down, why is it bad if other nations follow suit increasing their money supply so that their currency doesn't rise and their net trade doesn't drop? The result would be an increase in worldwide currency, decrease in the worldwide threat of deflation, and increase in worldwide demand, which is what you want in a severe worldwide recession. Why is this a race to the bottom, to encourage the nations of the world to print more money in the face of a severe demand contraction?

Posted by: Richard H. Serlin | Link to comment | December 15, 2008 at 05:39 AM

ken melvin says...

The 15 million plus are going to require government assistance. Why not employ them in useful ventures such as: infrastructure geared toward the future, energy transition, quality of life, enviro-remedial, ...?

Posted by: ken melvin | Link to comment | December 15, 2008 at 05:55 AM

wally says...

"What if years of research on the Great Depression have left even the best and the brightest with tunnel vision such that they could not accept that they were wrong?"

If you are a central banker, you think the world revolves around central banking and think you have superpowers to turn the economy up or down. The reality is otherwise. Banking follows business. Credit and money are not limitless. Liquidity is not an issue... but solvency is.

Posted by: wally | Link to comment | December 15, 2008 at 06:18 AM

reason says...


balance sheets, balance sheets, balance sheets. The solution to too much debt is SURELY not more debt. Of course though the issue is complicated by the USD being the reserve currency. It was time the world found another solution.

Posted by: reason | Link to comment | December 15, 2008 at 06:28 AM

D. Malcolm Carson says...

The question that we should all be focused on his how much is too much? I think it's obvious that at some point, the deficit spending/quantitative easing will reach a point of diminishing returns and mounting costs. Some dollar devaluation would be a good thing. We definitely need to make more and buy less. But clearly too much would not be. Where's the line?

Econbrowser Predicting the trough and a jobless recovery

The quality of the Qual VAR  model is the key here and we do not know much about it.  All those declarations "the Qual VAR treats recessions as distinct events in the economy, akin to switches between high and low gears. " looks to me pretty much meaningless due to low precision of data and strong arguments against V-shape recovery that the model predicts.  Due to this we need to treat those data with healthy skepticism as phases like "Nevertheless, one could argue that the U.S. economy was experiencing a run-of-the-mill recession until the failure of Lehman Brothers, with the business cycle index bouncing around -0.5. After that shock, financial market conditions sent the economy sharply downward" imply...

Current business cycle forecasts see a July or August 2009 trough and a jobless recovery until March 2010

...In general, the Qual VAR model espouses Jim Hamilton's view, that recessions correspond to a switching of gears in the economy, rather than simply a loss of speed due to a few randomly missed strokes within a single gear. As Hamilton has noted, if economic cycles do not signify more than the loss of speed, then the amount of speed the economy needs to lose to signify an economic downturn becomes completely arbitrary, as does the meaning of an economic downturn. In other words, the Qual VAR treats recessions as distinct events in the economy, akin to switches between high and low gears. Inferences as to whether the economy is in an expansionary or recessionary state add important perspective to interpretations of GDP numbers, such as the 2.8 percent GDP growth rate in 2008Q2.

... ... ...

the Qual VAR treats recessions as distinct events in the economy, akin to switches between high and low gears.

... ... ...

Given that the past two recessions have been followed by jobless recoveries, where employment continues to fall and remain sluggish well after the end of the formal NBER recession, it is interesting to look at the Qual VAR's forecasts of employment growth. The second figure shows that the forecast is for a jobless recovery to follow the NBER recession again, with payroll employment declining until March 2010 and not returning to trend growth until July 2010.


The Broader Unemployment rate is at 12.5%. I have been told that this rate is closer to the measurement of unemployment during the Great Depression but I would need confirmation.

Dueker's numbers on unemployment simply reinforce my call of double digit unemployment by 4th QTR 2009. Dueker is not taking into account what government will do to create more unemployment so I guess that is my hedge number.

[Dec 11, 2008] The forgotten side of FDR

November 30, 2008 | Dani Rodrik's weblog

... by economists at least. FDR was an experimenter who understood the need for institutional innovation during uncertain times.  Here is what he said in May 1932:

The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach.

Repeat after me: "bold, persistent experimentation." 

The question for the members of Obama's old-new economic team is whether they will remain true to their fundamentally conservative instincts, or engage in the creative experimentation for which their ample talents render them highly suitable.

[Dec 11, 2008] November Jobs Report: It's Worse Than It Looks

Beat The Press The American Prospect

Losing. now show.

The reason is that the Bureau of Labor Statistics (BLS) imputes jobs into its survey for new firms that could not included in its sample. This imputation is based on its "birth/death" model which is inevitably backward looking. As a result, it misses turning points, underestimating job growth when the economy speeds up and overestimating job growth (or underestimating job loss) when the economy slows.

The BLS imputed 143,000 jobs into the establishment data over the last three months based on its birth/death model. In the three months from September to November of last year BLS imputed just 117,000 jobs into the establishment data.

It is inconceivable that job growth in new firms over the last three months was larger this year than in the same months of 2007. When BLS revises these data based next summer based on data from unemployment insurance records, it is virtually certain that November will show even more job loss than was reported today.

In short, as bad as the picture looks now, the reality is almost certainly worse. (Btw, reporters who cover the employment data should know about the birth/death imputations.)

--Dean Baker

Posted at 10:32 PM | Comments (16)

[Dec 11, 2008] Junk-Bond Market Has Closed the Door -
U.S. companies were locked out of the junk-bond market in November, putting half of American corporations at risk of being unable to raise cash.

The current environment is causing market participants to harken back to 1991, when the collapse of Drexel Burnham Lambert sent the junk, or high-yield, bond market into a tailspin.

About 50% of U.S. companies have below-investment-grade credit ratings, making the $750 billion junk-bond market a vital source of financing for car makers, airlines, retailers, utilities, restaurant chains and media companies

[Dec 11, 2008] The Current Macroeconomic Outlook 2009 Issues of Systemic Stability, Speech by John Lipsky, First Deputy Managing Director, DevisenForum 2008 Devisen 2009, Steigenberger Airport Hotel, Frankfurt

Global Outlook

Global economic prospects have deteriorated sharply in recent months, as the financial crisis has spread and increasingly engulfed emerging economies. In the advanced economies, consumer and business confidence have dropped to levels not seen in decades, and activity is slowing sharply or contracting. Most worrisome has been the sudden-and severe-toll that the crisis has begun to take on emerging economies; in many cases, deleveraging and asset sales have led to capital flow reversals, a sharp widening of spreads on sovereign and corporate debt, and abrupt currency depreciations.

On the positive side, headline inflation is receding rapidly across advanced and most emerging economies. This has opened additional room for monetary policy easing.

Against this background, policy makers have three broad tasks ahead:


[Dec 12, 2008]  Jim Rogers calls most big U.S. banks bankrupt Industry Summits Reuters

Lost decade ?
While not saying how long the U.S. economic recession will last, he said conditions could ultimately mirror those of Japan in the 1990s. "The way things are going, we're going to have a lost decade too, just like the 1970s," he said.

Goldman Sachs & Co analysts this week estimated that banks worldwide have suffered $850 billion of credit-related losses and writedowns since the global credit crisis began last year.

[Dec 12, 2008] Treasury’s Lowest Yields Offer No Help to Companies (Update1) By Bryan Keogh

The lowest yields on Treasuries are providing no solace to U.S. companies paying the highest borrowing costs on record.

While rates on everything from four-week Treasury bills to 30-year bonds fall to all-time lows, companies are paying an average 10.8 percent on their debt, up from 6.53 percent in January, according to Merrill Lynch & Co.’s U.S. Corporate & High Yield Master Index. The premium investors demand for lending to companies instead of the government rose to 8.85 percentage points yesterday, compared with 2.96 percentage points at the start of the year, the index shows.

[Dec 11, 2008] 8 really, really scary predictions - Nouriel Roubini (1)

Looks like he is 9 month early in his 12 month prediction. See also Roubini 12 steps to financial disaster  published in February 2008 to think about the far from perfect clarity of his crystal ball...

For the next 12 months I would stay away from risky assets. I would stay away from the stock market. I would stay away from commodities. I would stay away from credit, both high-yield and high-grade. I would stay in cash or cashlike instruments such as short-term or longer-term government bonds. It's better to stay in things with low returns rather than to lose 50% of your wealth. You should preserve capital. It'll be hard and challenging enough. I wish I could be more cheerful, but I was right a year ago, and I think I'll be right this year too.

... ... ...

In terms of the stock market, the price/earnings ratio is no longer high. I use a P/E ratio in which the price is divided by ten-year average earnings. It's a really conservative way of looking at it. That P/E ratio got up to 44 in the year 2000, which was a record high. Recently it was down to less than 13, which is below the average of around 15. But after the stock market crash of 1929, the price/earnings ratio got down to about six, which is less than half of where it is now. So that's the worry. Some people who are so inclined might go more into the market here because there's a real chance it will go up a lot. But that's very risky. It could easily fall by half again.

... ... ...

[Bill Rogers] I have covered most of my short positions in U.S. stocks, and I'm now selling long-term U.S. government bonds short. That's the last bubble I can find in the U.S. I cannot imagine why anybody would give money to the U.S. government for 30 years for less than a 4% yield. I certainly wouldn't. There are going to be gigantic amounts of bonds coming to the market, and inflation will be coming back.

In my view, U.S. stocks are still not attractive. Historically, you buy stocks when they're yielding 6% and selling at eight times earnings. You sell them when they're at 22 times earnings and yielding 2%. Right now U.S. stocks are down a lot, but they're still very expensive by that historical valuation method. The U.S. market is yielding 3% today. For stocks to go to a 6% yield without big dividend increases, the Dow will need to go below 4000. I'm not saying it will fall that far, but it could very well happen. And if it gets that low and I'm still solvent, I hope I'm smart enough to buy a lot. The key in times like these is to stay solvent so you can load up when opportunity comes.

... ... ...

What happens in 2009? Frankly, it's hard for me to predict what's going to happen next week, never mind next year. What I will say is that I expect all these banks to be back in the market looking for more capital. We'll also have a wholesale restructuring of our banking system, probably toward the end of 2009. There will be banks getting smaller, banks going away, and banks consolidating. At the same time, though, I think you'll see more new banks created. We've already seen more applications. And it's a great idea: You start with a clean balance sheet and make loans today with today's information. Plus, right now you've got a yield curve that's good for lending.

I think the overall economy will be worse than people expect. The biggest issue will be consumer spending. If 2008 was characterized by the market impacting the economy, then 2009 will be about the economy impacting the market. It's already started.

[Dec 10, 2008] Joseph E. Stiglitz on capitalist fools

No. 1: Firing the Chairman

In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do. On his watch, inflation had been brought down from more than 11 percent to under 4 percent. In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.

Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.

... ... ...

The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn’t address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction. The bailout package was like a massive transfusion to a patient suffering from internal bleeding—and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, “cash for trash,” buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.

[Dec 9, 2009] Worst Spending Slump Since 1942 Extends ‘Scary’ U.S. Recession

Dec. 10 (Bloomberg) -- The biggest slump in U.S. consumer spending since 1942 will extend the recession and push the jobless rate to the highest level in a quarter century, according to economists surveyed by Bloomberg News.

Household spending will drop 1 percent in 2009, the biggest decline since after the attack on Pearl Harbor, according to the median estimate of 51 economists surveyed Dec. 4 through Dec. 9. By the middle of next year, the economy will have shrunk for a record four consecutive quarters, the survey showed.

“That sounds scary enough to me,” said Jeffrey Frankel, an economics professor at Harvard University and a member of the group that determined the start of the recession. “Consumers have carried the weight of expanding demand for a long time at the expense of a serious deterioration of their balance sheets.”

A drop in spending has brought the auto industry to the brink of collapse, and mounting unemployment, a lack of credit, and falling property and stock values will prompt Americans to turn even more frugal. President-elect Barack Obama has pledged to pursue the biggest public-works plan since the 1950s to stem the already year-old economic slump.

“It’s a serious recession, and there’s a good chance it will break the 16-month record since the Depression,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “We’re at the stage where the weakness is feeding on itself. The next few months look pretty rough.”

Longest Slumps

The National Bureau of Economic Research last week announced the U.S. contraction began in December 2007. The longest economic slumps since 1945 were the 16-month downturns that ended in March 1975 and November 1982. The Great Depression lasted 43 months, from August 1929 to March 1933.

Economists cut fourth-quarter forecasts for gross domestic product by more than a percentage point from last month, predicting the economy will shrink at a 4.3 percent annual rate, the biggest plunge since 1982.

The world’s largest economy will contract at a 2.4 percent pace in the first three months of 2009 and at a 0.5 percent rate the following quarter, the survey showed. Combined with the 0.5 percent drop in this year’s third quarter, it would be the longest slide since quarterly records began in 1947.

Consumer purchases, the biggest part of the economy, may drop at a 4 percent rate this quarter, the survey showed. Following the 3.7 percent slump from July through September, it would be the first time on record that spending declined in excess of 3 percent in consecutive quarters.

The spending slump will continue into the first half of 2009, according to economists.

More Joblessness

The drop in sales will prompt employers to keep cutting staff, sending the employment rate to 8.2 percent by the end of next year, a 25-year high, the survey showed.

“It’s the perfect storm for the consumer,” said Peter Kretzmer, a senior economist at Bank of America Corp. in New York. “With rising unemployment, we’re talking about a very serious recession. If credit conditions don’t ease, it’s difficult to see the recession ending” soon.

... Retailers also are concerned about the November-December holiday season, which brings in one-third or more of annual revenue and is predicted to be the worst in years.

“The big problem is that there’s no bottom in sight for consumers and for businesses,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York. “The negative sentiment makes it difficult to stabilize the situation. It’s very worrisome.”

Businesses are pulling back as Americans retrench. Dow Chemical Co., the largest U.S. chemical maker, this week said it will cut 5,000 jobs, permanently shut 20 facilities, temporarily idle 180 plants and reduce the company’s contractor workforce by about 6,000.

‘Recessionary Mode’

“The entire industrial supply chain all the way to whatever the consumer buys outside of food and health is in a recessionary mode,” Chief Executive Officer Andrew Liveris said on a conference call. “Across the board, everywhere.”

The downturn will help contain inflation, the survey showed. Consumer prices will rise 1.6 percent this year and next, the smallest back-to-back gain since 1964-65, according to the median.

[Dec 9, 2009] World Bank Data Shows Global Pain by MARK LANDLER

December 9, 2008 |

WASHINGTON — The world economy is on the brink of a rare global recession, the World Bank said in a forecast released Tuesday, with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries predicted to plunge 50 percent.

The projections are among the most dire in a litany of recent gloomy forecasts for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty.

Even more troubling, several economists said, there is no obvious engine to drive a recovery.

American consumers are unlikely to return to their old spending habits, even after the United States climbs out of its current financial crisis. With growth in China slowing sharply, consumers there are not about to pick up the slack from the Americans. The collapse in oil prices — a side effect of the crisis — has knocked the wind out of consumers in oil-exporting countries.

“We know that the financial crisis now is likely to be the worst since the 1930s,” said Justin Lin, the chief economist of the World Bank, summarizing the projections.

The bank forecasts the global economy will eke out growth of 0.9 percent in 2009, down from 2.5 percent this year and 4 percent in 2006. That is the slowest pace since 1982, when global growth was 0.3 percent. Developing countries will grow an average of 4.5 percent next year — a pace that economists said constituted a recession, given the need of these countries to grow rapidly to generate enough jobs for their swelling populations.

“You don’t need negative growth in developing countries to have a situation that feels like a recession,” said Hans Timmer, who directs the bank’s international economic analyses and projections. He predicted rising joblessness and closed factories in many developing countries.

The volume of world trade, which grew 9.8 percent in 2006 and an estimated 6.2 percent this year, will contract by 2.1 percent in 2009, the report said. That drop would be deeper than the last major contraction in trade: 1.9 percent in 1975.

Net private flows of capital to developing countries are projected to decline to $530 billion in 2009, from $1 trillion in 2007.

The loss of that capital will sharply constrict investment in emerging-market economies, the report said, with annual investment growth slowing to 3.4 percent in 2009 from 13 percent in 2007.

Several countries are also being hurt by the decline in the prices of oil and other commodities — a phenomenon the World Bank characterizes as the end of a five-year commodities boom — though the decline in food and fuel costs has relieved the pressure on people in other countries.

The sudden drop in capital flows poses a particular danger to oil exporters, some of whom have run up heavy debts.

“They’ll have to roll over that debt, one way or the other,” said Simon Johnson, a former chief economist of the International Monetary Fund. “That’s going to put a huge squeeze on these countries.”

Mr. Johnson said the calmer atmosphere in foreign markets belied the gravity of the situation. Spreads on credit default swaps — a common yardstick for whether a country’s government is in danger of default — continue to signal potential trouble for Ireland, Italy and Greece.

The authorities in Greece are battling violent street protests in Athens and its suburbs, caused in part by the deteriorating economy.

Reflecting what is by now conventional wisdom, the World Bank recommended that countries undertake large fiscal stimulus programs to cushion the downturn. The bank itself has committed up to $100 billion in aid to developing countries over three years.

If there is a silver lining amid the gloom, it is the relief that lower food and fuel prices mean for poorer countries. While the prices of almost all commodities have fallen sharply since July, they remain higher than in the 1990s, which the bank says should prevent future supply shortages.

As the World Bank’s experts struggled to find a historical analog for the slump, they said it had more in common with the Depression of the 1930s than with the severe recessions of the 1970s or 1980s.

“It is not just a supply shock,” Mr. Timmer said. “It is not just a reduction in demand, but it is the lack of availability of credit.”

Deutsche Bank, in a forecast issued this week, was even more pessimistic. It said global growth would drop to 0.2 percent in 2009, with the United States, Europe, and Japan in recessions of roughly equal severity.

China, which grew 11.9 percent in 2007, will slow to 7 percent this year, the bank projects, and 6.6 percent in 2010, when the rest of the world is slowly recovering. “It’s not going to be the spark that reignites global demand,” said Thomas Mayer, the chief European economist for Deutsche Bank. “We’re almost in an air pocket, where we don’t have a new global driver of growth.”

[Dec 9, 2009] Global Economy - Global demand for oil to plummet By Javier Blas in London and Krishna Guha

December 9 2008 20:09 |

Global oil demand will collapse next year and commodities will not return to the highs they reached this summer in the foreseeable future, two authoritative reports said on Tuesday as they forecast a long and painful worldwide recession.

The stark conclusions came as the World Bank’s chief economist predicted that the world faced “the worst recession since the Great Depression”.

[Dec 8, 2009] Capital Markets - Post-Lehman company defaults to soar By David Oakley and Paul J Davies

Does this mean that junk bond funds are up to another trashing, or the current price reflacts this expectation of defaults ?
December 8 2008 22:52 |

Default rates for speculative grade companies are forecast to jump threefold next year following the fall of Lehman Brothers, the world’s biggest bankruptcy, according to Moody’s, the US ratings agency.

The implosion of Lehman on September 15 is widely regarded as a significant milestone, turning the credit crunch into a fully blown economic crisis.

Jim Reid, credit strategist at Deutsche Bank, said: “We are at a turning point for default rates, with much bigger monthly rises from now on.

“Two or three months after Lehman’s collapse, we are starting to see the impact on the real economy, particularly for those companies on short-term funding.”

European companies defaulting on their bonds are also set to outpace those in the US, although analysts suggest this is because the European junk-grade market is smaller, meaning any rise in defaults has a greater impact in percentage terms, rather than pointing to a deeper recession.

Global default rates are forecast to rise to 10.4 per cent by November 2009 – from 3.1 per cent last month – to levels last seen in 2001 following the dotcom crash. Rates are forecast to jump to 4.2 per cent by the end of this year.

A year ago, the global rate was 0.9 per cent.

In Europe, default rates are predicted to rise to 12.5 per cent a year from now, compared with 10.7 per cent in the US. Rates in Europe are currently 1.3 per cent, compared with 3.4 per cent in the US.

Moody’s predicts the durable consumer goods sector is likely to see the highest default rate in Europe over the next year, while in the US the most troubled sector is expected to be consumer transportation.

The ratings agency’s distressed index, which measures the number of companies with bonds trading at more than 1,000 basis points over government paper, rose to 51.8 per cent at the end of last month, up from 48.5 per cent at the end of October, and the highest level since Moody’s launched the index in 1996. This reflects the deepening problems for company funding. Even some investment grade companies are now trading at distressed levels.

The year-to-date global total of defaulted companies has risen to 80, compared with only 17 in the same period last year.

In another sign of growing credit problems for riskier companies, Standard & Poor’s put almost 200 notes issued by collateralised loan obligations on review for downgrade last week “due to rapid deterioration in the credit quality of the corporate loans [backing the deals] in recent weeks”.

The deals facing rating cuts are valued at almost $4bn and represent about 5.5 per cent of deals rated by S&P.

[Dec 9, 2008] Obama's choice: Straight talk - or more chaos By Hossein Askari and Noureddine Krichene

Dec 5, 2008 | Asia Times

The scale of the financial crisis facing the incoming Barack Obama administration almost beggars description, with the US financial crisis certainly the worst in the post-World War II period. The new government will inherit, besides sheer financial chaos, the largest fiscal deficit, projected at US$1.5 trillion in 2009, the highest level of public debt, and arguably the most expansionary and destabilizing monetary policy in US history.

The financial crisis is largely due to disorderly monetary policy of the Federal Reserve first under Alan Greenspan and now Ben Bernanke, in combination with lax financial supervision. The banking crisis has been triggered by the deliberate attempt of the Fed to re-inflate the economy since August 2007 and to prevent housing prices from adjusting to market fundamentals.

This expansionary policy was supported by a US$300 billion package adopted by the US Congress in July 2008 to support housing prices. Unfortunately, speculation shifted from housing to commodities and foreign exchange markets, sending food prices to unprecedented levels, oil price to $147 per barrel and the dollar to record lows.

The Fed has pursued an aggressive cheap monetary policy to inflate the economy, with fixed-income and wage earners having to pay for much of the bank losses. It has inadvertently undermined the health of the US banking system and caused economic recession.

By forcing real interest rates to negative levels, the Fed has eroded the income margins of the banking system at a time when banks have suffered huge losses and are in dire need of reconstituting their profitability, reserves, and price risks.

By circumventing banks and lending directly to borrowers at artificially low interest rates, the Fed is further undercutting the banking system and squeezing bank incomes. In order to keep interest rates low, the Fed has been injecting liquidity at a phenomenal rate, about $200 billion a week, pushing its outstanding credit to close to $2.5 trillion. This money is being used in part to monetize the fiscal deficit which has widened under the TARP, stimulus packages, housing bailouts, and war spending.

What does a combination of record fiscal deficits and overly expansionary monetary policy portend for US economic growth, inflation, external deficits, and the dollar? Real economic growth has slowed and unemployment has risen since August 2007, essentially under the effect of high food and energy price inflation and declining real savings.

Maintaining the same policy stance, that is to say excessive fiscal deficits and record monetary expansion, can only deepen real economic recession and increase unemployment because the deficit will increase consumption and depress savings and investment.

Hence, the amount of investment required for economic growth will be diminished, unless foreign financing becomes available to cover the savings-investment gap. In view of the prospects of a collapse of the dollar relative strong currencies (Japanese yen) and gold and the prevalence of low interest rates in the US, foreign financing may not be as readily forthcoming as in the past.

What will be the impact on inflation? The massive injection of liquidity after August 2007 combined with low interest rates that triggered high commodity price inflation are finally bringing world economic growth to a significant slowdown. The recent massive liquidity injections by the Fed have yet to find their way into aggregate demand. As this liquidity translates gradually into new credit to the government and the economy, aggregate demand will expand rapidly in nominal terms and will drive inflation upward.

Although, commodity prices have recently retreated, the outlook would be a resumption of rapid inflation with serious social consequences. The inflationary impact will operate through a lag that could extend up to two years. Once liquidity is fully transmitted and the lag is completed, the inflationary impact could be much stronger than witnessed during 2007-08. The massive liquidity is hoarded within the banking system. Banks have learned painful lessons from their recent debacle. In spite of the government pressure to lend regardless of risk, since the government provides unlimited bailouts, banks do not want to lend money they will never recover again. Most of their placement is in Treasury bills, or earning interest from the Fed on excess reserves.

The impact of the fiscal and money expansion on the external deficit and the dollar are evident. When fiscal or money expansion exceeds available savings, they translate into higher external deficit and a depreciating currency. The US external deficit widened to 7% of gross domestic product in 2007 and the US dollar tumbled relative to gold and the other major currencies.

The present policy stance in the US, that is free spending by the Congress, unlimited bailouts, and an expansionary Fed, is unsustainable. It could lead to high inflation, or even hyperinflation, a falling currency, and a more severe banking crisis in the future. The fiscal deficit cannot expand beyond real resources without fueling inflation. The government cannot for ever control or subsidize housing prices. Similarly, the Fed cannot keep interest rates negative in real terms for a prolonged period without damaging the real economy.

The chaotic nature of these policies can be felt only when disastrous economic and financial consequences prevail in the form of falling real incomes, rising unemployment, and waves of bankruptcies. Otherwise, policymakers will remain oblivious to the consequences of their wrongdoing, the same as Greenspan ignoring the housing bubble or Bernanke the commodity bubble.

The new administration has to accept the reality and pain of repairing the financial and economic disorder of the George W Bush years. The panacea of interest rates cuts or instantaneous fixes for the economy, a la Greenspan or Bernanke, have to be discarded. Similarly, the bailouts and interference with housing price adjustment have to be abandoned.

While the new administration has not yet announced a comprehensive economic program, beyond popular campaign speeches and vague promises, a stabilization program for the US economy should have four objectives if economic prosperity with financial stability is to be regained. These objectives consist of reducing the fiscal deficits; restraining monetary policy; allowing market determination of housing prices, interest rates, and securities prices; and restoring a supply-oriented growth strategy.
Certainly such a program is not a populist one and may be rejected by policymakers. However, it is unavoidable and will lead the economy from stagflation to sustainable non-inflationary growth. What are the benefits of each objective?

The reduction of fiscal deficit will allow national savings to increase and the private sector to invest and grow. It will avoid excessive monetization of the deficit and therefore reduce excess aggregate demand, external deficits, inflationary pressure, and currency depreciation. The restraint of monetary policy would allow interest rates to become market-determined and turn positive in real terms. Savings will increase; the banking system will regain its strength, reconstitute its income and reserve, and recapitalize. Credit to the economy will be realigned with savings and will be re-directed toward profitable and productive investment, and away from speculation and riskier credit.

Speculation can thrive only in a context of cheap monetary policy. For instance the housing or commodity bubbles and insolvent consumer loans would not have taken place in the context of a tight monetary environment.

Bailouts should be suspended; the central bank plays the role of last resort lender only for viable and solvent banks. No economy can growth with indefinitely negative real interest rates, which are only propitious for speculation and consumption.

Housing prices, interest rates, and security prices have to be market-determined. The US Congress and the Fed should not combine forces to keep a two-bedroom mobile home in California at $1.4 million when its true cost does not exceed $100,000, or prevent overly speculative housing prices from adjusting to market fundamentals. The government cannot for ever control the prices of more than 300,000 million dwelling units or millions of real-estate properties. Such control will maintain huge price distortions in the economy; it is too costly for the taxpayers; it will require renewed housing packages; and will be too disruptive for the economy. Moreover, knowing that the government will pay for mortgages, debtors will default on their payments even though they are in a position to make payments.

A demand-led growth program, as under the Bush administration where credit was showered on consumers and homeowners who could not afford it, has proven to be destabilizing for the financial system, costly for public finances, and creating excessive uncertainties and violent price and exchange rates instability. Moreover, such economic growth is not durable; it goes from a boom to a bust where real income gains during the boom are more than wiped out during the bust.

A supply-side economic growth requires neither an expansionary fiscal policy nor an expansionary monetary policy. It is oriented toward long-term investment in infrastructure and research, human development in education and health, and productive long-term investment in agriculture, industry, and services.

The recipes of this strategy are well known. The government should concentrate on social and economic infrastructure, such as roads, hospitals, schools, sanitation, environment protection, water, and energy; enhance factor and product markets competitiveness; reduce or eliminate factor and product price distortions; adopt reasonable income and corporate taxation; reduce trade barriers; and preserve financial stability. Such strategy is not consonant with over-indebtedness, booms and busts, or speculation, but will lead to stable and durable non-inflationary growth.

Will the Obama administration rein in the super inflationary policies of Bernanke's Fed and reduce fiscal deficits? Absent straight talk with the American people and a clear program, political and Wall Street pressures will most likely shape the new administration's policies and practices. Unfortunately, it seems that there is still no clear path towards economic and financial stability in our future.

Hossein Askari professor of international business and international affairs at George Washington University. Noureddine Krichene is an economist at the International Monetary Fund and a former advisor, Islamic Development Bank, Jeddah.

interview: a leading bear turns bull By Barry Ritholtz

The Big Picture

There’s no doubt we’re looking at an extremely oversold market. But by the end of the week, that oversold condition could be worked off. There’s upside here for a trade.

Over the past 100 years, we’ve only seen the relative strength of the S&P 500 drop to this level five times, and each time, it has been a major buying opportunity, although not necessarily a major bottom.

If you look at 1929, it was a low but it wasn’t the low, and there was a bounce. It was the same thing after Sept. 11 — from Sept. 21, you had a 40% bounce in the Nasdaq before you went down to make all-time lows.

Blaming Moody’s By Barry Ritholtz

December 7, 2008 |  The Big Picture

“We obviously cannot ask payment for rating a bond. To do so would attach a price to the process, and we could not escape the charge, which would undoubtedly come, that our ratings are for sale.”

— Edmund Vogelius, a Moody’s vice president, explained the company’s business model in a 1957 article in The Christian Science Monitor

“These errors make us look either incompetent at credit analysis or like we sold our soul to the devil for revenue, or a little bit of both.”

— A Moody’s managing director responding anonymously to an internal management survey, September 2007.

The Sunday NYT has a big Gretchen Morgenson column on Moody’s, one of the three incompetent and corrupt ratings agencies that helped foster the current credit crisis.

A combination of factors led the ratings agencies to their current state of criminal embarrassment. Once they went public, the usual short term focus on profits began driving what was once an objective decision making process regarding rating bonds.

Once again, we see misplaced incentives shift the focus of a publicly traded firm: From safe, low-margin business of rating bonds to the more lucrative business of covering structured financial products and derivatives.

Thomas J. McGuire, a former director of corporate development at the company who left in 1996, was quote din the Times article, saying: “Moody’s was like a good watchdog that had regarded the financial markets as its turf and barked and growled when anybody it didn’t know came near it. But in the ’90s, that watchdog got muzzled and gelded. It was told to turn into a lapdog.”

This was a huge shift in where revenue came from. Formerly, it was the investors who bought Moody’s research and analysis. More recently, the ratings agencies worked with the underwriters. It was a bad case of pay-for-play payola, where triple AAA ratings weren’t forthcoming, the weasely bankers threatened to take their business to one of the other ratings firms.

And of course, the SEC, enraptured in their radical free-market, self-regulating, delusions, were nowhere to be found. The SEC is formerly in charge of supervising the agencies, but it was yet another example of nonfeasance: the intentional failure to perform a required legal duty or obligation.

Here’s an excerpt:

Since the subprime mortgage troubles exploded into a full-blown financial crisis last year, the three top credit-rating agencies — Moody’s, Standard & Poor’s and Fitch Ratings — have faced a firestorm of criticism about whether their rosy ratings of mortgage securities generated billions of dollars in losses to investors who relied on them.

The agencies are supposed to help investors evaluate the risk of what they are buying. But some former employees and many investors say the agencies, which were paid far more to rate complicated mortgage-related securities than to assess more traditional debt, either underestimated the risk of mortgage debt or simply overlooked its danger so they could rake in large profits during the housing boom.

A Moody’s spokesman, Anthony Mirenda, said the company would not change ratings without substantive reasons. “As a matter of policy, Moody’s is obligated to reconvene a rating committee if there is new information put forth by an issuer that could have a material impact on a security’s creditworthiness,” he said, “and our policies prohibit changes to ratings for anything other than credit considerations.”

He added that “Moody’s knows of no instances in which a reconvened rating committee resulted in improper changes to ratings on Countrywide securities.”

What a bunch of clowns.

Since I cannot put this in the book, I might as well toss it out here: All of these motherfuckers need to be thrown in prison, where they will be sodomized on a daily basis for the rest of their lives.

[Dec 4 2008] More Bailout Comparisons

2008 Credit Crisis Bailout: a mountain give birth to a mouse...
The Big Picture
Prior Bailouts as a % of US GDP

via mindtangle (note that this data is already old!)

[Dec 4 2008] Records of Failure

Pretty acerbic summary of Obama's economic appointments as appointment of the “Yeltsin” team who sponsored Russia’s privatization mess in the mid-1990s – Larry Summers and other Robert Rubin protégés. Summers-related paragraph is hilarious:

Summers went so far as to write in an internal note: The under-populated countries of Africa are largely under-polluted. Their air quality is unnecessarily good compared to Los Angeles or Mexico (...)  There needs to be greater migration of pollutant industries towards the least developed countries (...) and greater concern about a factor increasing the risk of prostate cancer in a country where people live long enough to get the disease, than in a country where 200 children per thousand die before the age of five. He even adds, still in 1991: There are no limits on the planet's capacity for absorption likely to hold us back in the foreseeable future. The danger of an apocalypse due to global warming or anything else is non-existent. The idea that the world is heading into the abyss is profoundly wrong. The idea that we should place limits on growth because of natural limitations is a serious error; indeed, the social cost of such an error would be enormous if ever it were to be acted upon.

[Dec 4 2008] Trying to avoid the unavoidable, but at what cost?

Are banks necessary in this scenario or are they merely leeches?

These financial bailouts are ostensibly justified so that the banks will "lend again", except of course that they're not lending, rather they are hoarding the money. Presumably the idea is that, eventually, the banks will have enough money to feel safe enough to start lending. What no one doing the bailing cares to mention is that money provided by taxpayers is shoveled en masse to banks so they can, one day, lend that money back out to taxpayers at interest. This doesn't make sense. Taxpayers pay the government, the government pays the banks, the banks cream off their salaries and perks and bonuses and operating costs and everything else, and then lend back to the taxpayers? Are banks necessary in this scenario or are they merely leeches?

[Dec 4 2008] Shoot the messenger, again

It looks like Marxist orthodoxy which considered "bourgeoisie journalists" as special kind of prostitutes might not be completely off mark in case of financial journalism...
December 3 2008 09:26 |

As the search for scapegoats for five years of bad banking intensifies – even the Queen wants to know why no one saw the credit crunch coming – it was inevitable that financial journalists would be dragged into the stocks. With a Treasury select committee deliberating whether to impose reporting restrictions during banking crises, the risk of regulatory creep is rising. It is a sign of the times that Richard Lambert, director-general of the CBI, an employers’ body, has slammed the Press Complaints Commission, a self-regulatory body, for failing to ram home the “special responsibilities” on business journalists in such time

[Dec 04, 2008] Should the 401k Be Killed By Justin Fox

Dec. 04, 2008 | TIME

Teresa Ghilarducci has always had more interesting — and controversial — things to say than your average retirement-policy wonk. An economist who moved this year from the University of Notre Dame to the New School for Social Research in New York City, she has railed for years against the decline of the traditional pension. She recently wrote a book subtitled The Plot Against Pensions and the Plan to Save Them; the less contentious main title is When I'm Sixty-Four.

Still, as she sat at the witness table on Oct. 7 at a hearing of the House Committee on Education and Labor, running through the litany of what's wrong with the 401(k) and other defined-contribution retirement plans — they have high fees, for one — Ghilarducci didn't think she was courting controversy. "I was saying things that seemed completely milquetoast," she recalls. Ghilarducci did bring up a bold proposal to replace the 401(k) with a mandatory, government-run pension plan and suggested that Congress immediately allow retirees to swap 401(k)s battered by the stock market's collapse for monthly payouts from the government. But she had floated both ideas before, to little effect. (See pictures of the global financial crisis.)

This time, all hell broke loose. Her proposal caught the attention of talk-radio juggernaut Rush Limbaugh, and over the next few weeks Limbaugh hammered on Ghilarducci's idea as a Democratic plot to kill the 401(k). "McCain has gotta tie Obama to these people," he said on the air. Republican presidential candidate John McCain did try, but only perfunctorily. It didn't help him much on Election Day.

Limbaugh has since dropped the subject, but it is far from dead. In fact, it's evolving. While Limbaugh took care to describe Ghilarducci's proposals correctly even as he castigated them, word has since spread, and warped, in some conservative circles of a purported Democratic plan to confiscate 401(k)s. Ghilarducci, who thinks existing accounts should be grandfathered under any new scheme, says she's still being swamped with email from people berating her for trying to steal their money. (That's Wall Street's job, isn't it?)

Meanwhile, Ghilarducci's long list of 401(k) deficiencies hasn't gotten any shorter, and the Democrats, who as of January will dominate Washington, may just try to do something about them.

The 401(k) gets its name from a section of the Internal Revenue Code that, a clever benefits consultant discovered in 1980, could be used to build tax-sheltered employee retirement plans. It was at first seen as a supplement to the existing system of workplace pensions, but during the 1990s the 401(k) largely replaced pensions in the private sector.

Therein lies the problem, or problems. Unlike pensions, 401(k)s are voluntary, and many workers either don't participate or don't set aside enough money to give them a shot at a comfortable retirement. Those who do save enough often bungle their investment choices. Those who choose well pay higher investment fees generally than pension funds do. Even participants in the best-run, lowest-cost retirement funds face the risk that the market will tank — as it has done this year — when they're close to retirement. At retirement comes another issue: pensions insure against the risk that you'll outlive your money, because they pay until you die; 401(k)s don't. And finally, the tax breaks built into the 401(k) — about $80 billion a year — fall mostly in the laps of high earners. (See 10 things to do with your money.)

The one big positive of the 401(k) is that it's portable, while most pensions aren't. But on balance, there's widespread agreement among those who study retirement matters that the 401(k) has so far proved a less-than-adequate replacement for disappearing corporate pensions. "It may be a good tax-free-savings system for wealthy individuals," sums up George Miller, the California Democrat who chairs the Education and Labor Committee and plans to spearhead a re-examination of the 401(k). "It may not be the best retirement-savings system for working families."

That leaves the question of just what the best retirement-savings system for working families might look like. There have been several proposals (including one by Barack Obama during the campaign) to create modestly subsidized, automatic IRAs, at least for the more than 50% of private-sector workers who don't have access even to 401(k)s. Ghilarducci wants more — a government-run plan, financed in part by the end of the 401(k) tax deduction, that would guarantee a 3% return above inflation. Don't think that's a good deal? Fine. But remember that for most Americans, the 401(k) isn't either.

[Dec 08, 2008] Bacevich: The Limits of Power

As Bacevich states the USA foreign policy was directly by internal impulses and first of all the desire to sustain overconsumption. But now the USA foreign policy became a factor that influence the economic policy.  In this context you can reread famous Bush quote: “Our enemies are innovative and resourceful, and so are we. They never stop thinking about new ways to harm our country and our people, and neither do we.” Aug. 5, 2004
  • September 30, 2008 | Bigpicture

    Is an imperial presidency destroying what America stands for?

    Bill Moyers sits down with history and international relations expert and former US Army Colonel Andrew J. Bacevich who identifies three major problems facing our democracy: the crises of economy, government and militarism, and calls for a redefinition of the American way of life.

    Part I click for video 

    Part II click for video

    September 26, 2008

    BILL MOYERS: Welcome to the JOURNAL.

    Here in New York a new season is opening on and off Broadway. But nothing, not even a comic opera, can compete with the spectacle, drama and farce of what's happening in Washington and on Wall Street.

    If it is possible for a political system, like individuals, to become deranged, so unhinged from reality there is no longer any regard for the consequences, we saw the process this week. It's nothing but bizarre, and for a supposedly mature democracy, deeply troubling.

    For technical reasons we had to tape this broadcast before John McCain finally made up his mind about whether to show up for the debate tonight. So we decided not to try and second guess events.

    Instead, we are going to hear some truth-telling from a man who says our country's in deep trouble and needs a renewed commitment to critical thinking, honest words, and hard choices.

    In this slim volume on THE LIMITS OF POWER, Andrew J. Bacevich goes to the root causes of our discontent and to our broken and foundering politics. That many people agree with this unsentimental diagnosis was apparent when we first aired this interview a few weeks ago, your emails poured in to In a matter of hours his book had become a best-seller.

    Now, with chaos in Washington and the markets, it seems a good time to give this soldier, scholar, and patriot another hearing. He has found an audience across the political spectrum, whether writing for THE NATION or THE AMERICAN CONSERVATIVE magazines, lecturing to college classes or testifying before Congress.

    ANDREW BACEVICH: ...fixing our problems before fixing the world's problems.

    BILL MOYERS: Bacevich speaks truth to power, no matter who's in power, which may be why those on both the left and right listen to him. Perhaps it's also because when he challenges American myths and illusions, he does so from a patriotism forged in the fire of experience as a soldier in Vietnam.

    After 23 years in the army, this West Point graduate has been teaching international relations and history at Boston University.

    Andrew J. Bacevich is with me now, welcome to the JOURNAL.

    ANDREW BACEVICH: Thank you very much for having me.

    BILL MOYERS: It's been a long time since I've read a book in which I highlighted practically every third sentence. So, it took me a while to read, what is in fact, a rather short book. You began with a quote from the Bible, the Book of Second Kings, chapter 20, verse one. "Set thine house in order." How come that admonition?

    ANDREW BACEVICH: Well, I've been troubled by the course of U.S. foreign policy for a long, long time. And I wrote the book in order to sort out my own thinking about where our basic problems lay. And I really reached the conclusion that our biggest problems are within.

    I think there's a tendency on the part of policy makers and probably a tendency on the part of many Americans to think that the problems we face are problems that are out there somewhere, beyond our borders. And that if we can fix those problems, then we'll be able to continue the American way of life as it has long existed. I think it's fundamentally wrong. Our major problems are at home.

    BILL MOYERS: So, this is a version of "Physician, heal thyself?"

    ANDREW BACEVICH: Well, yes, "Physician, heal thyself," and you begin healing yourself by looking at yourself in the mirror and seeing yourself as you really are.

    BILL MOYERS: Here is one of those neon sentences. Quote,

    "The pursuit of freedom, as defined in an age of consumerism, has induced a condition of dependence on imported goods, on imported oil, and on credit. The chief desire of the American people," you write, "is that nothing should disrupt their access to these goods, that oil, and that credit. The chief aim of the U.S. government is to satisfy that desire, which it does in part of through the distribution of largesse here at home, and in part through the pursuit of imperial ambitions abroad."

    In other words, you're saying that our foreign policy is the result of a dependence on consumer goods and credit.

    ANDREW BACEVICH: Our foreign policy is not something simply concocted by people in Washington D.C. and imposed on us. Our foreign policy is something that is concocted in Washington D.C., but it reflects the perceptions of our political elite about what we want, we the people want. And what we want, by and large - I mean, one could point to many individual exceptions - but, what we want, by and large is, we want this continuing flow of very cheap consumer goods.

    We want to be able to pump gas into our cars regardless of how big they may happen to be, in order to be able to drive wherever we want to be able to drive. And we want to be able to do these things without having to think about whether or not the book's balanced at the end of the month, or the end of the fiscal year. And therefore, we want this unending line of credit.

    BILL MOYERS: You intrigued me when you wrote that "The fundamental problem facing the country will remain stubbornly in place no matter who is elected in November." What's the fundamental problem you say is not going away no matter whether it's McCain or Obama?

    ANDREW BACEVICH: What neither of these candidates will be able to, I think, accomplish is to persuade us to look ourselves in the mirror, to see the direction in which we are headed. And from my point of view, it's a direction towards ever greater debt and dependency.

    BILL MOYERS: And you write that "What will not go away, is a yawning disparity between what Americans expect, and what they're willing or able to pay." Explore that a little bit.

    ANDREW BACEVICH: Well, I think one of the ways we avoid confronting our refusal to balance the books is to rely increasingly on the projection of American military power around the world to try to maintain this dysfunctional system, or set of arrangements that have evolved over the last 30 or 40 years.

    But, it's not the American people who are deploying around the world. It is a very specific subset of our people, this professional army. We like to call it an all-volunteer force-

    BILL MOYERS: Right.

    ANDREW BACEVICH: -but the truth is, it's a professional army, and when we think about where we send that army, it's really an imperial army. I mean, if as Americans, we could simply step back a little bit, and contemplate the significance of the fact that Americans today are fighting in Iraq and Afghanistan, and ask ourselves, how did it come to be that organizing places like Iraq and Afghanistan should have come to seem to be critical to the well-being of the United States of America.

    There was a time, seventy, eighty, a hundred years ago, that we Americans sat here in the western hemisphere, and puzzled over why British imperialists went to places like Iraq and Afghanistan. We viewed that sort of imperial adventurism with disdain. But, it's really become part of what we do. Unless a President could ask fundamental questions about our posture in the world, it becomes impossible then, for any American President to engage the American people in some sort of a conversation about how and whether or not to change the way we live.

    BILL MOYERS: How is Iraq a clear manifestation, as you say, of this, "yawning disparity between what Americans expect, and what they're willing to pay?"

    ANDREW BACEVICH: Let's think about World War Two. A war that President Roosevelt told us was essential to U.S. national security, and was. And President Roosevelt said at the time, because this is an important enterprise, you, the American people, will be called upon to make sacrifices. And indeed, the people of the United States went off to fight that war in large numbers. It was a national effort. None of that's been true with regard to Iraq. I mean, one of the most striking things about the way the Bush Administration has managed the Global War on Terror, which President Bush has compared to World War Two.

    BILL MOYERS: Right.

    ANDREW BACEVICH: One of the most striking things about it is that there was no effort made to mobilize the country, there was actually no effort even made to expand the size of the armed forces, as a matter of fact. The President said just two weeks or so after 9/11, "Go to Disney World. Go shopping." Well, there's something out of whack here, if indeed the Global War on Terror, and Iraq as a subset of the Global War on Terror is said to be so critically important, on the one hand. And on the other hand, when the country basically goes about its business, as if, really, there were no War on Terror, and no war in Iraq ongoing at all.

    BILL MOYERS: "So it is," you write, "seven years into its confrontation with radical Islam, the United States finds itself with too much war for too few warriors and with no prospect of producing the additional soldiers needed to close the gap." When I hear all this talk about increasing the troops in Afghanistan from two to three battalions, maybe even more, I keep asking myself, where are we going to get those troops?

    ANDREW BACEVICH: Well, and of course the answer is, they have to come from Iraq. I mean, as we speak, the security conditions in Iraq have improved a little bit, and in a sense, it's just in time, because what the Pentagon wants to do is to draw down its presence in Iraq to some degree, not in order to give those troops a breather, but in order to redeploy them after a period of retraining to Afghanistan, because Afghanistan is going so poorly. So, we're having a very difficult time managing two wars which, in the 20th century context, they're actually relatively small.

    BILL MOYERS: You say, "U.S. troops in battle dress and body armor, whom Americans profess to admire and support, pay the price for the nation's refusal to confront our domestic dysfunction." What are we not confronting?

    ANDREW BACEVICH: The most obvious, the blindingly obviously question, is energy. It's oil. I think historians a hundred years from now will puzzle over how it could be that the United States of America, the most powerful nation in the world, as far back as the early 1970s, came to recognize that dependence on foreign oil was a problem, posed a threat, comprised our freedom of action.

    How every President from Richard Nixon down to the present one, President Bush, declared, "We're gonna fix this problem." None of them did. And the reason we are in Iraq today is because the Persian Gulf is at the center of the world's oil reserves. I don't mean that we invaded Iraq on behalf of big oil, but the Persian Gulf region would have zero strategic significance, were it not for the fact that that's where the oil is.

    Back in 1980, I think, President Carter, in many respects when he declared the Carter Doctrine, and said that henceforth, the Persian Gulf had enormous strategic significance to the United States and the United States is not going to permit any other country to control that region of the world.

    And that set in motion a set of actions that has produced the militarization of U.S. policy, ever deeper U.S. military involvement in the region, and in essence, has postponed that day of reckoning when we need to understand the imperative of having an energy policy, and trying to restore some semblance of energy independence.

    BILL MOYERS: And this is connected, as you say in the book, in your first chapters, of what you call "the crisis of profligacy."

    ANDREW BACEVICH: Well, we don't live within our means. I mean, the nation doesn't, and increasingly, individual Americans don't. Our saving - the individual savings rate in this country is below zero. The personal debt, national debt, however you want to measure it, as individuals and as a government, and as a nation we assume an endless line of credit.

    As individuals, the line of credit is not endless, that's one of the reasons why we're having this current problem with the housing crisis, and so on. And my view would be that the nation's assumption, that its line of credit is endless, is also going to be shown to be false. And when that day occurs it's going to be a black day, indeed.

    BILL MOYERS: You call us an "empire of consumption."

    ANDREW BACEVICH: I didn't create that phrase. It's a phrase drawn from a book by a wonderful historian at Harvard University, Charles Maier, and the point he makes in his very important book is that, if we think of the United States at the apex of American power, which I would say would be the immediate post World War Two period, through the Eisenhower years, into the Kennedy years. We made what the world wanted. They wanted our cars. We exported our television sets, our refrigerators - we were the world's manufacturing base. He called it an "empire of production."

    BILL MOYERS: Right.

    ANDREW BACEVICH: Sometime around the 1960s there was a tipping point, when the "empire of production" began to become the "empire of consumption." When the cars started to be produced elsewhere, and the television sets, and the socks, and everything else. And what we ended up with was the American people becoming consumers rather than producers.

    BILL MOYERS: And you say this has produced a condition of profound dependency, to the extent, and I'm quoting you, "Americans are no longer masters of their own fate."

    ANDREW BACEVICH: Well, they're not. I mean, the current debt to the Chinese government grows day by day. Why? Well, because of the negative trade balance. Our negative trade balance with the world is something in the order of $800 billion per year. That's $800 billion of stuff that we buy, so that we can consume, that is $800 billion greater than the amount of stuff that we sell to them. That's a big number. I mean, it's a big number even relative to the size of our economy.

    BILL MOYERS: And you use this metaphor that is intriguing. American policy makers, quote, "have been engaged in a de facto Ponzi scheme, intended to extend indefinitely, the American line of credit." What's going on that resembles a Ponzi scheme?

    ANDREW BACEVICH: This continuing tendency to borrow and to assume that the bills are never going to come due. I testified before a House committee six weeks ago now, on the future of U.S grand strategy. I was struck by the questions coming from members that showed an awareness, a sensitivity, and a deep concern, about some of the issues that I tried to raise in the book.

    "How are we gonna pay the bills? How are we gonna pay for the commitment of entitlements that is going to increase year by year for the next couple of decades, especially as baby boomers retire?" Nobody has answers to those questions. So, I was pleased that these members of Congress understood the problem. I was absolutely taken aback when they said, "Professor, what can we do about this?" And their candid admission that they didn't have any answers, that they were perplexed, that this problem of learning to live within our means seemed to have no politically plausible solution.

    BILL MOYERS: You say in here that the tipping point between wanting more than we were willing to pay for began in the Johnson Administration. "We can fix the tipping point with precision," you write. "It occurred between 1965, when President Lyndon Baines Johnson ordered U.S. combat troops to South Vietnam, and 1973, when President Richard Nixon finally ended direct U.S. involvement in that war." Why do you see that period so crucial?

    ANDREW BACEVICH: When President Johnson became President, our trade balance was in the black. By the time we get to the Nixon era, it's in the red. And it stays in the red down to the present. Matter of fact, the trade imbalance becomes essentially larger year by year.

    So, I think that it is the '60s, generally, the Vietnam period, slightly more specifically, was the moment when we began to lose control of our economic fate. And most disturbingly, we're still really in denial. We still haven't recognized that.

    BILL MOYERS: Now you go on to say that there was another fateful period between July 1979 and March of 1983. You describe it, in fact, as a pivot of contemporary American history. That includes Jimmy Carter and Ronald Reagan, right?

    ANDREW BACEVICH: Well, I would be one of the first to confess that - I think that we have misunderstood and underestimated President Carter. He was the one President of our time who recognized, I think, the challenges awaiting us if we refused to get our house in order.

    BILL MOYERS: You're the only author I have read, since I read Jimmy Carter, who gives so much time to the President's speech on July 15th, 1979. Why does that speech speak to you so strongly?

    ANDREW BACEVICH: Well, this is the so-called Malaise Speech, even though he never used the word "malaise" in the text to the address. It's a very powerful speech, I think, because President Carter says in that speech, oil, our dependence on oil, poses a looming threat to the country. If we act now, we may be able to fix this problem. If we don't act now, we're headed down a path in which not only will we become increasingly dependent upon foreign oil, but we will have opted for a false model of freedom. A freedom of materialism, a freedom of self-indulgence, a freedom of collective recklessness. And what the President was saying at the time was, we need to think about what we mean by freedom. We need to choose a definition of freedom which is anchored in truth, and the way to manifest that choice, is by addressing our energy problem.

    He had a profound understanding of the dilemma facing the country in the post Vietnam period. And of course, he was completely hooted, derided, disregarded.

    BILL MOYERS: And he lost the election. You in fact say-


    BILL MOYERS: -this speech killed any chance he had of winning reelection. Why? Because the American people didn't want to settle for less?

    ANDREW BACEVICH: They absolutely did not. And indeed, the election of 1980 was the great expression of that, because in 1980, we have a candidate, perhaps the most skillful politician of our time, Ronald Reagan, who says that, "Doom-sayers, gloom-sayers, don't listen to them. The country's best days are ahead of us."

    BILL MOYERS: Morning in America.

    ANDREW BACEVICH: It's Morning in America. And you don't have to sacrifice, you can have more, all we need to do is get government out of the way, and drill more holes for oil, because the President led us to believe the supply of oil was infinite.

    BILL MOYERS: You describe Ronald Reagan as the "modern prophet of profligacy. The politician who gave moral sanction to the empire of consumption."

    ANDREW BACEVICH: Well, to understand the truth about President Reagan, is to understand why so much of what we imagined to be our politics is misleading and false. He was the guy who came in and said we need to shrink the size of government. Government didn't shrink during the Reagan era, it grew.

    He came in and he said we need to reduce the level of federal spending. He didn't reduce it, it went through the roof, and the budget deficits for his time were the greatest they had been since World War Two.

    BILL MOYERS: And do you remember that it was his successor, his Vice President, the first President Bush who said in 1992, the American way of life is not negotiable.

    ANDREW BACEVICH: And all presidents, again, this is not a Republican thing, or a Democratic thing, all presidents, all administrations are committed to that proposition. Now, I would say, that probably, 90 percent of the American people today would concur. The American way of life is not up for negotiation.

    What I would invite them to consider is that, if you want to preserve that which you value most in the American way of life, and of course you need to ask yourself, what is it you value most. That if you want to preserve that which you value most in the American way of life, then we need to change the American way of life. We need to modify that which may be peripheral, in order to preserve that which is at the center of what we value.

    BILL MOYERS: What do you value most?

    ANDREW BACEVICH: Well, I think the clearest statement of what I value is found in the preamble to the Constitution. There is nothing in the preamble to the Constitution which defines the purpose of the United States of America as remaking the world in our image, which I view as a fool's errand. There is nothing in the preamble of the Constitution that ever imagined that we would embark upon an effort, as President Bush has defined it, to transform the Greater Middle East. This region of the world that incorporates something in order of 1.4 billion people.

    I believe that the framers of the Constitution were primarily concerned with focusing on the way we live here, the way we order our affairs. To try to ensure that as individuals, we can have an opportunity to pursue our, perhaps, differing definitions of freedom, but also so that, as a community, we could live together in some kind of harmony. And that future generations would also be able to share in those same opportunities.

    The big problem, it seems to me, with the current crisis in American foreign policy, is that unless we do change our ways, the likelihood that our children, our grandchildren, the next generation is going to enjoy the opportunities that we've had, is very slight, because we're squandering our power. We are squandering our wealth. In many respects, to the extent that we persist in our imperial delusions, we're also going to squander our freedom because imperial policies, which end up enhancing the authority of the imperial president, also end up providing imperial presidents with an opportunity to compromise freedom even here at home. And we've seen that since 9/11.

    BILL MOYERS: The disturbing thing that you say again and again in here, is that every President since Reagan has relied on military power to conceal or manage these problems that stem from the nation's habits of profligacy, right?

    ANDREW BACEVICH: That's exactly right. And again, this is, I think, this is another issue where one needs to be unsparing in fixing responsibility as much on liberal Democratic presidents as conservative Republican ones. I think that the Bush Administration's response to 9/11 in constructing this paradigm of a global war on terror, in promulgating the so called, Bush Doctrine of Preventive War, in plunging into Iraq - utterly unnecessary war - will go down in our history as a record of recklessness that will be probably unmatched by any other administration.

    But, doesn't really mean that Bill Clinton before him, or George Herbert Walker Bush before him, or Ronald Reagan before him, were all that much better. Because they all have seen military power as our strong suit. They all have worked under the assumption that through the projection of power, or the threat to employ power, that we can fix the world. Fix the world in order to sustain this dysfunctional way of life that we have back here.

    BILL MOYERS: So, this brings us to what you call the political crisis of America. And you say, "The actual system of government conceived by the framers no longer pertains." What pertains?

    ANDREW BACEVICH: I am expressing in the book, in a sense, what many of us sense, even if many of us don't really want to confront the implications. The Congress, especially with regard to matters related to national security policy, has thrust power and authority to the executive branch. We have created an imperial presidency. The congress no longer is able to articulate a vision of what is the common good. The Congress exists primarily to ensure the reelection of members of Congress.

    As the imperial presidency has accrued power, surrounding the imperial presidency has come to be this group of institutions called the National Security State. The CIA, the Joint Chiefs of Staff, the Office of the Secretary of Defense, the other intelligence agencies. Now, these have grown since the end of World War Two into this mammoth enterprise.

    But the National Security State doesn't work. The National Security State was not able to identify the 9/11 conspiracy. Was not able to deflect the attackers on 9/11. The National Security State was not able to plan intelligently for the Iraq War. Even if you think that the Iraq War was necessary. They were not able to put together an intelligent workable plan for that war.

    The National Security State has not been able to provide the resources necessary to fight this so called global war on terror. So, as the Congress has moved to the margins, as the President has moved to the center of our politics, the presidency itself has come to be, I think, less effective. The system is broken.

    BILL MOYERS: Yeah, you say no one knows what they're doing, including the President. No one in Washington, as you say, that's the political crisis, as you define it, no one in Washington knows what they're doing.

    ANDREW BACEVICH: What I mean specifically is this. The end of the Cold War coincided almost precisely with the first Persian Gulf War of 1990, 1991, Operation Desert Storm. Operation Desert Storm was perceived to be this great, historic, never before seen victory. It really wasn't.

    BILL MOYERS: The mother of all battles-

    ANDREW BACEVICH: Right, I mean-

    BILL MOYERS: Schwarzkopf cam-

    ANDREW BACEVICH: Politically, and strategically, the outcome of that war was far more ambiguous than people appreciated at the time. But nonetheless, the war itself was advertised as this great success, demonstrating that a new American way of war had been developed, and that this new American way of war held the promise of enabling the United States to exercise military dominion on a global basis in ways that the world had never seen.

    The people in the Pentagon had developed a phrase to describe this. They called it, "full spectrum dominance." Meaning, that the United States was going to exercise dominance, not just capability, dominance across the full spectrum of warfare. And this became the center of the way that the military advertised its capabilities in the 1990s. That was fraud. That was fraudulent.

    To claim that the United States military could demonstrate that kind of dominance flew in the face of all of history and in many respects, set us up for how the Bush Administration was going to respond to 9/11. Because if you believed that United States military was utterly unstoppable, then it became kind of plausible to imagine that the appropriate response to 9/11 was to embark upon this global war to transform the greater Middle East. Had the generals been more cognoscente of the history of war, and of the nature of war, then they might have been in a better position to argue to Mr. Rumsfeld, then the Secretary of Defense, or to the President himself, "Be careful." "Don't plunge ahead." Recognize that force has utility, but that utility is actually quite limited. Recognize that when we go to war, almost inevitably, there are going to be unanticipated consequences. And they're not going to be happy ones.

    Above all, recognize that, when you go to war, it's unlikely there's a neat tidy solution. It's far more likely that the bill that the nation is going to pay in lives and in dollars is going to be a monumental one. My problem with the generals is that, with certain exceptions, one could name as General Shinseki, with certain exceptions-

    BILL MOYERS: Who said, "We are going to need half a million men if we go into Iraq." And-


    BILL MOYERS: -he was shown the door for telling the truth.

    ANDREW BACEVICH: By and large, the generals did not speak truth to power.

    BILL MOYERS: One of the things that comes through in your book is that great truths are contained in small absurdities. And you use the lowly IED, the improvised explosive device, or roadside bomb, that's taken such a toll of American forces in Iraq, to get at a very powerful truth. Tell me about that.

    ANDREW BACEVICH: Well war - wars are competitions. The adversary develops capabilities. Your enemy develops capabilities. And you try to develop your own capabilities to check what he can do to you to be able to, overcome his capabilities.

    One of the striking things about the Iraq War, and in which we had been fighting against, technologically at least, a relatively backward or primitive adversary, one of the interesting things is they have innovated far more adeptly and quickly than we have.

    BILL MOYERS: The insurgents.

    ANDREW BACEVICH: The insurgents have. And an example of that is the IED, which began as a very low tech kind of primitive mine. And, over time, became ever more sophisticated, ever more lethal, ever more difficult to detect, ever more difficult to check. And those enhancements in insurgent IED capability continually kept ahead of our ability to innovate and catch up.

    BILL MOYERS: And I think you say, in your book, that it costs the price of a pizza to make a roadside bomb?

    ANDREW BACEVICH: That's right. Yeah.

    BILL MOYERS: This is what our men and women are up against in Afghanistan-

    ANDREW BACEVICH: The point is to say that the reality of war is always a heck of a lot more complicated than you might imagine the day before the war begins. And, rather than looking to technology to define the future of warfare, we ought to look - really look at military history.

    BILL MOYERS: And what do we learn when we look to the past?

    ANDREW BACEVICH: What we should learn from history is that preventive war doesn't work. The Iraq War didn't work. And, therefore, we should abandon notions, such as the Bush Doctrine of preventive war. We should return to the just war tradition. Which sees force as something that is only used as a last resort. Which sees war as something that is justifiable for defensive purposes.

    BILL MOYERS: How, then, do we fight what you acknowledge, in the book, is the perfectly real threat posed by violent Islamic extremism?

    ANDREW BACEVICH: I think we need to see the threat for what it is. It is a real threat. It's not an existential threat. The 19 hijackers that killed 3,000 Americans on 9/11 didn't succeed because they had advanced technology, because they were particularly smart, because they were ten feet tall.

    They succeeded because we let our guard down and we were stupid. We need to recognize that the threat posed by violent Islamic radicalism, by terrorist organizations, al Qaeda, really is akin to a criminal conspiracy, a violent conspiracy, a dangerous conspiracy. But it's a criminal enterprise. And the primary response to a criminal enterprise is policing.

    Policing as in organizations like the FBI, intelligence organizations, some special operations forces. That would undertake a concerted campaign to identify and root out and destroy this criminal conspiracy. But that doesn't require invading and occupying countries. Again, one of the big mistakes the Bush Administration made, and it's a mistake we're still paying for, is that the President persuaded us that the best way to prevent another 9/11 is to embark upon a global war. Wrong. The best way to prevent another 9/11 is to organize an intensive international effort to root out and destroy that criminal conspiracy.

    BILL MOYERS: You, in fact, say that, instead of a bigger army, we need a smaller more modest foreign policy. One that assigns soldiers missions that are consistent with their capability. "Modesty," I'm quoting you, "requires giving up on the illusions of grandeur to which the end of the Cold War and then 9/11 gave rise. It also means reining in the imperial presidents who expect the army to make good on those illusions." Do you expect either John McCain or Barack Obama to rein in the "imperial presidency?"

    ANDREW BACEVICH: No. I mean, people run for the presidency in order to become imperial presidents. The people who are advising these candidates, the people who aspire to be the next national security advisor, the next secretary of defense, these are people who yearn to exercise those kind of great powers.

    They're not running to see if they can make the Pentagon smaller. They're not. So when I - as a distant observer of politics - one of the things that both puzzles me and I think troubles me is the 24/7 coverage of the campaign.

    Parsing every word, every phrase, that either Senator Obama or Senator McCain utters, as if what they say is going to reveal some profound and important change that was going to come about if they happened to be elected. It's not going to happen.

    BILL MOYERS: It's not going to happen because?

    ANDREW BACEVICH: Not going to happen - it's not going to happen because the elements of continuity outweigh the elements of change. And it's not going to happen because, ultimately, we the American people, refuse to look in that mirror. And to see the extent to which the problems that we face really lie within.

    We refuse to live within our means. We continue to think that the problems that beset the country are out there beyond our borders. And that if we deploy sufficient amount of American power we can fix those problems, and therefore things back here will continue as they have for decades.

    BILL MOYERS: I was in the White House, back in the early 60s, and I've been a White House watcher ever since. And I have never come across a more distilled essence of the evolution of the presidency than in just one paragraph in your book.

    You say, "Beginning with the election of John F. Kennedy in 1960, "the occupant of the White House has become a combination of demigod, father figure and, inevitably, the betrayer of inflated hopes. Pope. Pop star. Scold. Scapegoat. Crisis manager. Commander in Chief. Agenda settler. Moral philosopher. Interpreter of the nation's charisma. Object of veneration. And the butt of jokes. All rolled into one." I would say you nailed the modern presidency.

    ANDREW BACEVICH: Well, and the - I think the troubling part is, because of this preoccupation with, fascination with, the presidency, the President has become what we have instead of genuine politics. Instead of genuine democracy.

    We look to the President, to the next President. You know, we know that the current President's a failure and a disappoint - we look to the next President to fix things. And, of course, as long as we have this expectation that the next President is going to fix things then, of course, that lifts all responsibility from me to fix things.

    One of the real problems with the imperial presidency, I think, is that it has hollowed out our politics. And, in many respects, has made our democracy a false one. We're going through the motions of a democratic political system. But the fabric of democracy, I think, really has worn very thin.

    BILL MOYERS: The other consequence of the imperial presidency, as you point out, is that, for members of the political class, that would include the media that covers the political class, serving, gaining access to, reporting on, second guessing, or gossiping about the imperial president are about those aspiring to succeed him, as in this campaign, has become an abiding preoccupation.

    ANDREW BACEVICH: I'm not - my job is not to be a media critic. But, I mean, one - you cannot help but be impressed by the amount of ink spilled on Obama and McCain compared to how little attention is given, for example, to the races in the Senate and the House. Now, one could say perhaps that makes sense, because the Congress has become such a dysfunctional body. But it really does describe a disproportion, I think of attention that is a problem.

    BILL MOYERS: Would the imperial presidency exist were it not for the Congress?

    ANDREW BACEVICH: No. I think that the imperial presidency would not exist but for the Congress. Because the Congress, since World War II, has thrust power and authority onto the presidency.

    BILL MOYERS: Here is what I take to be the core of your analysis of our political crisis. You write, "The United States has become a de facto one party state. With the legislative branch permanently controlled by an incumbent's party. And every President exploiting his role as Commander in Chief to expand on the imperial prerogatives of his office."

    ANDREW BACEVICH: One of the great lies about American politics is that Democrats genuinely subscribe to a set of core convictions that make Democrats different from Republicans. And the same thing, of course, applies to the other party. It's not true. I happen to define myself as a conservative.

    Well, what do conservatives say they stand for? Well, conservatives say they stand for balanced budgets. Small government. The so called traditional values.

    Well, when you look back over the past 30 or so years, since the rise of Ronald Reagan, which we, in many respects, has been a conservative era in American politics, well, did we get small government?

    Do we get balanced budgets? Do we get serious as opposed to simply rhetorical attention to traditional social values? The answer's no. Because all of that really has simply been part of a package of tactics that Republicans have employed to get elected and to - and then to stay in office.

    BILL MOYERS: And, yet, you say that the prime example of political dysfunction today is the Democratic Party in relation to Iraq.

    ANDREW BACEVICH: Well, I may be a conservative, but I can assure you that, in November of 2006, I voted for every Democrat I could possibly come close to. And I did because the Democratic Party, speaking with one voice, at that time, said that, "Elect us. Give us power in the Congress, and we will end the Iraq War."

    And the American people, at that point, adamantly tired of this war, gave power to the Democrats in Congress. And they absolutely, totally, completely failed to follow through on their commitment. Now, there was a lot of posturing. But, really, the record of the Democratic Congress over the past two years has been - one in which, substantively, all they have done is to appropriate the additional money that enables President Bush to continue that war.

    BILL MOYERS: And you say the promises of Harry Reid and Nancy Pelosi prove to be empty. Reid and Pelosi's commitment to forcing a change in policy took a backseat to their concern to protect the Democratic majority.

    ANDREW BACEVICH: Could anybody disagree with that?

    BILL MOYERS: You say, and this is another one of my highlighted sentences, that "Anyone with a conscience sending soldiers back to Iraq or Afghanistan for multiple combat tours, while the rest of the country chills out, can hardly be seen as an acceptable arrangement. It is unfair. Unjust. And morally corrosive." And, yet, that's what we're doing.

    ANDREW BACEVICH: Absolutely. And I think - I don't want to talk about my son here.

    BILL MOYERS: Your son?


    BILL MOYERS: You dedicate the book to your son.

    ANDREW BACEVICH: Yeah. Well, my son was killed in Iraq. And I don't want to talk about that, because it's very personal. But it has long stuck in my craw, this posturing of supporting the troops. I don't want to insult people.

    There are many people who say they support the troops, and they really mean it. But when it comes, really, down to understanding what does it mean to support the troops? It needs to mean more than putting a sticker on the back of your car.

    I don't think we actually support the troops. We the people. What we the people do is we contract out the business of national security to approximately 0.5 percent of the population. About a million and a half people that are on active duty.

    And then we really turn away. We don't want to look when they go back for two or three or four or five combat tours. That's not supporting the troops. That's an abdication of civic responsibility. And I do think it - there's something fundamentally immoral about that.

    Again, as I tried to say, I think the global war on terror, as a framework of thinking about policy, is deeply defective. But if one believes in the global war on terror, then why isn't the country actually supporting it? In a meaningful substantive sense?

    Where is the country?

    BILL MOYERS: Are you calling for a reinstatement of the draft?

    ANDREW BACEVICH: I'm not calling for a reinstatement of the draft because I understand that, politically, that's an impossibility. And, to tell you the truth, we don't need to have an army of six or eight or ten million people. But we do need to have the country engaged in what its soldiers are doing. In some way that has meaning. And that simply doesn't exist today.

    BILL MOYERS: Well, despite your loss, your and your wife's loss, you say in this powerful book what, to me, is a paradox. You say that, "Ironically, Iraq may yet prove to be the source of our salvation." And help me to understand that.

    ANDREW BACEVICH: We're going to have a long argument about the Iraq War. We, Americans. Not unlike the way we had a very long argument about the Vietnam War. In fact, maybe the argument about the Vietnam War continues to the present day. And that argument is going to be - is going to cause us, I hope, to ask serious questions about where this war came from.

    How did we come to be a nation in which we really thought that we could transform the greater Middle East with our army?

    What have been the costs that have been imposed on this country? Hundreds of billions of dollars. Some projections, two to three trillion dollars. Where is that money coming from? How else could it have been spent? For what? Who bears the burden?

    Who died? Who suffered loss? Who's in hospitals? Who's suffering from PTSD? And was it worth it? Now, there will be plenty of people who are going to say, "Absolutely, it was worth it. We overthrew this dictator." But I hope and pray that there will be many others who will make the argument that it wasn't worth it.

    It was a fundamental mistake. It never should have been undertaking. And we're never going to do this kind of thing again. And that might be the moment when we look ourselves in the mirror. And we see what we have become. And perhaps undertake an effort to make those changes in the American way of life that will enable us to preserve for future generations that which we value most about the American way of life.

    BILL MOYERS: The book is "The Limits of Power: The End of American Exceptionalism." Andrew J. Bacevich, thank you for being with me.

    ANDREW BACEVICH: Thank you very much.

    BILL MOYERS: I have to believe that if Barack Obama and John McCain took time to read THE LIMITS OF POWER, this would be a different campaign. The reality just might sober them up.

    A personal word if you will at the end of this frenzied and dangerous week. All week I've thought of my father — and his friend in the White House. My father dropped out of the fourth grade and never returned to high school because his family needed him to pick cotton to help ends meet. The Great Depression knocked him down and almost out. He never made more than $100 a week in his working life, and he made that only when he joined the union in the last job he held. He voted for Franklin Delano Roosevelt in four straight elections and would have gone on voting for him until kingdom come if he'd had the chance. When I asked him why, he said, "Because he was my friend."

    Now, my father of course never met FDR; no politician ever paid him much note. But when Roosevelt died, my father wept. I puzzled at how it was a struggling young husband and father, lucky enough to get a job as a day laborer on the highway to Oklahoma City, could believe that the patrician in the White House knew what life was like for people like him.

    Then, one day, years later, listening to a compilation of Franklin Roosevelt's speeches, I understood. Listen, and I think you will understand too. Remember, it's 1933-- chaos has descended across the country. Millions are out of work, their savings gone, their pantries empty, and a quarter of the banks are closed. Everything that's tied down is coming loose. And there on the banks of the Red River a young couple with one son and about to have another, sat listening to the radio, listening to the new president being sworn into office, listening to this:

    FRANKLIN D. ROOSEVELT: In such a spirit on my part and on yours we face our common difficulties…a host of unemployed citizens face the grim problem of existence and an equally great number toil with little return…Yes, the money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.

    This is preeminently the time to speak the truth, the whole truth, frankly and boldly…let me assert my firm belief that the only thing we have to fear is fear itself…

    BILL MOYERS: And so my father took heart. No false promises. No passing the buck. No pandering. Just a simple truth: when the new president said we can do this, my father knew he was included. He never forgot it, never stopped believing his friend in the White House believed in him.

    That's it for the JOURNAL.

    Before we go, I want to call your attention to a special broadcast scheduled to air on many of these PBS stations next week, as part of the series, "POV." "Critical Condition" is the powerful story of four patients struggling to survive, to survive not only illness but America's failing health care system, where treatment is all too often delayed or denied.

    WOMAN: A lot of people are dying, and they're dying because they don't have health care.

    I'm Bill Moyers. We'll see you next week.

    [Dec 07, 2008] Deflation virus is moving the policy test beyond the 1930s extremes -


    We are beyond the extremes of the 1930s. The frontiers of monetary policy are being pushed to limits that may now test viability of paper currencies and modern central banking.

    You cannot drop below zero. So what next if the credit markets refuse to thaw? Yes, Japan visited and survived this policy Hell during its lost decade, but that was a local affair in an otherwise booming global economy. It tells us nothing.

    This time we are all going down together. There is no deus ex machina to lift us out. Certainly not China, which is the most vulnerable of all.

    As the risk grows, officials at the highest level of the British Government have begun to circulate a six-year-old speech by Ben Bernanke – at the time of its writing, a garrulous kid governor at the US Federal Reserve. Entitled Deflation: Making Sure It Doesn’t Happen Here, it is the manual of guerrilla tactics for defeating slumps by monetary means.

    “The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost,” he said.

    Critics had great fun with this when Bernanke later became Fed chief. But the speech is best seen as a thought experiment by a Princeton professor thinking aloud during the deflation mini-scare of 2002.

    His point was that central banks never run out of ammunition. They have an inexhaustible arsenal. The world’s fate now hangs on whether he was right (which is probable), or wrong (which is possible).

    As a scholar of the Great Depression, Bernanke does not think that sliding prices can safely be allowed to run their course. “Sustained deflation can be highly destructive to a modern economy,” he said.

    Once the killer virus becomes lodged in the system, it leads to a self-reinforcing debt trap – the real burden of mortgages rises, year after year, house prices falling, year after year. The noose tightens until you choke. Subtly, it shifts wealth from workers to bondholders. It is reactionary poison. Ultimately, it leads to civic revolt. Democracies do not tolerate such social upheaval for long. They change the rules.

    Bernanke’s central claim is that the big guns of monetary policy were never properly deployed during the Depression, or during the early years of Japan’s bust, so no wonder the slumps dragged on.

    The Fed can create money out of thin air and mop up assets on the open market, like a sovereign sugar daddy. “Sufficient injections of money will ultimately always reverse a deflation.”

    Bernanke said the Fed can “expand the menu of assets that it buys”. US Treasury bonds top the list, but it can equally purchase mortgage securities from US agencies such as Fannie, Freddie and Ginnie, or company bonds, or commercial paper. Any asset will do.

    The Fed can acquire houses, stocks, or a herd of Texas Longhorn cattle if it wants. It can even scatter $100 bills from helicopters. (Actually, Japan is about to do this with shopping coupons).

    All the Fed needs is emergency powers under Article 13 (3) of its code. This “unusual and exigent circumstances” clause was indeed invoked – very quietly – in March to save the US investment bank Bear Stearns.

    There has been no looking back since. Last week the Fed began printing money to buy mortgage debt directly. The aim is to drive down the long-term interest rates used for most US home loans. The Bernanke speech is being put into practice, almost to the letter.

    No doubt, such reflation a l’outrance can “work”, but what is the exit strategy? The policy leaves behind a liquidity lake. The risk is that this will flood the system once the credit pipes are unblocked. The economy could flip abruptly from deflation to hyper-inflation.

    Nobel Laureate Robert Mundell warned last week that America faces disaster unless the Bernanke policy is reversed immediately. This is a minority view, but one held by a disturbingly large number of theorists. History will judge.

    Most central bankers suffer from a déformation professionnelle. Those shaped by the 1970s are haunted by ghosts of libertine excess. Those like Bernanke who were shaped by the 1930s live with their Depression poltergeists.

    His original claim to fame was work on the “credit channel” causes of slumps. Bank failures can snowball out of control as the “financial accelerator” kicks in. The cardinal error of the 1930s was to let lending contract.

    This is why he went nuclear in January, ramming through the most dramatic rates cuts in Fed history. Events have borne him out.

    A case can be made that Bernanke’s pre-emptive blitz has greatly reduced the likelihood of a catastrophe. It was no mean feat given that he had to face down a simmering revolt earlier this year from the Fed’s regional banks.

    ... ... ...

    Monetary stimulus is a better option than fiscal sprees that leave us saddled with public debt – the path that nearly wrecked Japan.

    Yes, I backed the Brown stimulus package – with a clothes-peg over my nose – but only as a one-off emergency. Public spending should be a last resort, as Keynes always argued.

    Of course, Bernanke should not be let off the hook too lightly. Let us not forget that he was deeply complicit in creating the disaster we now face. He was cheerleader of Alan Greenspan’s easy-money stupidities from 2003-2006. He egged on debt debauchery.

    It was he who provided the theoretical underpinnings of the Greenspan doctrine that one could safely ignore housing and stock bubbles because the Fed could simply “clean up afterwards”. Not so simply, it turns out.

    As Bernanke said in his 2002 speech: “the best way to get out of trouble is not to get into it in the first place”. Too late now.

    [Dec 4, 2008] The Root Cause of the Crisis of 2008 By JOHN WALSH

    “Why have you raised the wages of your workers, Mr. Ford”?

    “So that someone can buy my cars.”

    Why is the crash and depression of 2008 shrouded in mystery?  Why is it not possible to explain the crisis in simple terms that do not involve financial instruments which no one understands – not even their creators?  Why have the pundits and economists resorted to little more than a primitive analogy to temperature, that is, the credit market has “frozen up.”  Or a psychological one – that this is simply a crisis of confidence. The banks will not lend even though they are being provided heaps of cash by their government; but still there is no lending and no one can or will say why.  Is there a real reason why credit is not available and why banks will not lend?  Either no one knows, or the answer is unthinkable for the elite and unspeakable for the Commentariat.

    There are major factors at work in the economy for decades, which are evident to even the most casual observer; and these, it would appear, are now coming home to roost.  Since the 1970s the real wages of American workers have been falling – a decline now lasting over 30 years.  Similarly, membership in unions has plummeted as the government has made it harder to organize and employers have become ever more adept at shutting unions out.  At the same time, the Democratic Party supposedly the representative of the working class has sold out its base at every turnToday the wealthiest 400 Americans sit atop a mountain of wealth equal to the wealth of the bottom half of the population, about 150 million Americans.  And of course many jobs have been lost to overseas factories, many of them funded by American capital.  All of this is a boon to those at the top.  And all this means that the purchasing power of the average American has fallen.

    At the same time, Americans have systematically been deprived of other means of making purchases.  Defined benefit pension plans have all but disappeared, and there are calls for the remaining ones to be dismantled. Social security is not an adequate retirement program, leaving ever more people in poverty or close to it, or working until their dying day.  And education is more and more beyond the reach of those who want to “purchase” it, a real mystery, since faculty salary and benefits are in sharp decline.  (University CEO’s however are paid ever more handsomely.) Medicare, as a way for seniors to “purchase” health care, is still not comprehensive , and health insurance for all others is non-existent or prohibitively expensive ever less adequate even for those who have it.  In previous downturns health care was “counter cyclical” but not this time according to The Wall Street Journal.
    So what has been the solution to keep the economy going in this situation?  The answer is easy – credit.  Since the 1970’s the credit card has emerged as part of our life. Credit has been extended to anyone and everyone.  And plastic credit has gradually become an ever more burdensome form of usury, with stinging and often disabling penalties, much to the delight of the creditors who simply find ways to extend more credit and extract more money.  Credit has also been extended for mortgages which the creditors, banks and others, are only too happy to lend on the assumption, which no one dared question, that home prices always rise and the borrower can always be made to pay more.  An army of real estate agents serves as enforcers for endless property inflation.

    One other solution for the plight of the impoverished American is import of goods from overseas.  But what can America provide in return?  Nothing, is the answer for the long term.  For the short term the answer is dollars which others have accepted despite their declining value and because at least fossil fuels can be purchased with them.  But the dollar is ever less attractive for this reason.  Similarly military Keynsianism has a limited ability to prime the pump in the long term since it is unproductive and there are limits to the ability of the US to force arms sales down the gullet of “allies.”

    That such factors are operative is beyond dispute.  But why has the crisis hit now?  What is the straw that has broken the back of the economy?  It would to the war on Iraq and the Muslim world, although it may be simply a coincidence that the economy has crashed as Iraq has burned.  In a fairly short time the Iraq war has added another $3-5 trillion dollars of debt to the present and future balance sheets in the US, according to economists Joseph Stiglitz and Linda Bilmes. And with it has come the decline of the dollar, which Paul Craig Roberts has documented so convincingly on CounterPunch.

    A simple comparison illustrates the truth of this analysis. Last week the Finance Minister of France was interviewed at length on CPB’s News Hour.  She pointed out that France while not growing spectacularly is not in recession!  Why?  Good pensions, public sector health care insurance, public sector education and no crazy mortgage schemes.  And in France a credit card is a rare thing – debit cards yes, credit cards, no.  All these things are “counter-cyclical” as they say.  Of course it remains to be seen whether France can escape the downward pull of the US economy.

    What does recovery for the US economy entail?  Certainly not giving more to the banks which have a disappearing class of worthwhile debtors and hence no one to lend to.   But that is precisely the strategy which W. and Obama are pursuing.  Such a strategy cannot possibly work because there are no credit worthy borrowers – and so far it has not.  Quite simply the system has to reverse itself to save itself – and there is little sign of that.  The idea that the rich should get poorer and vice versa has no precedent in this society.  And Obama shows very little of such tendencies, and his advisers are dead set against it.

    So here we are – with a capitalism that has been too successful at extracting wealth and no remedy in sight.  Quite simply there are ever fewer people who can afford to buy Mr. Ford’s cars.  This is simply a crisis of overproduction – not a new idea, of course, but one that seems to explain the present state of affairs very adequately.  Could it be the end of the road for this system?  Probably not, because it has still a role to play in the developing world.  But it would seem that we are in for a lot of suffering, a lot of turmoil and considerable opening for some radical changes in our way of life – for better or worse. 
    John Walsh is a professor at U Mass. He is not an a practitioner of the Dismal Science, and he frankly doubts that “economics” as taught in the universities now, as distinguished from political economy, is a valid discipline. He has some knowledge of the physicists and mathematicians who put together the Wall Street “instruments” that have triggered the present crisis.  Many of these people knew that they were simply providing their bosses with simulations that proved what the bosses wanted proven.  And many of these former academics openly referred to themselves as “whores.”  It may be dangerous to let too many physicists go unemployed. He can be reached at

    [Dec 4, 2008] The Mess That Greenspan Made Deflation, alcohol abuse, and asset bubbles

    [Dec 4, 2008] "Number Of The Day: 'Percentage Of US Companies With A Junk Rating."

    This at the start of a deep and long recession...... After the events of the last 3 month it is valid to wonder how much of this debt will get bailed out ( GM....) or will end up without much disclosure on the Fed´s balance sheet......I wonder how many companies are now on the brink of bankruptcy just because they decided to make big debt financed stock buybacks or megalomaniac takeovers & buyouts......

    WSJ Junk-Bond Market Has Closed the Door

    U.S. companies were locked out of the junk-bond market in November, putting half of American corporations at risk of being unable to raise cash.

    The current environment is causing market participants to harken back to 1991, when the collapse of Drexel Burnham Lambert sent the junk, or high-yield, bond market into a tailspin.

    About 50% of U.S. companies have below-investment-grade credit ratings, making the $750 billion junk-bond market a vital source of financing for car makers, airlines, retailers, utilities, restaurant chains and media companies. The shutdown already has sent U.S. car makers, desperate for cash, to Washington for emergency loans.

    Yields Upward of 20% Make It Too Pricey for Borrowers; Zero Deals Made It in November

    About 50% of U.S. companies have below-investment-grade credit ratings, making the $750 billion junk-bond market a vital source of financing for car makers, airlines, retailers, utilities, restaurant chains and media companies

    [Dec 4, 2008] Citigroup says gold could rise above $2,000 next year as world unravels By Ambrose Evans-Pritchard

    27 Nov 2008 | 

    Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world's monetary system with liquidity, according to an internal client note from the US bank Citigroup.

    The bank said the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before.

    This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

    [Dec 4, 2008] Refinancing looks like the next phase of the financial crisis By John Foley

     Dec 03, 2008 | Telegraph

    Companies worldwide have $4 trillion of corporate debt due to be repaid or renewed in the next 18 months. Working out what to do with that sum – roughly the size of Japan's GDP – looks like the next phase of the global financial crisis.

    In normal times, companies have two options when debt payback looms.

    ... ... ...

    Where banks are lending, the loans are more expensive and more selective. Cash-generative, recession-resistant businesses, such as consumer staples and power companies, have the best chance of a hearing.

    Even then, a typical loan might now be extended for just under a year, rather than the five-year facilities of old. Some lenders are introducing rate step-ups halfway through the loan term, to encourage users to pay back quickly – as much as 3 percentage points, according to one senior banker. Less robust customers have an unenviable choice: come back next year, or don't come back at all.

    Companies with foresight took out facilities before the credit crunch bit. But the lending banks are doing everything they can to dissuade their customers from drawing down those low-priced loans. Some argue that doing so will be read by shareholders as a signal of distress.

    Others are pushing borrowers to swap their moderately sized, undrawn loans for bigger and much more expensive new ones.

    The other option, more popular in the US, is the bond market. Companies have been rushing to issue bonds, but at a high price. National Grid raised €600m of bonds this week at 3.3pc above the interbank rate, more than seven times its pre-crunch cost of debt. Daimler raised €1bn at 20 times what it paid in 2005. But there are two glitches. One is that only companies with a track record of raising bonds, and an investment-grade credit rating are palatable to bond investors. In November, there wasn't one sub-investment grade corporate bond issued, according to Thomson Reuters – the first such hiatus since March 1991.

    The other more serious glitch is that bond issuers have stiff competition for investors' attention. Governments have guaranteed vast swathes of bank debt to dig the financial system out of a hole, which means many lenders can now issue paper that has sovereign risk, but higher-than-sovereign rates. With around $3.6 trillion of government guarantees given out in the last two months, normal corporate borrowers could be crowded out of the market. That might explain the current rush.

    For those who can't get a loan – and either can't or won't issue bonds – an uncertain future awaits. Some will try to raise equity, though the gyrations of the stock markets make that a nail-biting prospect. Others will get creative, and issue convertible securities, or debt with equity kickers. Such instruments are well suited to volatile times, but they can prove very expensive, as UK lender Barclays discovered last month when it issued securities to a Qatari fund.

    Some of the problem may be self-correcting. If the recession causes companies to slash their dividends, income-focused investors may switch over to bonds, adding some demand. Banks, too, may relent on giving loans.

    After all, packing customers off to other banks is fine, but not if everyone does it. When companies end up going to the wall, it's the lenders who are left unpaid, or forced to take equity instead. Something has to give before then, or the crisis may well pass back to the banks themselves.

    [Dec 3, 2008] Grant Sees U.S. Working Toward `Disastrous Inflation'

    It might be that inflation is a real threat not deflation...
    Dec. 3 | Bloomberg

    James Grant, editor of Grant's Interest Rate Observer, talks with Bloomberg's Tom Keene about his new book, ``Mr. Market Miscalculates: The Bubble Years and Beyond,'' inflation risk in the U.S., business failures and financial history, and Federal Reserve monetary policy.


    [Dec 3, 2008] The cause and the solution

    October 6, 2008 | 

    You want just one quotation this morning that encapsulates the insanity?

    Here's a hint:  It's not Warren Buffett saying,  “In my adult lifetime, I don’t think I’ve ever seen people as fearful.”

    No, as a bank panic spreads worldwide, it's a White House economic adviser who has the temerity to remark (anonymously, of course), “We are both the cause of the problem and the solution. The world still expects US leadership."

    See, here's the problem folks like you and I face.  We snicker and sneer at the notion that the people who caused the problem have the wisdom and foresight to solve it.  But that puts you and me in the the "reality-based community," whereas this crowd believes they "create their own reality," a reality evidently encompassing the delusion that the United States is still the sole superpower, both military and economic.

    You want another representative quote?  Take Rep. Brad Sherman (D-California), a bailout critic.  During debate over the bailout bill that passed the House Friday, he said of the previous bill that had failed, "Many of us were told in private conversations that if we voted against this bill on Monday that the sky would fall, the market would drop 2000-3000 points the first day, another couple thousand the second day, and a few members were even told that there would be martial law in America if we voted no."

    Is Sherman engaging in hyperbole here?  I daresay that's not the point.  The mere possibility he's not engaging in hyperbole should send a chill down our spines.

    Meanwhile, a meme I've seen periodically over the last few days is this:  The Fed and the Treasury are deliberately pursuing a strategy similar to that of Japan's in 1989-90.  There's just one problem with this, as pointed out by Ambrose Evans-Pritchard in the London Telegraph.  "Japan entered its Lost Decade as the world’s top creditor, with a vast pool of household savings to cushion the slump," he writes. "America starts its purge with net external liabilities of $3 trillion, and a savings rate near zero. Foreigners own over half the US Treasury debt, and two thirds of all Fannie, Freddie, and other US agency bonds."

    The consequences of a similar response in the United States would be hyperinflationary.  But not right away, of course.  "The risk of a dollar collapse is one for the distant future," writes Pritchard.  "Right now the world faces the opposite problem. There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets 'delevers' with a vengeance."

    Call it The Great Deleveraging.  All the hedge-fund fast money that poured into commodities is pouring out now as the redemption orders pile up fast and furious.  It's why gold-mining stocks dropped 15% last Thursday, and fertilizer stocks as much as 40%.  More super-shocks are still to come.

    [Dec 3, 2008] Revisiting an Early Look at the Recession by cactus

    Angry Bear

    Now that the recession is officially here, I'd like to revisit a post I wrote in March entitled How is This Recession Not Like Other Recessions?.

    In it, I note the following:

    So in terms of politics... what we see is that the Fed is much more likely to cut real M1 by a lot when there's a Dem in office, and the economy has been much, much more likely to make it through such a cut in real M1 without suffering a recession when a Dem is in office. The end result, of course, is that the percentage of time that the economy is in recession when the President is a Republican is much higher than the percentage of time that the economy is in recession when the President is a Democrat.

    Now, back to the current mess... since every single one of the seven previous recessions for which we can compute real M1 using data on the Fed's website was preceded by a cut of 3.5% or more in the three month real M1, the natural question is.... is that true this time too? As with many things involving GW, the answer is... No. If there's one recession that wasn't at last partly triggered by the Fed, this one is it.

    This is not to say that the Fed wasn't partly at fault for creating the messy conditions, but it did not trigger the recession by shrinking the real money supply in the year leading up to the recession's start, unlike every other recession since 1959, the first year for which data on M1 is available on the Fed's website. Put another way - the cause of this recession is if not unique, its certainly extraordinary in the past few decades. And if its not a contraction in the money supply that's causing this, then its something "real." When the problem is a contraction in M1, well, the fix simply involves re-inflating the money supply. But something else has to happen when the recession is caused by something "real" - the "real" problem has to be fixed. One thing that ain't gonna fix it is throwing money at Goldman, Welfare, Queen & Sachs - its not Goldman's problems that precipitated the recession, after all. The economy had slowed down long before anyone realized what a hash the investment banks and AIG had made of their business.

    So how long is this recession going to last? I really hope not long. But what if the problem really is the fact that the US economy doesn't produce much any more, and houses are way overvalued? I sure hope we don't have to wait until those problems are fixed.

    The post also had something else that I like:

    Which leads to my question from yesterday's post, yet again - why are we seeing a recession now, at this time, so soon after the last one. The last time we see a recession so soon after the previous one, Reagan was in office. The last time we saw a President with two recessions in his term, Nixon was in office. Unless the last few decades have been a major aberration, an ordinary business cycle shouldn't be bringing us to a recession so soon. So to repeat: why are we seeing a recession now, given that GW has gotten everything he's wanted - tax cuts, help from the Fed, reduced regulation, even two wars (and remember - Conservatives and libertarians credit WW2 with ending the recession, not FDR)? Could the conservative or libertarian model have predicted such a thing?

    [Dec 3, 2008] Martin Wolf Says Big Stimulus Programs by Big Debtor Countries Will End in Tears

    Looks like Krugman is out of touch with reality... Not the first time, not the last... Are 401K investors ready for a dislocation in the treasury market? Boomers can became busters...

    One thing I have found troubling is the near-unanimity in the US that we must Do Something about the burgeoning economic crisis, and that Something is big time monetary and fiscal stimulus.

    Near unanimity is almost never a good thing in the political and policy realm, since conditions and options are sufficiently complicated so as to make it unlikely that there is a magic bullet.

    Not to beat a dead horse, but we have been struck by the number of analogies made to the Great Depression that strike us as wrongheaded. The first is the idea that throwing money at "stimulus" will actually do the job, I see a lot of back of the envelope calculations of what % of GDP it will take to do the job.

    But as the misguided tax rebates showed, it is quite possible to devise programs that are largely ineffective (roughly 80% of the rebates went to savings or debt reduction, which is a form of savings). A lot of money has similarly been thrown at the "get credit markets working again" program. And what are the results? Consumer and small business credit slashed, private securitizations a thing of the past, almost no debtor in possession financing (crucial for Chapter 11 bankruptcies), letters of credit scarce and costly, A2/P2 commercial paper at record spreads, and the Fed and Treasury still seeming to create, increase, or extend programs on virtually a weekly basis.

    So what economist Tom Ferguson calls the "hydraulic Keynesian" approach might not be as successful as its advocates suggest. And that assumes it is the right remedy. We have argued that Keynes himself would not be on board with the idea of the US leading the stimulus charge:

    The operating assumption behind US policy now is seeing the US situation as parallel to that of the US in the Depression, and taking the view, based on the fact that the US seemed to finally shake off the slump with the demands of wartime production and the unprecedented budget deficits that accompanied them. But there were considerable worries in 1946 that the US would fall back into Depression. The conventional view is that pent-up demand carried the US through, after a sharp but very short downturn in 1946.

    However, would this strategy have worked in a peacetime setting? The US also emerged from its slump to a world with a tremendous amount of industrial production destroyed by the war. Thus, the US, whose problem in the late 1920s (which didn't look like a problem at the time) was that it was a huge exporter, to the point where it sucked up so much gold as to be destabilizing to the financial system, could with 50% of world GDP, revert to its preferred old role with less damaging side effects. Had the rest of the world gone into wartime levels of stimulus along with the US, without the loss of productive capacity, would there ever have been an end of the beggar-thy-neighbor trade policies of the 1930s? International trade didn't just fall, "collapsed" is not an uncommon characterization of the degree of contraction....

    Similarly, as we have said before, the US was a world-dominating exporter, as China is now, and had the biggest gold reserves, as China now had the largest FX reserves. Thus it is China that needs to undergo a huge-scale stimulus program to make up for the loss of demand from the US. Keynes, in the 1930s, advocated that the US make up for the demand loss rather than expecting the US's overindebted European trade partners to continue overconsuming....

    Yet what is being advocated as a Keynesian remedy is in fact the opposite of what Keynes called for in his day. Keynes' prescription then would lead to a global rebalancing, with the US depending more on internally generated demand and less on its foreign partners (who were defaulting on their government debt). But if it were successfully deployed in the US now, it would lead to a continuation, of our excessive consumption and China's underdevelopment of its internal demand.

    Martin Wolf, in today's Financial Times, comes to a similar conclusion:
    With businesses uninterested in spending more on investment than their retained earnings, and households cutting back, despite easy monetary policy, fiscal deficits are exploding. Even so, deficits have not been large enough to sustain growth in line with potential. So deliberate fiscal boosts are also being undertaken...

    This then is the endgame for the global imbalances. On the one hand are the surplus countries. On the other are these huge fiscal deficits. So deficits aimed at sustaining demand will be piled on top of the fiscal costs of rescuing banking systems bankrupted in the rush to finance excess spending by uncreditworthy households via securitised lending against overpriced houses.

    This is not a durable solution to the challenge of sustaining global demand. Sooner or later....willingness to absorb government paper and the liabilities of central banks will reach a limit. At that point crisis will come. To avoid that dire outcome the private sector of these economies must be able and willing to borrow; or the economy must be rebalanced, with stronger external balances as the counterpart of smaller domestic deficits. Given the overhang of private debt, the first outcome looks not so much unlikely as lethal. So it must be the latter.

    In normal times, current account surpluses of countries that are either structurally mercantilist – that is, have a chronic excess of output over spending, like Germany and Japan – or follow mercantilist policies – that is, keep exchange rates down through huge foreign currency intervention, like China – are even useful. In a crisis of deficient demand, however, they are dangerously contractionary.

    Countries with large external surpluses import demand from the rest of the world. In a deep recession, this is a “beggar-my-neighbour” policy. It makes impossible the necessary combination of global rebalancing with sustained aggregate demand. John Maynard Keynes argued just this when negotiating the post-second world war order.

    In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy.

    The UK is closer to the endgame than the US, so it is easier for them to perceive the risks (Willem Buiter has detailed the parallels between the UK and Iceland). The US, with the advantage of its deep Treasury markets and the reserve currency, has more rope with which to hang itself and its hapless creditors.
    Anonymous said...
    What's left out of this picture is a section in Wolf's article you didn't quote:

    "Some argue that an attempt by countries with external deficits to promote export-led growth, via exchange-rate depreciation, is a beggar-my-neighbour policy. This is the reverse of the truth. It is a policy aimed at returning to balance. The beggar-my-neighbour policy is for countries with huge external surpluses to allow a collapse in domestic demand. They are then exporting unemployment. If the countries with massive surpluses allow this to occur they cannot be surprised if deficit countries even resort to protectionist measures."

    The policy choices should not viewed as huge American stimulus OR rebalancing by Americans saving more and consuming less.

    The policy choice is huge American stimulus PLUS large dollar depreciation, to restore American manufacturing.

    Yves Smith said...

    Anon of 2:39 AM,

    With all due respect, how do we "restore manufacturing" in this country? Blue collar work is demonized; look at the outrage against the UAW versus white collar workers in investment banks that have created products that have on balance proved detrimental, drove their companies into the ground, and took out vastly greater comp? Objectively, they did far greater damage and earned far greater rewards.

    We no longer have factories, related infrastructure, or managerial expertise in many industries where we were once meaningful players. The shoe business is my favorite example. There is no reason we should have ceded it entirely, but we did.

    And you don't just need workers, you need managers. How many capable people want to run a factory, or have the skills? My father ran paper mill startups in the coated paper business (very fussy manufacturing, unlike newsprint, and with a startup, you go from zero to 500 to 1000 people in 2 years, people who for the most part never operated this massive equipment. And getting all the custom machinery to work is no piece of cake either. Something is always botched. A two year startup, where the startup costs are 20% of the capital costs, which today would be $1 billion plus, is a good outcome. A bad start up is an ongoing hemorrhage).

    Despite being a difficult character and not a good marketer, he had a very robust consulting business in his later years because pretty much no one in the industry could shake down operations like he could. And how many people want to live in the boonies, which is where manufacturing plants are located (you don't put them on expensive land).

    Investors would have to believe a cheap dollar was more or less a permanent condition to bet on manufacturing on a sufficient scale to get our trade balance back in order. And even then, we have major rebuilding before us.

    Note that the recent improvement in our trade balance was largely commodities.

    December 3, 2008 3:02 AM
    ndk said...
    Martin thinks; others blindly apply principles without looking at conditions. I've been screaming about what a huge mistake further intervention and stimulus here would be at the top of my lungs for the last month, and I'm sorry to everyone who had to suffer through the repetition. Stimulus focused on increasing US demand can only make the situation worse, and we're ignoring our vulgarly obvious national insolvency.

    The beggar-my-neighbour policy is for countries with huge external surpluses to allow a collapse in domestic demand.

    Bingo. There can be no solution until this fundamental misalignment is fixed, and because that fix would induce tremendous pain for an already bleeding China, I don't think it's going to happen unless there's a true miracle of diplomacy. Given how trusted Hank was by China, and his strong attempts in better times to make them revalue, I don't believe in this miracle.

    Yet what is being advocated as a Keynesian remedy is in fact the opposite of what Keynes called for in his day.

    Krugman better read this. Nobody has disappointed me more than he, because while many bad economists don't, he does know better. I've come to believe he's just seizing an opportunity to get admittedly needed domestic priority adjustment done under a false flag. He's better than that, and it makes me sad.

    December 3, 2008 3:02 AM
    rahuldeodhar said...
    I dont see any reason why exchange rate realignment + concerted international financial regulation cannot solve this problem.

    Global banking regulation needs reform and Shiller has also highlighted this his new book (I just saw the interview - waiting for the book). There is something fundamentally wrong with accounting policies that let banks lower capital requirements based on "perceived" asset price increases. The same regulation also creates holes in balance sheets as asset prices falls. This regulation needs to be suspended for sometime - (upside suspension), banks be forced to take all the write-downs marking the assets to agreed upon prices (lets call them steady state prices) - and then made to raise capital enough to sustain them.

    Secondly exchange rate realignment is absolutely must. I have been harping about this on this blog comments for long now. US must become producer and China and surplus countries must become consumers. Without this there is no resolution of this crisis.

    Finally, there is likely to be a diplomatic war to protect and isolate the consumers an keep the consumer to itself. Such a trading barrier game will be detrimental to global prospects and will decrease the total pie.

    If a big ship(US and EU) is sinking - one way is to protect your resuce boat - or save the ship. Former saves you comfortably but leaves the world with just a boat! and latter is difficult but the Ship stays so we are better off.

    December 3, 2008 3:05 AM  
    ndk said...
    Investors would have to believe a cheap dollar was more or less a permanent condition to bet on manufacturing on a sufficient scale to get our trade balance back in order. And even then, we have major rebuilding before us.

    We need to rediscover our competitive advantages beyond excellent farmland in Iowa and a greater propensity to lie. Turning on the spending booster jets before pointing ourselves in the right direction isn't a great idea.

    The Internet has fundamentally busted a ton of business models. Margins have been permanently slashed, knowledge is now incredibly slippery and difficult to sell or leverage, and everyone around the world is now equally well positioned to do many jobs.

    It's going to take a lot of industries and individuals a long time to adjust, and the citizens of the richer countries are generally the losers. Let's see policies put into place that will protect and help them, rather than just hitch them more tightly to the debt yoke in hopes that even more leverage can pull us through to another few years of prosperity.

    December 3, 2008 3:10 AM

    Yves Smith said...

    rahuldeodhar, Anon of 2:39 AM,

    Another data point, Until the second half of this year, we have seen a protracted decline in the value of the dollar. Yet our savings rate continued to fall and the current account deficit rose to new highs. Now you can argue this is due to China's peg, but the point is that in a floating rate regime, we cannot simply revalue our currency (and too precipitous a fall, which we may unwittingly engineer thanks to all our debt creation, would create a destabilizing currency crisis).

    And Cerberus, which bought the Mead-WestVaco paper mills (now called NewPage) in 2005 has been closing mills and cutting costs aggressively in those mills, to the point of cutting maintenance, which is an unsafe practice. That in a weakening dollar environment in a capital intensive, high skill manufacturing business.

    December 3, 2008 3:24 AM

    ndk said...

    Secondly exchange rate realignment is absolutely must. I have been harping about this on this blog comments for long now. US must become producer and China and surplus countries must become consumers. Without this there is no resolution of this crisis.

    I agree, but I don't think China's going to do this. They're suffering plenty of internal problems and a revaluation will instantly bankrupt the PBoC, leading to a need to recapitalize it through taxing angry Chinese citizens. Not only that, but there's a lot of other peggers out there, and if only a few of them revalue, they lose out to the ones who preserve their peg. It's the OPEC problem in drag.

    This is likely to lead to the real deal Smoot-Hawley, as indebted uncompetitive nations feel they have no choice but to stop the mercantilism through trade restrictions.

    All of which is to say, this only gets worse.

    December 3, 2008 3:24 AM

    [Dec 2, 2008] Bill Gross Says Stocks Aren’t as Cheap as They Appear

    Stocks aren’t as cheap even with S&P500 under 900: Corporate tax rates, which declined during President George W. Bush’s administration, won’t keep falling
    Dec. 2, 2008 | Bloomberg

    Bill Gross, manager of the world’s biggest bond fund, said stocks aren’t as cheap as they appear given that the era of deregulation, low borrowing costs and tax cuts is over.

    “Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing and even lower corporate tax rates,” Pacific Investment Management Co.’s Gross wrote in a market commentary posted on the Newport Beach, California-based company’s Web site. “That world, however, is in our past not our future.”

    Gross said that while equities appear inexpensive according to price-to-earnings multiples and the so-called Q ratio, which compares prices with the replacement cost of net assets, the new economic reality means traditional techniques are sending false signals. The 64-year-old money manager didn’t say whether he expects stocks to climb or fall, although he argued that corporate bonds are better investments.

    “More regulation, lower leverage, higher taxes and a lack of entrepreneurial testosterone are what we must get used to -- that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner,” Gross wrote in his commentary.

    The Dow Jones Industrial Average is unlikely to decline to 5,000 or surge to 14,000, he said. The benchmark stock index, created in 1896, sank to a five-year low of 7,552.29 last month after closing at an all-time high of 14,164.53 in October 2007. In 2002, Gross predicted the Dow would decline to 5,000 at a time when the measure was at about 8,500.

    $1 Trillion

    The Standard & Poor’s 500 Index has fallen 46 percent since its record almost 14 months ago as credit losses and writedowns at financial firms approach $1 trillion and more economists forecast that the U.S. recession will be one of the most severe in the post-World War II era.

    Cheap financing won’t be available once the government is finished intervening in the credit markets, which will reduce corporate earnings, Gross wrote. The U.S. government have pledged more than $8.5 trillion on behalf of American taxpayers during the past 15 months, according to data compiled by Bloomberg.

    Corporate tax rates, which declined during President George W. Bush’s administration, won’t keep falling once Barack Obama takes office in January, Gross said in the note.

    His Total Return Fund lost 2.1 percent in the three months through Sept. 30, compared with a 0.49 percent slump by the benchmark it uses to measure performance, according to Pimco’s Web site. Mortgage securities and investment-grade corporate debt accounted for 93 percent of its holdings.

    Pimco, a unit of Munich-based Allianz SE, has about $790 billion in assets under management.

    [Dec 2, 2008] 8th Bear Market Rally Since October 2007

    It looks like 1100-1200 might be a decent expectation for the next S&P500 rally , if any...

    Merrill Lynch’s David Rosenberg notes that last week’s pop was the eighth bear market rally since October 2007.

    As the chart below shows, they have ranged in strength from ~8% to over 24%.

    Each one was treated (”enthusiastically”) as if a bottom had been made. Each one saw a subsequent lower low, excepting the most recent one that ended Friday.

    These included:

    1. The TAF (S&P 500 at 1500)
    2. January 75 bp rate cut (1325)
    3. The Bear Stearns deal in March (1270)
    4. The fiscal package in April (1200)
    5. The GSE conservatory in July (1200)
    6. The TARP in October (1180)
    7. Pre-election Rally (840)
    8. The Citi bailout in November (750)

    Rosenberg added late Sunday:

    This is now a five-day rally that has seen the S&P 500 surge 19%. Then again, we did see a 7-day rally tally up to 18.5% from late October to early November. And before that a 4-day rally in mid-October that netted equity traders an 8.5% spike. What is happening is that the bear market rallies are getting shorter and more flashy – but they are still bear market rallies. The ones we have seen thus far in this bear market have seen the S&P 500 rise nearly 10% and last 18 days on average. These are rallies, in our opinion, that investors should using as an opportunity to sell into.

    [Dec 1, 2008] UN team warns of a hard landing for dollar next year By Harvey Morris

    December 1, 2008 |
    The current strength of the dollar is temporary and the US currency risks a hard landing in 2009, according to a team of United Nations economists who foresaw a year ago that a US downturn would bring the global economy to a near standstill.

    In their annual report on the world economy published on Monday, the economists said the dollar’s sharp rebound this autumn had been driven mainly by a flight to the safety of the international reserve currency as the financial crisis spread beyond the US.

    The overall trend remained a downward one, however, reflecting perceptions that the US debt position was approaching unsustainable levels. An accelerated fall of the dollar could bring new turmoil to financial markets.

    “Investors might renew their flight to safety, though this time away from dollar-denominated assets, thereby forcing the US economy into a hard landing and pulling the global economy into a deeper recession,” the report said.

    Publication of the annual survey by the UN’s Department of Economic and Social Affairs, its trade organisation Unctad and UN regional bodies, was brought forward by a month in the light of the financial crisis. It was launched in Doha to coincide with the UN-sponsored development financing conference in the Qatari capital.

    The UN team said that, as the financial crisis spread beyond the US, there had been a massive shift of global financial assets into US Treasury bills, driving their yields almost to zero and pushing the dollar sharply higher. At the same time, however, the US’s external debt had risen to new heights that could provoke a dollar collapse.

    The report recommends reform of the international reserve system away from almost exclusive reliance on the dollar and towards a globally backed multi-currency system.

    Rob Vos, a Dutch economist who heads the UN’s policy and analysis division and who is responsible for the annual economic review, said the global economic pain could be eased if governments co-ordinated a spate of stimulus packages that were already under way.

    “There has been a sea change in attitudes in favour of intervention and concerted action,” he told the Financial Times. He welcomed statements from US president-elect Barack Obama’s transition team in support of spending on infrastructure.

    [Dec 1, 2008]  'Gone, Over, Toast.'

    We should be careful and not extrapolate events of completely different economy of 1928-1935 with the current situation.  This crisis is more like land bubble of XIX century then Great Depression. Also the country is a net debtor and need to fight two wars. In 1928-1935 the USA was the greatest beneficiary from the carnage of the WWI and was net lender.
    Financial Armageddon

    ... As noted here last week, (The Coming Great Depression: Scapegoats and Exploitation) the Dow Jones Industrial Average actually recovered in early 1930 to early-1929 levels. (Look for the same this time around, too -- DJIA 12,600 is in the cards a few months out, despite all the structural damage to the market and economy.)

    Breadlines didn't form in November 1929--the structural damage took years to play out then, and it will take years to play out now. So don't rush things, Peggy--we'll get to a visible Depression soon enough.

    Great Depression: (Wikipedia)

    The Great Depression was not a sudden, total collapse. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929. Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the summer of 1930.

    In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing. By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931. We can already anticipate "ample credit at low rates" in 2009, just as we can also anticipate wages holding steady for awhile even as sales fall. The wheels will fall off later in 2009 and deteriorate further in 2010, 2011 and 2012.

    Here are the structural realities which have yet to play out:

    1. You can't force households or businesses to borrow more money and spend it. Japan's central bank has flooded that nation with liquidity and low interest money for 19 years to little effect.

    2. U.S. consumers and corporations are already burdened with staggering debt. Not only can't you force people to borrow more, you also can't force lenders to loan more money to insolvent households and businesses.
    3. Whatever money people get their hands on is going to paying down debt and savings. Studies of the first "stimulus package" checks which went out to taxpayers in 2008 revealed that 2/3 of the money was not spent but used to service debt or saved. Future "stimulus checks" will also fail to boost spending; people already have more stuff than they know what to do with.

    4. The FIRE economy is dead. Finance, insurance and real estate (FIRE) all prospered for one reason: the velocity of transactions and debt instruments. With the volume of transactions off by 2/3 (real estate) or 99% (home equity loans), the FIRE economy is shrinking fast, with no barriers to further declines. With lending standards rising even as real estate values plummet, there is nothing to stop transaction and debt velocity from falling much further.

    5. Governments and corporations alike are living with Fantasyland expectations of revenue. I recently pored over the 2009 fiscal year budget of my town of 120,000 people (general fund spending is $135 million, which doesn't include capital projects or bond-funded spending) and was dumbstruck by the insanely unrealistic revenue expectations.

    The city expects to reap the same amount of easy money from real estate transfer taxes (1% of any real estate transaction goes to the city) in 2009 as it did in 2007 and 2008: about $11 million.

    Huh? As transaction volumes decline by 2/3 and the sales prices plummet, then how can you possibly expect to rake in the same transfer tax revenues?

    The downtown shopping district was eerily quiet on Black Friday; empty storefronts are everywhere, and sales are falling even at the town's sales-tax heavyweights, the Toyota and Honda auto dealerships. Yet the city expects to haul in the same sales tax revenue as in 2008. Based on what?

    The entire nation is in the grip of massive, total denial that revenues will drop in a recession. Companies are trimming travel costs, as are consumers; San Francisco International Airport was virtually empty on Wednesday, once one of the busiest travel days of the year. Airports almost empty day before Thanksgiving.

    "The dreaded Day before Thanksgiving was not so dreadful after all. Bay Area airports were eerily empty for much of what traditionally has been among the busiest travel days of the year.
    "There's nobody here," said Deborah Vainieri, who was waiting at San Francisco International Airport with her husband, Humberto, for a flight to Portland. In a plot to beat the crowds, the Vainieris had arrived at the airport four hours early. They walked right up to the check-in machine and were done in less than a minute."

    6. If lenders make risky loans, they will go under--and most U.S. households and businesses are no longer creditworthy risks. So there you have it: This conflict cannot be resolved. Lenders who foolishly extend credit to over-indebted, risk-laden borrowers will be paid back with losses and insolvency, yet as lending standards tighten and assets plummet in value, the number of creditworthy borrowers in the U.S. has shrunk.

    As noted here many times: many of those who qualify for loans are deadset against debt. That's why they're creditworthy--they've refused to take on huge debt for cultural or fiscal-prudence reasons. They have zero interest in taking on debt, even at zero interest.

    You can't force people to borrow money, especially when they're already overloaded with debt, and you can't force prudent people to borrow when they have no need for more property, nor can you force people to buy real estate even as the values continue falling.

    7. The U.S. already has too much of everything: too many hotels, malls, office towers, homes, condos, strip-malls, lamps, furniture, CDs, TVs, clothing, etc. As 50 million storage lockers filled to capacity with consumer crap are emptied in a desperate move to reduce expenses and raise cash, the value of literally everything ever manufactured will fall to near-zero.

    As noted here many times before, the entire U.S. housing market was held aloft by two anomalies: speculators hoping to "flip" for huge profits, and a "one dwelling for every person" mentality that confused rising population with a rising number of households.

    We are already seeing how population can continue rising slowly even as the number of households declines. It's called moving back home, doubling up, renting out a room, etc. There are at least 20 million surplus dwellings in the U.S. right now; there is no need for 700,000 more a year to be built, or even 70,000 more.

    The FIRE economy based on transaction and debt volume/velocity: gone, over, toast. Housing market based on speculative flipping and one-person households: over, gone, toast. Loose lending by delusional lenders to risky, over-indebted borrowers: gone, over, toast. Borrowing based on rising real estate values: gone, over, toast.

    The notion that we "need" more of anything: gone, over, toast. The idea that you can force lenders to lend to uncreditworthy borrowers: gone, over, toast. The idea you can force people drowning in debt to borrow more: gone, over, toast.

    [Dec 1, 2008] Whitney- Credit Card Consumer Liquidity to ...

    Dec 01, 2008 | CalculatedRisk/Reuters

    Credit card industry may cut $2 trillion of lines: analyst

    (Reuters) – The U.S. credit-card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said.

    The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.

    "In other words, we expect available consumer liquidity in the form of credit-card lines to decline by 45 percent."

    Bank of America Corp (BAC.N), Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N) represent over half of the estimated U.S. card outstandings as of September 30, and each company has discussed reducing card exposure or slowing growth, Whitney said.

    Closing millions of accounts, cutting credit lines and raising interest rates are just some of the moves credit card issuers are using to try to inoculate themselves from a tsunami of expected consumer defaults.

    A consolidated U.S. lending market that is pulling back on credit is also posing a risk to the overall consumer liquidity, Whitney said.

    Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable, she said.

    "We are now beginning to see evidence of broad-based declines in overall consumer liquidity."

    "Already, we have witnessed the entire mortgage market hit a wall, and we believe it will, for the first time ever, show actual shrinkage over the next few months," she wrote.

    The credit card market will be 18 months behind the mortgage market and will begin to shrink by mid-2010, Whitney said.

    Whitney also expects home prices to continue falling another 20 percent hurt by lower liquidity. They are down 23 percent from their peak, she said.

    "In a country that offers hundreds of cereal and soda pop choices, the banking industry has become one that offers very few choices," Whitney wrote in a note dated November 30.

    She also said credit lines to consumers through home equity and credit cards had been cut back from the second-quarter levels.

    "Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view," the analyst said.

    Most of the solutions to the situation involve government intervention, and all of them require more dilutive capital to existing lenders, she said.

    "Accordingly, we continue to be cautious on our outlook on US banks."

    [Nov 30, 2008] World stability hangs by a thread as economies continue to unravel

    "If in doubt, cleave to those countries with a deeply-rooted democracy, a strong sense of national solidarity, a tested rule of law – and aircraft carriers."  What about a couple of unfinished expensive wars contribution to stability in difficult circumstances ?

    We can hope that governments have acted fast enough this time – with rate cuts and a fiscal firewall – to head off such disasters. But then again, the debt excesses are much greater today.

    If in doubt, cleave to those countries with a deeply-rooted democracy, a strong sense of national solidarity, a tested rule of law – and aircraft carriers.

    The US and Britain do not look so bad after all.

    [Nov 30, 2008] Sad News: Tanta Passes Away

    She will be missed... Condolences to her family and all who loved her.
    Calculated Risk/NYT

    My dear friend and co-blogger Doris “Tanta” Dungey passed away early this morning. I would like to express my deepest condolences to her family and friends.

    ... David Streitfeld at the NY Times: Doris Dungey, Prescient Finance Blogger, Dies at 47 ...

    This is a very sad day...



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