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Financial Skeptic Bulletin, January 2009

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[Jan 24, 2009] The Never Changing Way of Life

Moon of Alabama

At the Earth Summit in 1992, George H.W. Bush forcefully declared, "The American way of life is not negotiable."

It's the End of the World as We Know It, Baltimore Chronicle, Aug. 3, 2004

My principle focus as vice president has been to protect the American people in our way of life

Transcript: Vice President Cheney on 'FOX News Sunday', Dec. 222, 2008

We will not apologize for our way of life nor will we waver in its defense.
Barack Obama’s Inaugural Address, Jan. 20, 2008

[Jan 2, 2009] Robert Reich's Blog Holiday Thoughts about Three Especially Vulnerable Groups

December 27, 2008 | Robert Reich's Blog

I try to be optimistic -- especially this time of year when the days are short and cold, when almost everybody things everyone else is having a better time than they are, and now that we're in the worst economic downturn in almost anyone's memory. Yet I also try to be realistic about the effects of this Mini-Depression. At least three distinct groups are especially vulnerable, each quite differently:

  1. The poor and near poor, with family incomes typically under $20,000 a year. Their connections to the labor force are tenuous at best, often involving part-time and temporary jobs. They're also the first to be let go during downturns. Not surprising, this recession is taking a toll, and about to take a larger one. Few in this group qualify for unemployment insurance, and an increasing number have exhausted the five-year maximum for temporary welfare assistance. To the extent they're getting by, they're moving in with relatives. The media have missed this story almost entirely.
  2. Middle and lower-middle class households whose breadwinners are within five years of being eligible for Social Security. Many are in danger of losing jobs and a large number are already working fewer hours. They're cutting back on all discretionary purchases.

    But their biggest problem is that both their savings and the value of their homes have shrunk dramatically, and probably won't bounce back before they planned to retire.

    Social Security will cover about 40 percent of their pre-retirement earnings. So many are now planning to work well beyond age 65. This will be a particular challenge for blue-collar workers whose earnings have depended largely on physical labor. Their bodies may not last.

  3. Middle and lower-middle class retirees. Most are dependent on income from savings, which has declined sharply. They're cutting expenses where they can, but they're running out of resources. To the extent they can turn to their children for help, they are doing so.

    That means a large and growing cohort of middle-income people between the ages of 35 and 65 have begun subsidizing their parents, even though they and their immediate families are under financial stress. Here's another untold story.

Other Americans are in distress but these three groups are particularly worrisome, and in the years ahead it seems likely they'll be in worse shape than they are today. If this is to be avoided, these three groups will need distinct public policies crafted to their particular needs. More on this to come.

In the meantime, happy holidays.

[Jan 02, 2009] Gold may shine again in 2009 By Martin Hutchinson,

Huge government deficits, low interest rates and rapidly growing money supply all add to the likelihood of renewed inflation - and a rising gold price. How high? Very.

Jan 02, 2009  | Telegraph  ( )

First, consider the risks of inflation. US money supply grew slowly for a while in early autumn, but in the two months to December 1 the St Louis Fed's measure of Money of Zero Maturity increased at an 11.7pc annual rate. That's a return to the trend that lasted from 1995 to 2008, when MZM grew 3.6 percentage points faster than nominal GDP.

The US is not alone. Around the world, governments have implemented large stimulus packages. If the corresponding borrowing is not to crowd out the private sector, it must be financed by money supply creation.

This monetary expansion is not supposed to be inflationary, since the governments promise to take any money away before it can push up prices.

But investors can be forgiven for scepticism. Higher inflation is at least possible once the global recession bottoms out. And gold provides good insurance against this outcome.

Demand for gold from investors increased rapidly in 2008, despite a falling price since June. The dollar value of gold demand was 45pc higher in the third quarter than the second, and 51pc above the previous year, according to the World Gold Council. Supply has failed to keep up, with mine output up only 2pc from the previous year and central bank sales down sharply.

Gold's economics are truly mysterious. The commodity demonstrated "negative price elasticity" in 2007, when a higher price produced increased demand.

Nevertheless, weak supply, strong demand and valid fears of inflation constitute a perfect mix of ingredients for building a gold rally. Any surge into gold by hedge funds and other speculators could overwhelm the market, turning the rally into a bubble.

In January, 1980 - just before the Fed led the world out of an inflationary catastrophe, the gold price peaked at $875. That is $2,430 in today's dollars. But the pools of speculative capital are much larger now than in 1980. A true gold bubble could well leave this benchmark far behind.



[Jan 28, 2008] European capacity collapse the preview by Tracy Alloway

Jan 28  | FT Alphaville

French and Italian quarterly production utilisation figures are out and they’re not pretty.

First, JP Morgan’s David Mackie reminds us why they are important:

Capacity utilization plays a critical role in our thinking about the Euro area.

Given the lags in the production of the official output data, it influences our view of high frequency developments in production.

Because the denominator is influenced by the capital stock, the level of capacity utilization seems to play an important role in capital spending decisions.

It is a key determinant of pricing power and thus it is very significant in our Phillips curve for the region which drives our core inflation forecast.

And, last but not least, it plays an important role in our ECB forecasting tool, as it influences the appropriate policy rate.

And to today’s numbers. In France, capacity utilisation fell to 75.8 in January from 82.2 in October — the biggest decline ever seen. The previous largest drop was 2.1 points between July and October last year, according to JPM, and before that 1.7 points at the beginning of 1993.

In Italy there was also a significant decline, to 69.9 in January, from 74.4 in October. The charts are below, but in in Mackie’s opinion, the read through is as striking as the numbers:

At the moment we only have manufacturing output data through last November; on the basis of the collapse in capacity utilization, output fell very, very dramatically in December and January. Furthermore, this collapse in capacity utilization suggests a big decline in capital spending and inflation in the months ahead…

The European-wide figures come out on Thursday in the European Commission’s quarterly report; based on these numbers, we’re expecting more ugly.

Barclays’ Julian Callow, for instance, elaborates:

Tomorrow (10am Ldn time) the European Commission releases its regular monthly survey of business and consumer sentiment, and along with this the results of its more detailed quarterly survey of European industry, a particular focus of which will be capacity utilisation. Based on our estimates, including today’s French and Italian data, we estimate that the euro area capacity utilisation rate fell in January by a record quarterly drop of 6.8pp, to a record low (in its 23 year history) to 74.9%, down from 81.6% in October, and therefore well below its long-term average of 81.9%.

… ... ...

Note that our euro area GDP projection is for GDP to contract by 1.6% this year, a bit worse than the January Consensus Economics estimate of -1.4% (down from -0.9% in Dec 08), and well below the Eurosystem staff mid-point projection of -0.5% from early December 08. While the Governing Council has effectively admitted that it needs yet again to cut this projection significantly again (hence the Jan. rate cut), nonetheless it may yet be unprepared for just how much it will need to do so. In short the scale of collapse in the industrial, construction and service sectors is unprecedented in Europe’s (and the world’s) history the past half-century.

[Jan 28, 2009] Eight Structural Factors Undermining Any Turn-Around by Simon Smelt

Jan 26, 2009 | Prudent Bear

The American banking sector imploded spectacularly to the degree that investment banking actually went extinct -- as if a meteor landed on the corner of Madison Avenue and 51st Street.

... ... ...

Eighth: Stormy international waters.  The United States is the world’s main debtor and its dollars provide liquidity to global trade. Eighty-five percent of international trade is in the world’s reserve currency – the U.S. dollar. Foreigners buy 80% of U.S. Treasury bills.  To keep its factories churning, China and other exporters buy U.S. dollars – effectively providing goods on credit.  All this is of vast benefit to the United States but could change. 

The tipping point may come in 2010 from the mundane issuance of government bonds.  New government spending programs and the downturn in tax revenues will require many governments massively to expand bond issues to cover their debt.

This will mean:

  1. Downward pressure on bond prices (higher yields), and
  2. sufficient supply of non U.S. government bonds that big money can shift from U.S. assets.   A lot of parked investment money will be looking for a good home. 

How much more exposure to U.S. debt – and “victim” psychology – will investors want?

[Jan 28, 2009] Americans Lost Over a Quarter of 401(k) Savings in 2008 By Nancy Trejos

Switching employees from defined benefit pension plans into 401K was an intentional major hit to the standard of living of middle class. Now chickens come home to roost. Like one reader aptly commented: "Thanks D'bya & Congress. You all did a hell of a job...." I would add that the mainstream media reached a state of zombification parallel to that of the banks. The sad thing is that for 401K investors lured into stock funds much of what has been lost in 2008 will not be recovered...
January 28, 2009 | Washington Post

Millions of American workers lost an average of 27 percent of their 401(k) retirement savings in 2008, according to a study released this morning by Fidelity Investments.

The average 401(k) balance went from $69,200 in 2007 to $50,200 last year because of dramatic market declines, the study found.

Despite such losses, Fidelity's analysis of 11 million participants in more than 17,000 corporate plans showed that employees continued to contribute to their retirement savings and took out fewer loans against the plans than the previous year. In fact, they added an average of $5,600 in pre-tax earnings to their accounts, a slight increase from the year before.

"Employees are staying the course and I think this is very good news because I think it really shows that employees recognize these savings dollars are a need to have, not a like to have," said Scott B. David, president of Workplace Investing for Fidelity Investments. "This is a necessary savings for their financial well-being."

But in a sign that workers are struggling financially, the Fidelity study showed a slight increase in the percentage of workers who took so-called hardship withdrawals, from 1.6 percent in 2007 to 1.8 percent in 2008. Unlike 401(k) loans, hardship withdrawals require proof of a severe financial need and come with a hefty tax bill.

David said the people who took hardship withdrawals most likely did not have the option to take a loan against their plans. Historically, those who take hardship withdrawals have taken out loans first and many employers restrict the number of loans allowed.

"Once you've taken the loan, the next likely step is the withdrawal, which is a terrible thing to do because of the tax implications and the penalties," David said.

The average hardship withdrawal amount decreased slightly in 2008 to $6,000, but David attributed that to the fact that workers had less money to pull out of their accounts.

The report comes at a time when the 401(k) concept is under intense scrutiny from lawmakers, academics and economists. The stock market's collapse has revealed the vulnerability of America's retirement system. Increasingly, employers have abandoned traditional pensions, forcing workers into 401(k)s which tend to have more exposure to market forces. Many lawmakers also pushed 401(k)s, approving rules in recent years that, for instance, make it easier for employers to automatically enroll their employees in such plans.

What a despicable hypocrite this Scott B. David is. Due to "stocks for a long run" brainwashing (in which Fidelity took a prominent role) 401K is a real trap for regular folks, who in reality are Wall Street donors instead of being  investors. And it is Wall Street brass who  appropriated large part of their savings.

David said 401(k)s are still a good retirement savings vehicle but should not be the only one that an employee relies on.

"They were designed to be one of several savings vehicles," he said. "To look at 401(k)s as the only form of retirement savings is not appropriate."

Selected comments

pjc8300892 wrote:

"To look at 401(k)s as the only form of retirement savings is not appropriate."

When the 3-5% we put into our 401K is all we can afford, and when our home also decline 25% in value, what alternatives do the common worker have? With unemployment zooming and most people either out of work of not sure they will have a job tomorrow, what do these experts suggest.

With assets decreasing by 30% a year, income decreasing by up to 90% and expenses increasing in double digits, just what should people do?

A. Wait for the banks to help us with the billions in tax dollars they have received?

B. Wait for our law makers to find a miracle cure?

C. Burry our head in the sand?

D. Blow our brains out before our insurance lapses?

E. All of the above!

[Jan 28, 2009] Global Banking Organization Predicts Worldwide GDP Fall for 2009

naked capitalism

The forecast for a global international contraction by the Institute of International Finance is significant because it is the first to project negative growth for 2009. That may seem unexceptional to some readers. However, the IMF is forecasting growth of 1.5% for 2009, which it actually sees as a serious recessionary level. Why? Emerging economies generally sport higher growth rates than advanced economies. so a 2.0% ish growth rate is seen as tantamount to stagnation. And official bodies often lag rather than lead conventional wisdom. Negative worldwide growth is thus a grim prediction.

From the Telegraph:

The Institute of International Finance, the global organisation of major banks, predicted an almost unprecedented collapse in world economic growth and capital flows.

It became the first major global institution to forecast a full-scale global contraction in 2009, predicting that the economy would shrink by 1.1pc.

IIF chief economist Philip Suttle said: "This is the worst period since the interwar years..."

He also expects rich economies to contract by 2.1pc – the worst peacetime output since the 1930s.

Private flows of capital into the emerging world are set nearly to dry up in the next year, the IIF predicted, dropping from $928.6bn in 2007 down to $465.8bn in 2008 and then to $165.3bn the following year.

As a result the current account deficits in emerging Europe will more than treble in the coming year, from $30bn in 2008 to $117bn next year...Asia is likely to suffer a worse downturn than during the Asian financial crisis, the report indicated.

The IIF was meeting ahead of the World Economic Forum in Davos, and Mr Rhodes warned that the growing concern this year was the rise in protectionism. He said: "There is a tremendous need to keep trade lines open. If you start seeing – with everything else we're talking about – the reduction of trade lines on top of that, then you really have a problem."

[Jan 27, 2009] Depression alert by Tracy Alloway

Jan 27, 2009 | FT Alphaville

Well, it’s finally happened - a mainstream investment bank calling not just a recession, but a depression. How depressing.

In a note entitled “Some inconvenient truths”,  Merrill Lynch’s North American economist David Rosenberg elucidates (emphasis ours):

It shouldn’t come as any big surprise that with such a provocative title, we would be saddled with questions as to how an economic depression is even defined. Of course, most portfolio managers still don’t know that a recession is not defined as back-to-back quarters of negative real GDP prints (which we had neither in 2002 nor 2008) but instead the timing of the peaks in real sales activity, employment, industrial production and organic personal income growth.

As for depressions, there is no official definition, except to say that they have existed in the past. There were no fewer than four in the nineteenth century, one in the twentieth century, and we are very likely enduring another one today. Though this current one is muted by the fact that most countries have an elaborate social safety net (deposit insurance, unemployment benefits, welfare, and socialized health care).

Depressions are basically long recessions - they can last anywhere from three to seven years, while historically cyclical recessions last 18 months - and tend to follow years of leveraged prosperity of Gatsby-like proportions. Considering that in this most recent leveraged cycle from 2002-07, we reached a point where a record 40% of corporate profits were derived from financial activities, where household debt relative to income and assets surged to unprecedented levels and the personal savings rate briefly went negative at the height of the housing bubble, it is safe to say the down-cycle we are currently experiencing did indeed follow a classic elongated period of leveraged prosperity. It is now reverting to the mean.

And with regards to reverting to the mean, Rosenberg provides some rather scary numbers:

And the scariest bit of all:
As Morgan Freeman (Red) put it so eloquently in The Shawshank Redemption,
“that’s all it takes, really, pressure, and time.” Time is certainly going to be a big part of the solution, and history tells us that deleveraging cycles last years. While the pendulum is obviously on the downswing, the forecasting community is obsessed with locating the bottom.
In our view the appropriate focus is to assess just how far the pendulum will swing in the opposite direction, because a mean-reversion process actually breaks through the mean.

The full note available in the Long Room (H/T teapack).

[Jan 27, 2009] Eight Structural Factors Undermining Any Turn-Around by Simon Smelt

January 26, 2009 |

Beyond rescue efforts and hopes of restoring confidence, deep structural forces remain unresolved. Current actions could make matters worse. Consider these eight factors:

First: We are off the map. The U.S. Federal Reserve and Treasury, like their counterparts around the world, face unprecedented challenges. Bank deposits with the Fed, the monetary base, interest rates in the United States and United Kingdom are all at historic highs or lows. Sophisticated tools of economic management are deployed, yet there is no sign that financial leaders have found maps to guide them beyond the immediate need for survival. They can’t even agree the cause: was it a global savings glut (former Treasury Secretary Henry Paulson) or bankers’ behavior (former Fed Chairman Alan Greenspan).  They just want to get out of the hole quick.  Little is heard of how to tackle America’s empire of debt.

Second: The compass is gone. The focus of monetary policy around the world has been keeping inflation (as measured by the Consumer Price Index) under control and, subject to that, encouraging economic activity through low interest rates.  But, this assumes that: (1) The market – guided by light-handed regulation – would look after the rest, notably risk; and (2) prices not covered by CPI – such as asset prices – didn’t matter much for the purposes of monetary management.

Well, wrong on both counts.  Result: there are no clear, long-term policy settings for central banks to follow. This makes life unpredictable – just what markets don’t like. 

Third: The transmission and steering are shot. The stimulus of competition and the market is being weakened by the growing role of government. More lobbying and more rescue packages will weaken economic performance. 

Unlike other central banks, the Fed is not part of government, yet it is a key player.  At international level, the elaborate Basle II accord to regulate banking has proved ineffective because it does not catch securitisation.

Fourth: The engine room has throttled back. The engine for global growth has been the U.S. consumer. This stems not from real wage growth but from the availability of cheap credit and the wealth effects of asset price inflation. Growth of 12% plus per annum in household borrowing is unsustainable. Consumption will stay shut down because of reduction in both the supply of credit (factor five) and the demand for credit.

U.S. households have consistently grown their wealth by 3% per annum, compounded, in the medium to long term. In the last 20 years, this has been achieved through capital gains not savings – boosting consumption and encouraging borrowing. The 2008 shock removes those gains. Households will save more, lowering consumption. A return to previous savings rates would result in a $1 trillion per annum decline in U.S. gross domestic product (GDP). 

Fifth: The fuel supply is low.  Much has been written about the reduced availability of credit.  The government and Fed are stepping in to fill the gap in various ways.  But:

Sixth: The tugboat can’t do it.  There are three big problems.

First, government’s operational limits.  In the United States, government accounts for 20% of GDP.  The harsh transition to a post bubble world is putting pressure on government to expand to replicate the size or pattern of lost economic activity or to enforce spending and lending; e.g. coercing banks to lend more, regulating old cars off the road so as to speed the replacement cycle for cars, and so on.

Second, monetary policy carries dangers.  With reduced leverage by banks and reduced consumption by households, both the quantity of money and the velocity of its circulation will fall. This shrinks nominal GDP.  For the Fed’s monetary levers to precisely counterbalance this fall is impossible. If the Fed undershoots, this leads to deflation and recession.  Fed Chairman Ben Bernanke will err towards overshoot but the resulting inflation will be difficult to control. 

Third, U.S. government debt is climbing, whilst reduced economic growth makes it harder to absorb consequent claims on future revenue.  Increased borrowing by government is a burden on future generations of taxpayers.

These three problems show that the boundaries for government action will be pushed hard. However great a leader new President Barack Obama may be, the U.S. government cannot fulfil its long to-do list from the downturn, and repay increasing borrowings, and meet its growing future obligations and ensure a healthy and competitive economy.  Yet, political as well as borrowing pressures encourage it to try. 

Seventh: Confused signals.  Taxpayer funded bailouts seek to save businesses, avoid outright nationalization and forestall panic exit of remaining private capital.

But, in consequence, government’s role has grown from providing welfare insurance to financial insurance.  A net transfer from the prudent to the imprudent and from future generations to this is enforced.  Consequences of mistakes are borne by those who did not make them.

The signals are perverse and reinforced by leaders.  In a guilt free society, Paulson and Treasury Secretary-designate Timothy Geithner view greedy and unwise U.S. consumers and bankers as victims of Asian lenders: “China made me do it!”

Eighth: Stormy international waters.  The United States is the world’s main debtor and its dollars provide liquidity to global trade. Eighty-five percent of international trade is in the world’s reserve currency – the U.S. dollar. Foreigners buy 80% of U.S. Treasury bills.  To keep its factories churning, China and other exporters buy U.S. dollars – effectively providing goods on credit.  All this is of vast benefit to the United States but could change. 

The tipping point may come in 2010 from the mundane issuance of government bonds.  New government spending programs and the downturn in tax revenues will require many governments massively to expand bond issues to cover their debt.

This will mean: (1.) Downward pressure on bond prices (higher yields), and (2) sufficient supply of non U.S. government bonds that big money can shift from U.S. assets.   A lot of parked investment money will be looking for a good home.  How much more exposure to U.S. debt – and “victim” psychology – will investors want? 

These eight factors are a formidable combination to overcome. Lifeboats anybody?

Simon Smelt is a New Zealand-based economist and policy analyst.

[Jan 27, 2009] Economic Cures Are Like Booze for an Alcoholic: Caroline Baum by Caroline Baum

Jan. 27  | Bloomberg

Someone returning to Earth from a yearlong sojourn in outer space could be excused for feeling disoriented.

After all, when said space traveler departed our fair planet, the U.S. economy was buckling under the weight of the burst housing bubble. The blame game was in full swing, with the villains ranging from Alan Greenspan and his easy money policies to consumers borrowing and spending beyond their means to financial institutions enabling profligate spending to a misallocation of capital to housing.

Fast forward one year, the crisis is still going strong, the villains are still under attack, yet something curious has happened: The policies and actions responsible for the economy’s illness are now being prescribed as cures.

How can that be? It’s not just our space traveler who’s confused.

Let’s start with the Federal Reserve. In the beginning, there was a boom in technology and Internet stocks followed by a predictable bust. Easy money, which had inflated the stock market bubble, came to the rescue, in the process fomenting another bubble of greater magnitude.

Then-Fed Chairman Greenspan let the benchmark overnight interest rate overstay its welcome at 1 percent, raising it so slowly that anyone with or without a good credit rating had time to get in on the housing boom.

Housing’s Role

The bubble burst with a ferocity that surprised even the most ardent bears. The price of overnight credit is now 0 percent to 0.25 percent, and the quantity of credit (the Fed’s balance sheet) has more than doubled in the past year. If removing the monetary stimulus was tough back in 2004, 2005 and 2006, just imagine what it will take this time when the magnitude of the task will necessitate Fed action well before politicians think it’s feasible.

Now let’s move on to housing, an asset whose price had never declined on a nationwide basis since the Great Depression. At least until home prices started to roll over in 2006.

During the height of the condo-flip frenzy, too much capital was being allocated to housing, a tax-advantaged, unproductive asset. And it was housing, the mortgages used to finance their purchase and the intertwined web of securitized loans that sent the economy into a tailspin.

Starting Over

Now that we’re here, with more homes for sale than buyers at the current price, what’s the government’s solution? Why, make it easier -- and cheaper -- to buy homes. The Fed has embarked on a program to buy $500 billion of mortgage bonds in the first half of 2009 in an attempt to lower actual mortgage lending rates, which fell to an all-time low of 5 percent earlier this month.

Rather than let the market “clear” -- or let prices seek their own level -- policy makers are stimulating artificial demand for housing to prevent prices from falling.

Welcome back to square one.

Then there’s the over-indebted consumer. From 1952 to 1998, the U.S. household sector was a net supplier of funds to the rest of the economy, acquiring more financial assets than debt, according to Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago.

That changed in 1999, when the household sector’s “net acquisition of financial assets,” as it’s called in the Fed’s Flow of Funds Report, turned negative. Households were “net demanders of funds” until 2008, at which point the gap turned positive again, Kasriel says. “It wasn’t because they were acquiring more assets. It was because they couldn’t acquire as much debt.”

More Leverage

Banks, burned by their former excesses, have shut the spigots so even good credits are having trouble getting loans.

The government wants to ensure that consumers, whose spending accounts for about 70 percent of gross domestic product, can borrow and spend. This makes as little sense as using easy money and housing incentives to cure the effects of easy money and over-investment in housing.

“What policy makers on both sides of the Atlantic desire is to sustain household leverage and consumption at any price, when the only exit from the credit crisis involves a return to thrift by the overleveraged,” writes David Roche, president of Independent Strategy, a London consulting firm, in a Jan. 22 Wall Street Journal op-ed. “That cannot be achieved painlessly.”

And yet the federal government is seeking ways to make mortgage and other credit cheaper and more readily available, going further into debt in the process. Institutions deemed too big to fail, such as mortgage-finance giants Fannie Mae and Freddie Mac, were recruited in that effort. (That was after they were told to curb the growth of their portfolios and before they became wards of the state.)


These are short-sighted, short-term solutions being orchestrated at the expense of the economy’s long-term health, and I suspect most economists know it. (Politicians are a different story. Their knowledge of economics is generally confined to the area of trade: providing favors in return for campaign contributions.)

President Barack Obama’s crack economics team, including Larry Summers and Christina Romer, and Fed officials from Ben Bernanke on down have to understand that the problem of too much leverage can’t be fixed with more borrowing; that a misallocation of capital to housing can’t be cured with incentives to buy more homes; that consumers (and the nation) can’t spend their way to prosperity.

At least I hope they do.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)

[Jan 27, 2009] Still Dark Ahead

Financial Armageddon

Although more and more people are starting to see the similarities between current economic conditions and those that existed 80 years ago, many differences of opinion remain about where we are in the cycle.

To the pessimists, we've only just begun the slide down the slippery slope. To the optimists, there are clear signs of a light at the end of the tunnel.

In "Bad News: We're Back to 1931. Good News: It's Not 1933 Yet," the Telegraph's Ambrose Evans-Pritchard suggests that the latter group has likely gotten way ahead of itself.

Barack Obama inherits an economy already contracting at an annual rate of 6pc, much like the mid-Depression year of 1931 (-6.4pc), writes Ambrose Evans-Pritchard

This may beat Germany (-7pc) Japan (-12pc) and Korea (-22pc) over the fourth quarter. But that merely underlines the dangers ahead as the collapse of global trade chokes the mini-boom in US exports, setting off another stage of the crisis.

The US is losing 500,000 jobs a month. Brazil lost 650,000 in December. Beijing says 10m Chinese have lost their jobs since the crunch began. Japan's exports fell 35pc last month, year-on-year. The central bank is printing money furiously, buying bonds to prevent a relapse into deflation.

So yes, it is like early 1931. Citigroup and Bank of America have more or less disintegrated. JP Morgan's health is failing fast. General Motors and Chrysler survive only on life-support from the US taxpayer.

But it is not yet like 1933. That second leg down was the result of "liquidation" policies by a Dickensian leadership blind to the dangers of debt deflation. By then the Gold Standard had degenerated into an instrument of torture. It forced the Fed to raise rates from 1.5pc to 3.5pc in October 1931 to stem gold loss, with predictable results for shattered banks.

It is worth glancing at the front page of New York Times on Monday March 6, 1933 to see what the world looked like three days after Franklin Roosevelt moved into the White House.

The newspaper splashed with the story that FDR had closed the US banking system – invoking the Trading with Enemies Act – and ordered the confiscation of private gold. From left to right, the headlines read: "Hitler Bloc Wins A Reich Majority, Rules Prussia"; "Japanese Push On In Fierce Fighting, China Closes Wall, Nanking Admits Defeat"; "City Scrip To Replace Currency"; "President Takes Steps Under Sweeping Law of War Time"; "Prison For Gold Hoarders".

President Obama faces a happier world. The liberal economic order is still in tact, if fraying at the edges. Capital and ships move freely. North America and Europe talk the same political language. China has so far proved a dependable pillar of the international system.

But then the world seemed benign enough in early 1931. It is the second phase of depression that does terrible things.

Roosevelt took over a country where the economic machinery had completely broken down. The New York Stock Exchange and the Chicago Board of Trade had closed. Thirty-two states had shut their banks. Texas had restricted withdrawals to $10 a day.

Few states could borrow on the bond markets. Illinois and much of the South had stopped paying teachers. Schools closed for months. An army of 25,000 famished war veterans squatting in view of Congress had been charged by troopers of the 3rd US cavalry with naked sabres – led by a Major George Patton.

Armed farmers threatening revolution had laid siege to a string or Prairie cities. A mob had stormed the Nebraska Capitol. Minnesota's governor was recruiting Communists only for the state militia. Lawyers attempting to enforce foreclosures were shot. More than 100,000 New Yorkers applied to go to the Soviet Union when Moscow advertised for 6,000 skilled workers.

We forget how close America came to open revolt. Eleanor Roosevelt feared the country was beyond saving. Her husband kept the faith. He channelled the anger against Wall Street, diffusing it. "The practices of the unscrupulous money-changers stand indicted in the court of public opinion," he began his presidency.

The Fed was an ideological deadweight. Bowing to pressure from Congress it began to purchase bonds in mid-1932 to boost the money supply, but then recoiled, before retreating into pitiful self-justification. A third of the rescue funds in Hoover's Reconstruction Finance Corporation had been embezzled.

Today there has been no such failure of US institutional imagination, even if, as George Soros argues, the Treasury's policies have been "haphazard and capricious".

The twin blasts of fiscal and monetary stimulus have been massive. In short order the Fed has slashed rates to zero. It is now conjuring money out of thin air on an industrial scale, buying $600bn of mortgage bonds to force down the cost of home loans, and propping up the commercial paper market to avoid mass corporate default. Ben Bernanke, a Depression junkie, is proceeding with a messianic sense of certainty. The wash of money should ensure that the next 18 months will not mimic the cascade of disasters from late 1931 to early 1933.

It buys time. But it does not solve the deeper problem, which is that a West addicted to Ponzi credit has put off the day of reckoning with ever more extreme monetary policy with each downturn, stealing prosperity from the future.

It will be an extremely delicate task to right the ship again. Central banks will have to extricate themselves from their venture into the bond markets without setting off a bond debacle in 2010 or 2011. Governments will have to map out of a path of Puritan discipline for year after year.

This will be Barack Obama's grim test of statesmanship.


The Ponzi credit is not the cause. The necessity to perpetually expand profits the blood line of Capitalism or face extinction is the real culprit. Its one thing to expand money supply via  Industrial production its is quiet another to create fictitious (surplus value) based on money only, M+M+M+M= Financial Armageddon!

Economist trained (brainwashed) by the system can and never will understand that no more than the Pope of Rome can understand a non believer.

Michael, would you please clarify again what bond market collapse means, in layman terms?
Since starting your blog and others last winter, I've realized that you really can pick up on distant drumbeats a lot sooner than you would by listening to the news. I think the bond market is about to melt down. I just don't really understand what that means for me. amazed. The money changers are not only in the temple but they own the temple. I seem to remember, long time ago, they were booted out of the temple. Have you ever gone to the racetrack? If you study the racetrack crowd the wealthy betters go to a special window. Generally they go to the big betting window and those bettors usually wait until all the "sucker bets" have been completed. At the last moment the big bets are made and all the sucker bettors
lost money goes into the pockets of the big bettors. Do you think it's any different on wall street? Think again. Next time you watch the media "cheerleaders" remember who pays them. No matter what is happening - up or down - the cheerleaders are in your face telling you sweet lies. Chase the money lenders out of the temple. Obama is not going to save you! The Messiah has left the room. EVERYONE ....MICHAEL PANZNER KNOWS! HE HAS BEEN TRYING TO TELL AMERICA AND THE WORLD WHAT THE REAL DEAL IS.
GO OUT TO BUY HIS BOOK. THIS IS NOT A COMMERCIAL - THIS IS NOAH AND THE ARK IS DEPARTING. to perpetually expand profits the blood line of Capitalism or face extinction is the real culprit.

I wonder how many economists can actually explain capitalism clearly, and how it is different from previous economic systems like feudalism. The workings of capitalism are the root of the issue, whether you agree with the system (but think it needs monitoring), or not.

[Jan 27, 2009] Rosenberg on the Recession vs Depression

The Mess That Greenspan Made It has already become quite entertaining to watch how the financial media and the mainstream media tip-toe around the "D" word. Mr. Rosenberg does not feel the need to.
We are likely enduring a depression today
As for depressions, there is no official definition, except to say that they have existed in the past. There were no fewer than four in the nineteenth century, one in the twentieth century, and we are very likely enduring another one today. Though this current one is muted by the fact that most countries have an elaborate social safety net (deposit insurance, unemployment benefits, welfare, and socialized health care).

Depressions can last anywhere from three to seven years
Depressions are basically long recessions – they can last anywhere from three to seven years, while historically cyclical recessions last 18 months – and tend to follow years of leveraged prosperity of Gatsby-like proportions. Considering that in this most recent leveraged cycle from 2002-07, we reached a point where a record 40% of corporate profits were derived from financial activities, where household debt relative to income and assets surged to unprecedented levels and the personal savings rate briefly went negative at the height of the housing bubble, it is safe to say the down-cycle we are currently experiencing did indeed follow a classic elongated period of leveraged prosperity. It is now reverting to the mean.
Mean reversion is only fun when you are below the mean.

[Jan 27, 2009] Animal Spirits and Trust

I've never been a big fan of the animal spirits story of business cycles, but Robert Shiller believes that "Animal spirits offer an explanation for ... why the economy fluctuates as it does":

Animal Spirits Depend on Trust, by Robert J. Shiller, Commentary, WSJ: President Obama is urging Congress to pass an $825 billion stimulus package as soon as possible. But even that may not be enough to stabilize the economy, since it fails to take into account the downward spiral of animal spirits...

The term "animal spirits," popularized by ... Keynes..., is related to consumer or business confidence, but it means more than that. It refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people. ...

Animal spirits offer an explanation for why we get into recessions in the first place -- for why the economy fluctuates as it does. ... A critical aspect of animal spirits is trust, an emotional state that dismisses doubts about others. In talking about animal spirits, Keynes sought to convey ... that swings in confidence are not always logical. The business cycle is in good part driven by animal spirits. There are good times when people have substantial trust... They make decisions spontaneously. They believe instinctively that they will be successful... As long as large groups of people remain trusting, people's somewhat rash, impulsive decision-making is not discovered.

Unfortunately, we have just passed through a period in which confidence was blind. It was not based on rational evidence. The trust in our mortgage and housing markets that drove real-estate prices to unsustainable heights is one of the most dramatic examples of unbridled animal spirits we have ever seen. ...

The danger at this point is that ... confidence will continue to plummet. ... So what must we do to revive our animal spirits...? We must be certain that programs to solve the current ... crisis are large enough, and targeted broadly enough, to impact public confidence. Not only do we need a fiscal stimulus significantly greater than the proposal ... currently on the table, government action is also needed to take the place of the credit markets... The Treasury and the Federal Reserve not only need a fiscal target, they also need a credit target. This should not be a dollar number, but rather a target for how the credit markets should behave. The goal should be that those who would normally receive credit in times of full employment can once again find it easy to do so...

The interventions so far have been in the right direction. Federal Reserve Chairman Ben Bernanke has been especially inventive and aggressive. But ... a great deal more still needs to be done. Now is not a time for the timid. ...

In due course our animal spirits will once again turn positive, but we would rather that happen this year or the next rather than five or 10 years from now. There is only one way to speed this process: greatly expand governmental support of credit markets and pass a much larger fiscal stimulus plan than is now proposed.

[Jan 25, 2008]  Retrospective: January Eggs-on-Face Awards

[Jan 25, 2009] IMF set to slash global growth forecast By Alan Beattie in Washington

January 25 2009 |

The International Monetary Fund will slash its forecasts for global economic growth this week, saying the downturn is worsening in both rich and poor economies.

Dominique Strauss-Kahn, IMF managing director, said last week that the fund would “significantly adjust” its projections downwards in the light of bad news about growth and continued problems in financial markets

Reuters on Sunday quoted Axel Bertuch-Samuels, deputy director of the IMF’s capital markets department, as saying that the global growth forecast for 2009 would be cut to 1-1.5 per cent from its current projection of 2.2 per cent, but the fund declined to confirm that number.

Barley | 01.25.09 - 4:28 pm | #

[Jan 24, 2009] Some Useful Notes on the Crisis, Arnold Kling EconLog Library of Economics and Liberty

An FDIC document on the risk weights of different bank assets. The higher the weight, the more capital the bank has to hold against that asset. As I read table 1 and table 3, if you originate a loan with a down payment of 20 to 40 percent, the risk weight is 35. But if you buy a AA-rated security, the risk weight is only 20. So if a junk mortgage originator can pool loans with down payments of less than 5 percent, carve them into tranches, and get a rating agency to rate some of the tranches as AA or higher, it can make those more attractive to a bank than originating a relatively safe loan. If you want to know why securitization dominated the mortgage market, this explains it. Regulatory arbitrage, pure and simple.

oinkoink writes:


You're missing the forrest for the tree you found.

"If you want to know why securitization dominated the mortgage market, this explains it. Regulatory arbitrage, pure and simple."

That is just a symptom of the problem. The real problem is that commercial banks, which borrow money from depositors, are currently allowed to invest that borrowed (leveraged) money in securities of any kind - including mortgage-backed securities. It wasn't always this way.

After the stock market crash of 1929, the United States Congress prohibited commercial banks from gambling with depositor's savings in the stock market. That prohibition lasted 66 years

That prohibition, known as Glass-Steagall, was repealed when President Bill Clinton signed the Gramm-Leach-Bliley Act into law in 1999 ... allowing banks once again to enter the stock market casino to gamble with your savings account.

The results have been predictable.

Commercial banks cannot be allowed to own stocks and other securities of any kind, whether they be based on mortgages, or based on anything else.

In this case, improper regulation [not necessarily excessive] led to loopholes which the majority of the market tried to exploit, and when the results finally caught up to them, the resulting rush back through the loophole tore open the financial markets.

Isaac K.,

I would refer you to Dr. Kling's article on the notion the average voter is a failing econ 101 student; given that postulate, "regulation" is easy to sell to a polity which transfers power to the regulators who then sell that power to small groups who manipulate regulation via lobbying.

Add to this equation economically illiterate politicians like Dodd, Biden, McCain, Obama, and you have a perfect storm of stupidity.

One need only look at the "war on drugs" viz Afghanistan or South Central LA to see there is no understanding of the most basic fundamentals of economics: moral hazard, rent seeking, risk reward, inflation vs deflation...nada, zip zilch, we are led by the ignorant who are empowered by people who think a law changes reality.

And absolutely no one thinks in terms of perverse outcomes or unintended consequences.

As long as the majority thinks in terms of static money amounts "shared" or "hoarded" by actors in the economy (socialist views) you will see regulatory subterfuges whereby the intentions of the ignorant are used to fleece them of their treasure.

I teach my sons to see it as an example of the Jedi mind trick: a politician (doesn't matter what stripe) waves his hand in front of a camera and says, "this law will make (poverty, drug addiction, crime, envy, class conscious inferiority complexes, scary terrorists, Mormon polygamists, etc. ad nauseam) go away and the world will be better! Never mind the reality, these are the laws you want, those aren't the droids you are looking for."

[Jan 23, 2009] How America Embraced Lemon Socialism

It's not lemon socialism, its "socialism for the rich."  I'm afraid Obama is about to find out the hard way that an economy built on fraud is not going to like or accept anything semi-honest.
January 23, 2009 | Robert Reich's Blog

America has embraced Lemon Socialism.

The federal government -- that is, you and I and every other taxpayer -- has taken ownership of giant home mortgagors Fannie and Freddie, which are by now basket cases. We've also put hundreds of millions into Wall Street banks, which are still flowing red ink and seem everyday to be in worse shape. We've bailed out the giant insurer AIG, which is failing. We've given GM and Chrysler the first installments of what are likely to turn into big bailouts. It's hard to find anyone who will place a big bet on the future of these two.

It gets worse. While Washington debates TARP II, the Federal Reserve Board continues to buy or guarantee or provide loans for a vast and growing pile of questionable financial and corporate assets, much of which are likely to be worth far less than the Fed has paid or guaranteed or accepted as collateral. We're talking big money here -- so far over $2.4 trillion. (The entire TARP -- parts I and II -- in combination with the proposed stimulus package come to just over $1.5 trillion.)

Taxpayers are on the hook for this Fed bailout money, too, of course. We have to pay the interest on the ever-growing debt used to make these payments or guarantees and loans. Yet while TARP II and the upcoming stimulus package are receiving a great deal of attention, this much larger public commitment by the Fed is not. That's partly because the media doesn't much of understand it, but also because the Fed is doing it in secret, using provisions of its charter never before utilized, and avoiding discussion before the full Board of Governors for fear such meetings would be subject to the Freedom of Information Act.

Put it all together and at this rate, the government -- that is, taxpayers -- will own much of the housing, auto, and financial sectors of the economy, those sectors that are failing fastest.

Consider too that the government already finances much of the aerospace industry, which is still doing reasonably well but depends on a foreign policy that itself has been a dismal failure. And a large portion of the pharmaceutical industry and health care sector (through the Medicare and Medicaid, the Medicare drug benefit, and support of basic research). These are in bad shape as well, and it seems likely the Obama administration will try to reorganize much of them.

What's left? Most of high-tech, entertainment, hospitality, retail, and commodities. So far, at least, we taxpayers are not propping them up. And when the economy turns up -- perhaps as soon as next year, most likely later -- these sectors have a good chance of rebounding.

But the others -- the ones the government is coming to own or manage -- are less likely to rebound as quickly, if ever. If anyone has a good argument for why the shareholders of these losers should not be cleaned out first, and their creditors and executives and directors second -- before taxpayers get stuck with the astonishingly-large bill -- I would like to hear it.

It's called Lemon Socialism. Taxpayers support the lemons. Capitalism is reserved for the winners.


JimPortlandOR writes:
"These are very bright people, and they will figure out a way." My comment: this is human nature. It is FUN trying to figure out a way around the rules.

That's why we need criminal sanctions and 100X higher civil penalties for folks who work around the rules and then want the public to clean up their crap.

It has to HURT if you game the system and get caught at it.

Then, put in regulators and prosecutors that believe in preserving the system (instead of industry cronies that think regulation is unneeded because wall street is full of honorable people)

Jail Terms, multimillion fines, and exclusion from market activity help people to not cater to their greed and desire to dominate.
JimPortlandOR | 01.24.09 - 11:44 pm | #

"How Cronyism and Rent-Seeking Replaced 'Creative Destruction'"

"I'm afraid Obama is about to find out the hard way that an economy built on fraud is not going to like or accept anything semi-honest."
Economist's View
Eliot Spitzer:

America's Fear of Competition, by Eliot Spitzer, Commentary, Slate: Although everybody claims to love the market, nobody really likes the rough-and-tumble of competition that produces the essential "creative destruction" of capitalism. At bottom, this abhorrence of competition and change are the common theme that binds together the near death of the American car industry, the collapse of the credit market, the implosion of the housing market, the SEC's disastrous negligence, the Madoff Ponzi scheme, and the other economic catastrophes of recent months.

Consider the examples of the SEC and GM, which would appear to have nothing to do with each other. The traditional critiques of the SEC have been that it was underfunded and didn't have up-to-date laws needed to regulate sophisticated financial transactions in evolving markets. That's not accurate. The SEC is a gargantuan bureaucracy of 3,500 employees and a budget of $900 million... And the ... powers of the SEC are so broad that it needs no additional statutory power to delve into virtually any market activity that it suspects is improper, fraudulent, or deceptive. ... The SEC has all the money and people and laws it needs. For ideological reasons, it just didn't want to do its job, and on the rare occasions when it did, it didn't know how.

GM's excuses—that its UAW contract and health care costs make it too top heavy to compete—are partially true but ignore a simple reality: These are the self-inflicted wounds of a company that chose a path of least resistance rather than confront the need for dynamism and innovation. ... The auto industry preferred protection to competition. And when it had to compete, it wasn't up to the task.

Both the SEC and GM refused to adapt from the world of the last century to the more dynamic new millennium. Each reacted the same way to competition: Instead of improving its product, it played defense. ... No one at the SEC seemed to ask the most important question: Given how the market is changing, what should we change to insure the integrity of the capital markets?

Instead, the SEC spent its energy preventing others from doing the work it should have done. Using the rather arcane doctrine of pre-emption, the SEC fought in the courts and on Capitol Hill to keep other enforcers at bay: Apparently, worse than having fraud in the marketplace was the possibility that an entity other than the SEC would appear to be more effective than the SEC at finding it.

For both the SEC and the auto industry, Congress was a place to find protection from meaningful competition. Each used its bureaucratic clout to insulate itself from the pressures of capitalism. ...

The result has been unfortunate: Over and over, we supplied the protection from needed change that these entities desired. Then, when the going got tough, neither the SEC nor GM was up to the task. By preventing the stern taskmaster of competition from forcing adaptation, we became complicit in their becoming dinosaurs. ... Both GM and the SEC need to see a change in market conditions as an opportunity—not a challenge to market share.

We must rebuild these two institutions. If we don't infuse them with a culture of change and love of competition, they will fail once again. ... This is a unique opportunity for President Obama and the Congress to take two seemingly different entities and force them to play by the real rules of capitalism...

Congress and the executive branch have, to a considerable extent, been devoted to business interests in recent years. In essence the argument is that what's good for business is good not just for America, but for the whole world. The ideological basis for this approach is that the interests of business and of greater society always coincide so that maximizing business interests maximizes social benefits at the same time, and that a hands off approach from government is the best way to allow those coincident interests to express themselves.

Unfortunately, however, this ideological foundation incorporated a flawed understanding of the interaction between market structure and social benefits, particularly the ability of markets to self-correct when the market structures deviate from the socially optimal structure. The result of this, particularly as it came to be applied in the political arena, contributed to the existence of cronyism, rent-seeking, institutions that became too big, interconnected, and too powerful to fail, and other problems. Political power combined with rigid ideology built upon a false premise - the doctrine of immediate self-correction by markets - gave us a result that was far from the competitive ideal presented in textbooks, a world that was far from the ideal competitive model that produces such large benefits for society.

I think there is some understanding that the approach of the past did not work, with the current state of the economy it's hard to argue that it did, and that we need to go in a new direction. And I'm sure we will try. But I wonder, when all is said and done, will anything really change?

[Jan 24, 2009] Obama's Financial Reform Proposals: Less Than Meets the Eye

Will Obama with his "perestroika" be more successful then Gorbachev ? It's a relief to see a president who speaks English correctly, who lived outside the USA and who has experienced something like real life prior to politics instead of binge drinking...
Now in theory, with a new SEC chief, the SEC might get a bit more aggressive, but even in the Clinton era, reform minded Ted Levitt was reined in by Congress that threatened to SEC budgets if it made life too hard for Wall Street (and Democrat Joe Lieberman was the biggest perp). So aside from some cosmetic moves, I doubt much will change here. Now let us return to the Times article, which illustrates that the underlying problem:
Officials said that the proposals were aimed at the core regulatory problems and gaps that have been highlighted by the market crisis. They include lax government oversight of financial institutions and lenders, poor risk management efforts by banks and other financial companies, the creation of exotic financial instruments that were not adequately supported by their issuing companies, and risky and ill-considered borrowing habits of many homeowners whose homes are now worth significantly less than their mortgages.
In other words, this is a symptom oriented, patchwork approach. And it misses some of the underlying drivers: the opaqueness and complexity of many of the new instruments, excessive leverage (oh wait, the powers that be think excessive leverage is the solution) and widespread accounting fraud.

For instance, how could Lehman have collapsed with what turned out to be a hole in its balance sheet of in excess of $100 billion when its financial statements gave no clue of problems of that size? And as we noted at the time, its executives were claiming, forcefully, that everything was OK, the converse of what was actually the case (see here, here and here for examples).

Or consider the views of William Black (a bank regulator during the S&L crisis who went after Lincoln Savings, owned by the powerful Charles Keating. Black's efforts were thwarted but he was eventually vindicated) on Merrill:

Thain portrayed himself as a hero of capitalism and the embodiment of a successful CEO deserving of millions of dollars in bonus compensation because he "sold" Merrill to B of A -- minimizing the losses of Merrill's shareholders. There was, of course, criticism of the scale of these bonuses, but no fundamental rejection of his claim to be a hero.

The lack of rejection illustrates why we are in crisis. We need to be blunt. Thain transferred a loss that risk capital is supposed to bear to the taxpayers of the United States (not B of A). He was able to transfer that loss to the taxpayers because Merrill, under his leadership, engaged in monumental accounting fraud (which means it also engaged in securties fraud). We have to start taking accounting fraud seriously. It is a crime. It is a felony. It is the "weapon of choice" among financial control frauds. It causes staggering direct losses and indirectly, by eviscerating trust, it causes entire markets to shut down. This should not surprise economists. We make things crimes in large part because they produce material negative externalities.

So, Thain "was part of the problem." The fact that he could (A) lead such a massive fraud and (B) think that he should be rewarded with many billions of dollars for defrauding the citizens of the United States shows two key reasons why the crises keep getting worse. Our most elite business leaders now embody traits we used to understand were loathsome. The fact that this is not obvious even to skilled, sceptical financial reporters shows how serious a problem we face.

Until we start talking addressing the root causes, these financial "reforms" will prove as effective as trying to treat gangrene with antibiotics.
Selected comments
Mr. T. writes... 
@ RockyR
I would say that it is (again, so far) only different in tone, not substance.

Consider that the financial statements of every single one of the major financial institutions have been false for at least the past five years (assets and profits booked that were not, in fact, there...with bonuses paid out based on same).

These have been material misstatements and represent massive fraud and yet I have not heard one peep about prosecutions, clawbacks, or accountability of any sort etc....

Talking about more transparency and regulatory reforms don't mean anything to me at this point.

We will see....I am not writing this administration off by any means but based on the appointments to date I am not really encouraged.

Mr. T. writes:
A lot of talk.....but the overall approach coming from the Obama camp is (so far) not materially different from what we have seen from the last administration.

Employing the same minds that presided over the creation of this mess more or less...more pumping....more debts....more bailouts....and an almost pathological avoidance of actually confronting the problems and facing the pain today.

More kick the can down the road.
Mr. T. | 01.24.09 - 10:24 pm | #

Anonymous said...
How does society go forward without some "responsible" rule of law around financial transactions? Why are the laws that we have not being enforced is maybe a better question? Since when is the American government in the practice of supporting a class society? Seems pretty obvious to everyone that this is what is occurring.

Oh my. What will the children think?

It is so stupid to read some of the comments on the various blogs where people are attacking all sorts of made up demons of our situation but the underlying wealth inequity and subsequent control of the world economies.


January 25, 2009 2:05 AM

Price Stout writes:
To restate what's been said slightly differently, one cannot blame the current mess on a lack of regulators or regulations. Citi and the GSEs are about as bad as it gets, and both were heavily regulated, by at least two regulatory agencies each (Citi by many more than that).

The issue is more fundamental: an agency problem. No amount of regulation will overcome that. In all cases a these collapsed companies, the very top management made millions while the owners are left with nothing and the taxpayers are stuck w/ a large bill.

What this suggests to me is the failure of the pubic company corporate form as it currently functions in the US. Need to give this some more thought.
Price Stout | 01.24.09 - 10:42 pm | #

 bg said...
So it boils down to fraud in the private sector and regulator capture in the public sector. I think this is what Minsky said (the economy becomes a ponzi scheme.)

The answer is more government, but it is also better oversight *of* government. Two comments got my attention:

"The fact that this is not obvious even to skilled, sceptical financial reporters shows how serious a problem we face."

"savvy CME members are now objecting to the idea"

The complacency that lead to our Minsky winter extends to our cognisenti, savvy and skilled. It also extends to you and I.

We simply need to find better ways to have the populace supervise our democracy.

January 25, 2009 2:22 AM

GM said...
From the NYT article. The report being referred to follows. It's a short read with broad sweeping recommendations.

"and in a recent report by an international committee led by Paul A. Volcker"


This Group of 30 report is the template the new regulations are being drawn from. The Group of 30 led by Paul Volcker is the leading bankers from the US and Europe. See page 8-9 for a list of members and when you recognize the names and the banks they represent then ask yourself how these guys having led us into this debacle are giving us the game plan to fix the problems they created.

I'd compare it to using Gen Custer's Last Stand as a road map on how to wage war.

January 25, 2009 3:55 AM

Joe Pomykala said...
In the aftermath of every financial crisis, there is usually some gargantuan set of new regulations. After the South Sea Bubble, the British government almost made it illegal to sell stock. The Great Depression had the SEC, Glass-Segal Act, after Enron and Worldcom accounting scandals, we hade Sarbanes-Oxley. This period will be no different.

We do need more regulation of OTC Credit Default Swap (CDS) market. CDS should be standardized and put on exchanges. The press did not talk about it much, but the US taxpayer bailout of AIG was caused by their one-sided exposure as counterparty on something like $500 billion, a good chuck related to MBS and subprimes. This is a huge amount, higher than GDP of many countries. If AIG failed and could not make good as counterparty on insuring all this debt, then all those owning AIG counterparty CDSs would have to write down their assets. European banks hold CDSs as regulatory capital under Basil. If AIG failed, the European banking system would have collapsed, remember the rush to raise depositor insurance all over Europe to prevent capital flight? This potential contagion prompted the AIG bailout. CDS exposure should not be held off the books as executory contracts, but fully disclosed. Counterparties should not be able to write CDS if they do not have sufficient collateral. This same CDS issue and potential contagion also helped prompt the US auto bailout. Something like $1 trillion in CDS exist over US automaker debt (I assume much has to be synthetic). If GM went bankrupt, such a triggering event would cause counterparties to pay out, some counterparties, say hedge funds, former investment banks (turned bank holding companies to access TAF), etc., probable could not pay. Contagion possibilities on CDSs helped drive the bailout of GM and GMAC.

I do not favor regulation in general, but for the CDS market I think it is necessary. We do not know since it is OTC, but likely $45-55 trillion in CDS exist. US GDP is only a paltry $14.4 trillion in comparison. CDS exposure is a multiple of all existing mortgage debt existing. Jezz - total US subprime mortgages are what? - $1 trillion. The numbers are scary, but many positions are hedged to make profits on spreads. However, (OTC) counterparty default could produce contagion and snowball. We regulate automobile insurance, homeowner insurance, and private mortgage insurers, to hold sufficient capital to pay potential loses. The CDS market should be much the same, counterparties should hold sufficient collateral. This potential default by CDS counterparties and possible world wide financial contagion (which would be a stunning Act II after Act I in the mortgage market) has helped driven taxpayer bailouts. The current CDS market is something like me being able to write hurricane insurance, but completely unable to pay claims if a hurricane happened, but OTC buyers of my CDS insurance may, or may not, know my position for potential claims or collateral. We need more disclosure. CDS should be standardized and exchange traded on CME instead of OTC, CDS counterparties should be fully collateralized.

Richard Kline said...
Look y'all, PresO has _no_ interest in extensive financial reforms. Messy. He's tight with the Money Boys. Always a pro-market man. You can tell that he has _NO_ ambitions at reform by the folks who he has chosen for appointments. Not a credible reformer or new face amongst that lot of bankster's hierlings, not one. We will get nothing but cosmetic or minor reforms from his Admin. The real hope for change is from Congress, and that is a hope both scant and faint.

. . . I expect no serious attempt at financial reform until the double dip of our Re/Depression. Just in time---the talking that is, not any action---for the run-up campaign for the O II Administration.

And on the subject of Thain, Is It Fraud?, by rejecting nationalization the powers that be have all but guaranteed numerous multi-billion dollar contexts in the banking industry which will have the appearance of fraud, the substance of fraud, but will for the most part be unprosecutable. If you hand billions to big banks, with no directives, and no oversight, and then they go out of business with said billions unrepaid, that looks like a fraud. But Paulson ensured that every Thief in Chief and their assistants will walk scot-free. This is what we have come to, and PresO's team wants a Second Increment. And he'll be back for a Third, and a Fourth, too, and Congress will back him. That is my view. Because there is absolutely no accountability to anyone about anything in this---except you and me. If we don't pay our taxes, that is counted against us.

. . . But so what if the game is rigged, sez they, "If you don't play, you can't win."

Anonymous said...
«The fact that he could (A) lead such a massive fraud and (B) think that he should be rewarded with many billions of dollars for defrauding the citizens of the United States shows two key reasons why the crises keep getting worse. Our most elite business leaders now embody traits we used to understand were loathsome.»

But that's a minority ideological position; Real Americans think that all that matters is to be winners, whatever it takes, and CELEBRATE the astuteness of Thain, and just wish to be winners like him. What Real Americans think is loathsome is the stealing and thieving of the money of the winners by the voracious hordes of welfare queens to buy cadillacs, of strapping your bucks wolfing down off t-bone steaks.

The defrauding that is loathsome to Real Americans is the hundreds of billions of dollars in taxes extorted every years from the best and brightest, from the deserving producers, by the vicious coercion of the government.

«The fact that this is not obvious even to skilled, sceptical financial reporters shows how serious a problem we face»

Sell-side financial reporters?

bobn writes:
To restate what's been said slightly differently, one cannot blame the current mess on a lack of regulators or regulations. Citi and the GSEs are about as bad as it gets, and both were heavily regulated, by at least two regulatory agencies each (Citi by many more than that).

Price Stout | 01.24.09 - 10:42 pm | #

But these were BushCo deregulationist deregulators.  Somehow we got from the end of the GD1 to roughly 2000 without any huge blowups.  Then we get some spectacular deregulation form Phill Gramm by way of Bill Clinton ( and Larry Summers, too) - bang- both barrels!
bobn | Homepage | 01.24.09 - 11:50 pm | #

[Jan 24, 2009] The Never Changing Way of Life

Moon of Alabama

At the Earth Summit in 1992, George H.W. Bush forcefully declared, "The American way of life is not negotiable."

It's the End of the World as We Know It, Baltimore Chronicle, Aug. 3, 2004

My principle focus as vice president has been to protect the American people in our way of life

Transcript: Vice President Cheney on 'FOX News Sunday', Dec. 222, 2008

We will not apologize for our way of life nor will we waver in its defense.
Barack Obama’s Inaugural Address, Jan. 20, 2008

[Jan 24, 2009] There's no new motor to drive the economy Matthew Parris by Matthew Parris

Times Online

There's a piece of fashionable political nonsense you should be vaccinated against before the virus hits us: a whole vocabulary of ministerial happy thoughts to which you'd best learn to block your ears.

The coming nonsense is that when this recession is over, countries such as Britain should seek and find our salvation in (in what will become a buzz phrase of 2009-10) a “new economic model”.

Wrong. Actually we're just stuffed. We hit a tree. There is no replacement economic model for us to drive off in. We must bash out the dents, clear the broken glass, remove the bumper from the front wheel, and limp on as best we can. We should accommodate ourselves to that prospect.

Instead, as our prosperity sinks, the politicians' rhetoric will go skyward. “New challenges”, “a new vision”, “post-millennial economy”, “thinking outside the box”... how wearisome this inspirational PowerPoint pap becomes. Already I can hear that most unlikely exemplar of the next generation of economic thrust, Lord Mandelson, of Foy and Hartlepool, now in his sixth decade, fumbling through ermine for the right intergalactic techno-patter.

He will not be alone. “One thing is certain,” the greying heralds of a new economic age will intone, hair tint running down their collars, “nothing will ever be the same again.” Hear, hear! How this stuff resounds around the gilded screens and neo-Gothic tat of the Upper Chamber.

Melancholy will be the spectacle of a range of middle-aged-to-elderly political throwbacks burbling about life changes and sea changes and gear changes and step changes for the British economy. “Post-recession Britain... new age... new economic dispensation... recalibrate... re-balance... blah, blah, blah.” Oh boy, is this nonsense going to sound wise. The riff will be that Western economies like Britain's must reinvent themselves.

Behind the curve, and banging the table as ever, Gordon Brown has not yet latched on to the rhetoric of the “new economic model”. He's still trying to kick life back into the old one. His reflexive response to calamity remains to try to get the wounded to their feet, and to pretend it hasn't happened. Yesterday on the Today programme he was still choking on words like “boom” and “bust”. Like those pensioners one witnesses taking an unfortunate tumble while boarding a bus, his instincts, and those of much of the political class, have been to stand up again as fast as possible and carry on.

So the talk until recently has been about “kick-starting” the old economy, and Mr Brown's immediate promise was to get mortgage lending back to the levels of 2007. Hah! This mindless attempt to return to routine is an indication either of the absence of imagination, or of panic. I've seen a mule that had just broken one front leg scramble back on to three of its hooves, then begin trying to graze again, desperately reaching for the familiar, though the poor beast was doomed.

But as it becomes apparent even to Mr Brown that there is to be no return to that golden decade of no hard choices and uninterrupted growth, he and his Cabinet will begin the search for something new in the Uplift Department to say.

Listen to Peter Mandelson already: this is how it will run. Although (the argument will concede) the old rust-belt industries of the 20th century had to go, Britain turned its back on industry rather too readily. We were bedazzled by financial services: fool's gold from the City.

Now (the argument continues) we must square up to the fact that Man cannot live by leverage alone. We need (wait for it) a new economic model. First, we must (argh) “rebalance” our economy. Government must seek out (key words) “a new generation” of manufacturing strengths, a second-wave industrial renaissance.

What, then, are these strengths? Our talent (runs the argument) for (key word) “innovation”; an “IT” (key word) generation; the potential of our existing (key word) “high-tech” industries and (key words) “high added-value” economic activity; and our (key words) “genius for invention”. Vital to all this will be (key words) “skills”, “training” and “education”. We should remind ourselves, too, of that inestimable resource available to our economy: English as a (key words) “world language”.

Nobody will quite say “white heat of the technological revolution”, because Harold Wilson said that in the 1960s and it became a joke.

Nobody will quite say “picking winners” because 1960s and 1970s Labour governments tried to do just that, and ended up picking some deadbeat car factories. Nobody will quite say “fast-forwarding into the future at an ever-increasing pace” because Tony Blair has used those words and they sounded silly first time. So maybe somebody brainy could coin phrases such as “virtual manufacturing” or “the circuit-board economy”...

And it will all be just so much hot air. What do people think India's growth is based on? Rice? What is it, precisely, that we do so much better than China? The truth is that some parts of Britain's high-technology economy, and some of our services industry, are strong already and can remain strong. Where there is potential strength the market has invested already without any help from ministers. However recently the ministers may have discovered promising parts of the British economy located outside the Square Mile, investors and customers can sniff out quality for themselves, and do, and did, even as far afield as Birmingham.

The non-City part of our economic landscape has not been held back by political inattention, and will not be significantly advanced by political patronage or speeches. Politicians don't “rebalance” economies. Market forces do.

This recession is not a failure of market economics. It is a reassertion of market economics after a decade in which we paid ourselves more than we were producing, and funded it precariously and temporarily by complicated credit instruments that it took a while for the market to rumble. Now a prosperity that always baffled ordinary citizens has collapsed. The collapse of confidence is not irrational; it's the correction to a long run of irrational confidence. All that stuff about the emerging Asian giants wasn't just phrasemaking for party conference speeches. It was true. We're falling behind. We face a mountain of debt: the difference between the life we are able to sustain and the life we were enjoying.

Politicians cannot do much to jack up the first. So it falls to them to arrange and explain a reduction in the second. The great task facing the next British government is to help the country to recognise and embrace its fate: that we should get poorer, and slip with as good a grace as possible into the world's second league. Yes, there is a rebalancing required: a rebalancing of popular expectation.

Selected comments

Very well said: Matthew's last polemic like this was contradicted by Anatole Kaletsky who seemed to say that it was sufficient that we order and market things, with manufacture irrelevant. But how do we pay for the things we order?

PS How's the heat pump working in a Derbyshire winter?

Richard Adams, Exeter, Devon

a free market economy is the only model that works. The wider economy was functioning perfectly well
The financial services are only a component of this albeit an important part but with better regulation and a greater transparancy and understanding of their business model.

paul gilboy, whitley bay, england

I think the manufacturing sector would disagree with you. A shortage of skills, poor support for science and innovation, lack of captial for restructuring, a mind set that sees industry as unneccesary for prosperity.

The German economy is twice the size of ours: we should follow their model.

[Jan 24, 2009] City Minister Lord Myners attacks bankers for greed and arrogance

Times Online

A furious onslaught on banking’s “masters of the universe” has been unleashed by Gordon Brown’s City Minister.

Too many top bankers fail to realise they are grossly over-rewarded and have no sense of society, Lord Myners says in an interview with The Times.

With figures yesterday pointing to a longer and deeper recession than feared, lasting into 2010, Lord Myners says that banks have been mismanaged and delivers the strongest attack so far on those responsible.

He also reveals that the banking system was close to collapse before the first bailout was announced.

“We were very close on Friday, October 10. There were two or three hours when things felt very bad, nervous and fragile. Major depositors were trying to withdraw — and willing to pay penalties for early withdrawal — from a number of large banks.”

Lord Myners says that there will have to be fundamental changes in the way that banks operate and that “the golden days of huge bonuses in the investment banking arms are gone”.

He calls on banking boards and shareholders to stamp on reckless behaviour of bosses and adds that if people have committed crimes they should be prosecuted. Lord Myners says: “I have met more masters of the universe than I would like to, people who were grossly over-rewarded and did not recognise that. Some of that is pretty unpalatable.

“They are people who have no sense of the broader society around them. There is quite a lot of annoyance and much of that is justified. Let us be quite clear: there has been mismanagement of our banks.”

The 1.5 per cent fall in national income between October and December, announced yesterday, was the biggest decline experienced since 1980, when Britain was fighting soaring unemployment and inflation at the beginning of the Thatcher era. The statistics led to dire predictions of the worst drop in growth in a calendar year since the Second World War.

Lord Myners’ attack comes days after Gordon Brown vented his anger at Sir Fred Goodwin, the former Royal Bank of Scotland chief executive, and the “irresponsible risks” taken by the bank.

Barclays chief executive John Varley was last night under extreme pressure after shares in the bank fell for a ninth day running.

Barclays has lost 73 per cent of its stock market value during the last 12 trading sessions and an increasing number of City analysts believe he may be forced to quit.

Regulators don't run banks, the management do. The pay is a side issue except to the extent that it encouraged them to neglect prudence and to chase headline "profits" and glory.

Howard, London,

The labour government, in particular the Treasury under Gordon Brown, was responsible for creating the FSA which has systematically failed to regulate the industry. Will government ministers and senior executives at the FSA also be asked to repay their salaries from the past few years?

Aaron, Cambridge, UK

In professional life a Lawyer or Surveyor, owe a duty of care, if this is breached the individual or their organisation face litigation in the form of a negligence claim. Surely the same applies to highly paid "professional bankers" who breached their duty of care to shareholders.

[Jan 24, 2009] Brace yourselves for record corporate defaults in 2009 by Stacy-Marie Ishmael

Jan 23 | FT Alphaville

In August last year, Moody’s issued what was then considered a gloomy outlook for corporates in the US. The ratings agency said it expected the global default rate to reach to 6.3 per cent by the following August, and as high as 10 per cent by the end of 2009 “should the US sink into a protracted recession.”

In December, following the collapse of Lehman, Moody’s revised its estimates for junk-rated companies slightly higher, to 10.4 per cent by November 2009 - compared with 3.1 per cent in the same period in 2008. These levels, if reached - and FT Alphaville thinks they will be attained and surpassed - were last seen in the aftermath of the 2001 dotcom crash.

Consider the parlous state of (non-financial) corporates today, particularly in the US and the UK. The latter has already had a series of high-profile corporate failures, including (but certainly not limited to) XL Airways, Woolworths and Zavvi.

In North America, Circuit City’s descent into liquidation and the Chapter 11 filings of Nortel and LyondellBasell do not bode well for their industry peers.

S&P expects the US corporate default rate to reach all-time high of 13.9 per cent this year, a significant revision of its previous projection a 7.6 per cent base-case and the consequence of “a substantial worsening of the economy and the financial environment”.

[Jan 24, 2009] Brace yourselves for record corporate defaults in 2009

FT Alphaville

In August last year, Moody’s issued what was then considered a gloomy outlook for corporate in the US. The ratings agency said it expected the global default rate to reach to 6.3 per cent by the following August, and as high as 10 per cent by the end of 2009 “should the US sink into a protracted recession.”

In December, following the collapse of Lehman, Moody’s revised its estimates for junk-rated companies slightly higher, to 10.4 per cent by November 2009 - compared with 3.1 per cent in the same period in 2008. These levels, if reached - and FT Alphaville thinks they will be attained and surpassed - were last seen in the aftermath of the 2001 dotcom crash.

Consider the parlous state of (non-financial) corporate today, particularly in the US and the UK. The latter has already had a series of high-profile corporate failures, including (but certainly not limited to) XL Airways, Woolworths and Zavvi.

In North America, Circuit City’s descent into liquidation and the Chapter 11 filings of Nortel and LyondellBasell do not bode well for their industry peers.

S&P expects the US corporate default rate to reach all-time high of 13.9 per cent this year, a significant revision of its previous projection a 7.6 per cent base-case and the consequence of “a substantial worsening of the economy and the financial environment”.

[Jan 24, 2009] GE- "2009 to be extremely difficult"


elmer fudd writes:

Kinda OT and kinda long, but interesting comment from Talking Points Memo on the Thain/Merril mess:

You really should take a look at disclosure this morning regarding the payment by Merrill Lynch of $3-4 billion in bonuses in late December, just ahead of the closing of the acquisition by Bank of America.
John Thain, former head of Merrill and now formerly with BofA (fired today), paid the bonuses earlier than they are normally paid (late January, February) because he knew that once the BofA deal closed, he would be unable to "reward" all those hardworking Merrill bankers and traders who lost a mere $27 billion in 2008 ($15 billion in just the fourth quarter), and whose company needed an injection of another $10 billion of government capital and $118 billion of government backstops in order to convince BofA to follow through with the 12/31/08 acquisition. Without that capital and backstop, no BofA deal, and certain bankruptcy for Merrill and its fine crew of bankers and traders.

I worked on Wall Street for 15 years, and was laid off late last year. I can tell you this for sure: you don't need to pay a dime in bonus to anyone on Wall Street these days. I know this firsthand: there's nowhere to go!

Where would a Merrill banker unhappy with a donut for a bonus go? Lehman? Bear? Bank of America? There are no jobs on Wall Street, there are no jobs on Main Street (and certainly none that will even pay close to what these guys earn just in salary; my salary alone put me in the 99+ percentile in income).

These guys aren't going to leave Merrill because of no bonus to become CEOs, law firm partners, or MLB shortstops. They'll do what every single person I know on Wall Street that still has a job: they'll keep their heads down and hope the next round of layoffs doesn't include them.

One last thing: this is, I think, would be a perfect situation for Obama to discuss specifically. Merrill bankers and traders making off with $3-4 billion days before taxpayers are "required" to put up another $128 billion in capital and backstops, thanks to the fine work of those bankers and traders?

Come on...enough is enough.

elmer fudd


JohnR(VA) writes:
"Subcommander Doom writes:
The fallacy of perpetual growth has led us into a sense of entitlement that is based on complete blindness and utterly wrong assumptions. If we are not awake enough to leave that behind, we will be the reason for fighting in the streets, in our own Barbie neighborhoods. If we want to prevent that from happening, we need to take not one, but 826 steps back. But the president of Hope and Belief talks about resuming the economy of growth. That is not possible. People need a reality check. They need to adjust to living on less personal, corporeal, space. If you think or hope that the PM of Iceland is the last one to be thrown out by the wayside, you need to start thinking instead of believing.

The Automatic Earth

Subcommander Doom | 01.23.09 - 7:16 pm | #


I think Subcommandante has discovered a good point in his posting. The years since WW II have been an exception IMHO in terms of providing extraordinary rates of economic growth for very large numbers of people for a relatively short time (50 years or so). Now it is time for reversion to the mean, which will involve no growth for a while followed (I hope) in a decade or so by "ordinary" growth, based much more on localized economies and even bartering.

There are people like "Instapundit" who seem to be betting on technological innovations of one sort or another (nanotechnology for example) and that sort of viewpoint would allow for another spurt of extraordinary growth sooner rather than later. But I am not in that camp.

Others believe that a concerted effort by the US, the EU, the BRICs, etc. could provide a way out without massive economic dislocations. The success of this approach would of course depend on smart, economic/financial decisions made by hundreds of governmental officials worldwide. (Bretton Woods II as it were.) Chances for that? Slim to none IMHO.

JohnR(VA) | 01.23.09 - 10:44 pm | #

[Jan 24, 2009] ‘Fear’ Signals U.S. Jobless Rolls to Swell: Chart of the Day

“There is no structural impediment to reaching the peaks in unemployment we saw in the early 1980s,” said Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh. “It’s a matter of the amount of fear in corporate boardrooms as companies position themselves defensively.”

... ... ...

The recession that began in December 2007 has so far cost 2.6 million jobs. The jobless rate will rise to 8.4 percent by the end of this year from 7.2 percent at the end of 2008, according to the median estimate of economists surveyed this month by Bloomberg News. Unemployment rose to 10.8 percent at the end of the 1982 downturn.

[Jan 24, 2009] Obama Signals Tough Restrictions on Banks in Rescue Package

Blinder, along with Harvard University professor Martin Feldstein and Mark Zandi, chief economist at West Chester, Pennsylvania-based Moody’s, painted what Senate Majority Leader Harry Reid described as a dark outlook for the economy in their meeting with lawmakers.

“We have economic problems that have never been seen in this country or the world before,” Reid, a Nevada Democrat, said on the Senate floor.

Blinder forecast that the unemployment rate would rise to 9 percent from 7.2 percent, even with the $825 billion economic stimulus package that Obama is negotiating with Congress.

[Jan 24, 2009] Stuck in the Muddle, by Paul Krugman, Commentary, NY Times:

 Like anyone who pays attention to business and financial news, I am in a state of high economic anxiety. Like everyone of good will, I hoped that President Obama’s Inaugural Address would offer some reassurance...

But it was not to be. ... Just to be clear, there wasn’t anything glaringly wrong with the address... But my real problem with the speech, on matters economic, was its conventionality. ...Mr. Obama did what people in Washington do when they want to sound serious: he spoke, more or less in the abstract, of the need to make hard choices and stand up to special interests.

That’s not enough. In fact, it’s not even right.

Thus, in his speech Mr. Obama attributed the economic crisis in part to “our collective failure to make hard choices and prepare the nation for a new age” — but I have no idea what he meant. This is, first and foremost, a crisis brought on by a runaway financial industry. And if we failed to rein in that industry, it wasn’t because Americans “collectively” refused to make hard choices; the American public had no idea what was going on, and the people who did know ... mostly thought deregulation was a great idea.

Or consider this statement...: “Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished. But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed.”

This ... was almost surely ... a paraphrase of words ... Keynes wrote as the world was plunging into the Great Depression... “The resources of nature and men’s devices,” Keynes wrote, “are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life. ... But today we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.”

But something was lost in translation. Mr. Obama and Keynes both assert that we’re failing to make use of our economic capacity. But Keynes’s insight — that we’re in a “muddle” that needs to be fixed — somehow was replaced with standard we’re-all-at-fault, let’s-get-tough-on-ourselves boilerplate. ...

Remember, Herbert Hoover didn’t have a problem making unpleasant decisions: he had the courage and toughness to slash spending and raise taxes in the face of the Great Depression. Unfortunately, that just made things worse.

Mr. Obama is ... going to have to make some big decisions very soon. In particular, he’s going to have to decide how bold to be in his moves to sustain the financial system, where the outlook has deteriorated so drastically that a surprising number of economists, not all of them especially liberal,... argue that resolving the crisis will require the temporary nationalization of some major banks.

So is Mr. Obama ready for that? Or were the platitudes in his Inaugural Address a sign that he’ll wait for the conventional wisdom to catch up with events? If so, his administration will find itself dangerously behind the curve.

And that’s not a place that we want the new team to be. The economic crisis grows worse, and harder to resolve, with each passing week. If we don’t get drastic action soon, we may find ourselves stuck in the muddle for a very long time.

[Jan 23, 2009] Worldwide

Jan. 23 (Bloomberg) -- Stocks will retreat around the world because of shrinking demand from China as growth in the third- biggest economy slows, said Nouriel Roubini, the New York University professor who predicted last year’s financial crisis.

Global equities will fall 20 percent from current levels as China, which contributed 19.5 percent to total growth in 2007, contends with its slowest expansion in seven years, he said. Wall Street strategists predict the Standard & Poor’s 500 Index will rise 29 percent this year from the closing level yesterday.

Roubini, an economics professor at NYU’s Stern School of Business, said China already is in a “recession” despite government data showing a 6.8 percent fourth-quarter growth rate, as power output drops and manufacturing shrinks.

“Demand is falling in China, they’re over-invested in capacity and there’s a global supply glut,” Roubini, 50, said in a telephone interview. “It has very, very important implications.”

Roubini’s view is shared by Societe Generale SA global strategist Albert Edwards, who was correct in forecasting in March 2007 that a U.S. contraction would spur a bear market in equities. Edwards says the China slowdown will reduce earnings at industrial, energy and raw-materials companies, worsening a selloff in emerging and developed-market stocks that may send the S&P 500 down 40 percent to 500.

Emperor’s Clothes

“People should be thinking really hard about this rather than sticking their heads in the sand,” said Edwards, a London- based strategist and member of the top-ranked global investment strategy team in Thomson Extel’s surveys the past three years. “We’re just pointing out when the emperor doesn’t have any clothes on.”

The consensus among eight strategists surveyed by Bloomberg this week is for the S&P 500 to end the year at 1,066. The index fell 1.5 percent to 815.41 at 10:59 a.m. New York time.

[Jan 23, 2009]  Ballmer provides grim outlook as economy 'resets' - Network World

The world has changed, and we must change with it." -- Barack H. Obama, 44th president of the United States

Steve Ballmer referred to current economic conditions as an entire recalibration that means the economy likely won't return to its previous prosperity.

"As things go down, they reset," Ballmer said on a conference call Thursday. "The economy shrinks and then it doesn't rebound, it rebuilds from a lower base. We're not expecting a bounce."

Ballmer also predicted it could take a year or two for the economy to improve, and that Microsoft is prepared to keep its priorities tight and its costs conservative for the long term. "

... ... ...

Certainly the size and scope of this economic dislocation is unprecedented," he said. "It may delay some technology adoption in the technology industry at large. But I don't think there's anything stopping the forward march of our industry and Microsoft. The pause in our economy is imposing but will certainly be just that -- it's a pause."

[Jan 23, 2009]  Rail Freight Traffic Off Sharply in 2009

1/22/2009 | CalculatedRisk

From the Association of American Railroads (AAR): Rail Freight Traffic Slides During 2nd Week of 2009 (hat tip Bob_in_MA)

Carload freight totaled 267,063 cars, down 17.9 percent from 2008, with loadings down 13.2 percent in the West and 24.4 percent in the East. Intermodal volume of 199,117 trailers or containers was off 13.7 percent from last year, with container volume falling 10.2 percent and trailer volume dipping 27.0 percent. Total volume was estimated at 28.3 billion ton-miles, off 16.8 percent from 2008.


[Jan 23, 2009]  "Threading a Needle"

Economist's View

Bond markets reacted as one might expect:

The drop in Treasuries sent yields on benchmark 10-year notes to as high as 2.63 percent, the highest level in almost six weeks. China held about $682 billion of Treasuries as of November, and overtook Japan as the biggest overseas owner of the debt last year.

Certainly, Geithner’s comment may have just been an excuse for traders to do what they wanted to do anyway, sell Treasuries. That seems to be something of a trend of late:

Treasury benchmark notes headed for their fourth weekly loss in five as President Barack Obama’s spending plans led traders to add to bets on faster inflation.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, widened to a nine-week high of 67 basis points.

“People are demanding a larger premium to hold U.S. bonds,” said Satoshi Okumoto, general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has $61.4 billion in assets. The insurer trimmed its holdings in December, he said.

Bonds declines have tended to be short lived in recent months, but may also corresponded to a renewed, albeit fragile appetite for risk. As CR points out, some bond spreads are narrowing. A greater appetite for risk should push investors out of low-yielding Treasuries into higher yielding assets. And if these trends were to continue – A BIG IF – financing the impending US deficit spending may not be as cheap as currently believed.

... ... ...

Taken together, these bits and pieces imply the Obama Administration is attempting to thread a very tight needle: Provide enough stimulus to keep unemployment from soaring well into the double digits while taking long term concerns about the national debt seriously. This would account for what many believe to be a relatively tepid and insufficient stimulus package. Presumably, they want to avoid “long tails” for policy that extends stimulus related deficit spending into the time horizons when the US Treasury will be forced to float publicly traded debt to fund entitlement obligations. Silly as it may seem given the recent runaway demand for Treasuries, the incoming officials may be greatly concerned about the sustainability of that trend.

At the same time, they want to lessen dependence on China, which requires that Chinese policymakers stimulate domestic demand to a sufficient extent to allow for China to ease purchases of Treasuries and allow the Yuan to appreciate in a nondisruptive fashion. Seems like a steep expectation for the export-dependent Chinese, you are now faced with faltering growth rates. If the Chinese don’t cooperate, a portion of any US stimulus is lost to higher imports – always remember that the US doesn’t have much excess productive capacity in tradable goods. The excess capacity exists in China. And Congress would be less than happy to see US tax dollars supporting Chinese jobs.

And, as if that wasn’t enough, the Fed would have to cooperate, and allow US rates to rise to encourage private investors to purchase debt as Chinese purchases ease. That, however, would raise borrowing costs to consumers (who are not in a position to acquire more debt anyway) as well as mortgage rates (which are bouncing upwards). Would Bernanke & Co. be willing to allow rates to rise, even on the long end, given recent avowals to support consumer spending and housing markets at virtually any cost? Tough to see...especially if unemployment is well into the upper single digits, and given concerns about withdrawing stimulus too early. As it is, I imagine the Fed is already getting nervous that efforts to contain mortgage rates have been less than effective.

Moreover, China is only one player. Geithner & Co. would have to convince European policymakers that it was no in their best interest to take advantage of US and Chinese stimulus to depreciate the Euro. In other words, we need to all rise together or all sink together.

All in all, a remarkably tricky policy maze to navigate…and I find myself with more questions than answers…even before considering the additional complications of a fresh rescue attempt for the financial system.

[Jan 23, 2009]  Wall Street’s Sick Psychology of Entitlement by John Carney

"But when you pay yourself a bonus with taxpayer money you are simply taking money from someone who earned it and giving it to someone who didn't."
Jan 22, 09

The news that Merrill Lynch paid out $15 billion in bonuses is sure to ignite new questions about the wisdom of bailing out Wall Street. Merrill Lynch took $10 billion from the TARP, allegedly to fill holes in its balance sheet. But instead of using that to repair its financial health, it simply put the money into the pockets of its employees. There is no way to defend this disgusting payout.

But that won’t stop Bank of America, which now owns Merrill, from defending the bonuses. And across Wall Street there are lots of people who actually believe that Merrill did the right thing.

How can so many smart people be so dumb?

Easily. There is a sick psychology of entitlement on Wall Street that was created during the bubble years. Many simply cannot believe that they do not deserve huge pay packages. Their brains have not caught up with the idea that they are working in broken institutions that would be unable to pay to keep the lights on if not for the fact that Washington has given them billions of taxpayer dollars.

Of course, smart people are very good at rationalizing their fantasies, especially when the fantasy serves to make them money. There are three rationales they’ll offer when pressed on this. Each one is easily skewered.

Look. We’re not hysterical opponents of paying big bonuses. Actually, I'm on the record as defending huge bonuses from a couple of years ago. If your firm makes money, it can decide how to reward its employees. If it loses money, it can still decide to pay bonuses if it still has cash on hand. But when you pay yourself a bonus with taxpayer money you are simply taking money from someone who earned it and giving it to someone who didn't. If the government hadn’t supplied the means for redistributing that money, you’d just be a mugger.

It was only a few months ago that we were being told that Merrill Lynch, among others, desperately needed billions of dollars to survive, that without injections of new capital the financial system would come crashing down around us. If any of this was true, it should have been impossible for Merrill to pay out $15 billion in bonuses. Even the sharpest critics of the bailout never imagined that it would be used to make wealthy idiots even wealthier.

All of this is a reminder of why it is very, very dangerous to allow the government to rescue firms instead of allowing the market to decide who should survive. Perhaps instead of a bailout, we should have confined the TARP to overseeing the orderly disolution of failed financial institutions.

Selected comments

Cthulhu fhtagn said:

Net-net this is probably a positive.

Hank Paulson privatized the Treasury Department for the benefit of his cronies. He even specifically asked for immunity from criminal prosecution, obviously because he envisioned committing criminal acts while Treasury Secretary.

At the time (mid Sept) there was this "Saddam-WMD-Al Qaeda"- type hysteria that Paulson & Pals had succeeded in whipping up, so no one took the time to ask tricky questions like why Paulson needed immunity from criminal prosecution in exchange for grabbing $700 billion of taxpayer money.

Now that the market has fallen 2000 points (as he said would happen if TARP didn't pass...whoops!) and the predictions of TARP's opponents have come true TO THE LETTER, and we've seen TARP money looted for the benefit of banksters on the way out the door, it should be possible to re-examine the efficacy of the project, just as we successfully re-examined the efficacy of the Iraq invasion, Katrina reconstruction, etc.

ItsDifferentThisTime said:

I came from the industry I covered for a time at a bulge bracket several years ago. One thing I never came to terms with, besides the pressure to slap buys on and push toxic crap, was how many of my colleagues actually thought they deserved their big paydays. Yes, they put in a lot of hours, but I did the same and often more in the industry I had left.

What so many never seemed to understand was that their bonuses were more a factor of being able to dip their hands in the river of money that flowed through the firm, rather than any value creation greater than in other industries.

Could any one of them honestly say the value he or she created was more than that of a teacher in a third-grade classroom? Their compensation was a result of a structural imbalance in our economy that rewarded oligopolistic behavior in the name of an illusory market transparency derisorily (un)enforced by the SEC and the self-regulatory organizations.

That imbalance is now being partially rectified in a way that is painful for all of us.

jon said:

Wall Street's collective brilliance is questionable as most have simply ridden a nice 10 yr wave and are ignorant to the dimensional beauty of coincidence. Madoff and a few other are the only smart ones in the realistic big picture. Madoff is actually a genius - anyone who disagrees isn't mature enough to accept defeat.

Requesting bonuses and claims of entitlement at a time when their industry is in dire straits is just another example of their ignorant bliss and disregard for ethical corporate behavior.

These people are no different from Madoff and those responsible for pushing and turning a blind eye to NINA's who have made a complete mockery of Wall Street. The national and international public has lost trust and confidence... watch as the dow drops significantly over the next few months.

If there is any positive turnaround it will be a result of some/another form of a government bail out and no elaborate strategy by high-powered bankers that for as much as any common sense person can assume have absolutely no clue as to what is really going on.

Anybody with a decent IQ, leadership skills, and an interest in math and economic theory can work hard for 1-2 decades and manage a big bank or big company for that matter. That said, the only thing they should be celebrating is that they know absolutely nothing, fire anybody associated with the old, and start busting their tails.

bebe said:

Is it called "robbing a bank without a gun? Probably we need to re-write the law on this respect because the impact and devastation of robbing without a gun could be more than with a gun. Another area for our new president to look into it.

RJM said:

To Tim HK's point...

Wall Street may have gotten T.Geithner into Treasury but I suspect A Cuomo will have something to say about the 'gains'/bonuses,etc of the past year!

When money goes directly from the Gov through AIG into GS, even the deaf can hear bells ringing! (one of many recent conduit payouts / Gov $$>BAC>ML bonus pool, Gov$$> BAC > purchasing Chinese Construction Co equity!, etc,etc)

The most astonishing aspect is how it is being done in broad daylight without the slightest hint of clever deception or anything! "American taxpayer be damned! We're entitled!" "We're Wall Street. This is what we do"

I don't see the Federal Government or the New Administration having the balls to claw it all back either!

Steve (URL) said:

I agree with the sense of entitlement - and I actually think its part of a larger cultural issue.

There's a strange idea that
A) If you make a lot of money you're very productive.
B) If you're productive you make a lot of money.

However as we've see, it's simply not true. You can make an invention thats wonderful and it fails (I'm in Silicon Valley, home of failed great ideas), and you can make a ton of money and still screw people over and create misery (Bernie Madoff). How much you make is no measure whatsoever of what you actually contribute to society or do.

Thus I think this isn't just about the money - it's about image. Getting these huge bonuses reinforces peoples image that they're somehow special, worth it, productive, valuable.

Right now when so many of them are part of a financial fiasco, maybe they need that image reinforced more than ever.

observer said: Ask people in towns all across America and you will find a sense of absolute contempt for such people, which will gradually grow to include much of the financial industry if they don't see some sense of justice restored. Everywhere I go on my rounds, people talk about the rot at the center of what they thought all these years was a fair system with a basic correlation between achievement and reward.

db said:

It is far more difficult to take something away from someone even if the expectation is unreasonable. An expectation is developed irrespective of reason. Someone needs to research the physiological effects on the brain of a heroine addict vs. wall street bonus whore.

bruno said:

$15b was ML total comp& benefits, which goes way beyond bonus!!

Ace said:

If I were to architect a 2nd American Revolution, this is exactly what I'd start with.

When the government starts cutting welfare and medical benefits, and increasing fees and taxes, the people will have no choice but to revolt.

They actually are already suspending welfare and tax refund payments in California.

monkey biz said:


Awesome! The money river is the greatest analogy ever on the subject. When I started in the business in risk management a veteran trader drew me a picture of the money river to tell me how everyone got paid.

He drew the river and then in a prime spot, a dam. That's where management was. Then you had sales and trading rank and file down the river a bit, but on the bank dipping their pans in the river. Middle office was behind the river bank dipping in the occasional spill over.

Then he drew a spot miles away from the river. "I used to be a chemical engineer and this is where I used to be."

KF said:

"If we don't pay bonuses when firms take the TARP, they won't take it."

I still say that's why Lehman went BK, they wanted their bonus pool and kept it in BK. They would have lost it under the bailout plan.

RJM said:

It will be interesting to see if President Obama & Co. let this stand. Irrespective of whether you may or may not want to prosecute a former Treasury Secretary, I CANNOT see them moving forward into an 'era of accountability and responsibility
( TARP 2) without so much as a cursory glance back at what just happened!
And you are right! It does have the quality of a mugging!

Dan said:

Nice piece. I've been saying for a while the only way to cure the sense of entitlement the bankers have is to let all the firms go. Not only have these firms not created value, they have actually destroyed trillions in value over the past several years yet have payed themselves hundreds of billion in comp. Yet they still think they are entitled. Only a total restructuring of the system is going to cure it. They really, really don't get it.

jrh said:

We are paying some of our smartest people huge amounts of money to make ridiculous bets that wreck our economy. How much stupider could we be?

It's bad enough that the private sector misdirected trillions of dollars with a system of whacked-out incentives. It's criminal that the public sector steps in to keep the game going. It's got to stop.

2 words: CLAW BACK

L'Emmerdeur said:

So, if the government facilitates this, guess what - the government is the mugger. And when we don't riot and burn Washington, D.C. to the ground and demand a government that looks after our interests instead of spending out money on coke and hookers for the rich, we are rubber stamping their actions.

27&Liquid said:

All you whiney bitches who think bankers make too much: stop bitching and change it. Do something about you fat sloths.

In the meantime, I'm content making 7figs.

Grant said:

People, don't confine your ire to this message board!

Call Senator Schumer in NYC at 212-486-4430 and and explain how pissed off you are.

You can also call AG Cuomo in NYC at 1-800-771-7755.

Make your voices heard!

Remember, WE are the government ("of the people, by the people" etc. etc.). Don't let the greedy S.O.B.'s get away with this.

bebe said:

Is it called "robbing a bank without a gun? Probably we need to re-write the law on this respect because the impact and devastation of robbing without a gun could be more than with a gun. Another area for our new president to look into it.

Tim HK said:


Under the equitable principles which inform corporate and fraud law there is a long-establishment concept called "tracing" pursuant to which ill-gotten gains can be discovered by the court and yes, clawed back. State law is the prime repository of this timeless tool. Get any jury in the land on this (but Texas tends to be best) and it doesn't matter where the bonus money went. If it wasn't destroyed it can be recovered. And four more words to add to this happy possibility: punitive damages and class action.

TJ (URL) said:

Grant: Congress has approval ratings in the low teens and return rates for incumbents of around 90%.

Why? Gerrymandering.

So long as state parties control redistricting they can effectively decide who gets elected and Congress will represent the parties and not the people.

What is most needed in the US is not revolution but a simple procedural change to ensure non-partisan electoral commissions set district boundaries.

Tim in HK said:

When I was sketching some of the legal tools available to right this wrong, I was being polite. Using the law to remedy a clear injustice is the right thing to do. At first. We're not animals. But if the law doesn't work, and it might not, depending the will of Congress and the Administration, there are other methods of settling the score. After all, we're not victims. Underestimating the latent anger of the taxpayers of a nation that gave birth to the Boston Tea Party, the Whiskey Rebellion and the Revolutionary War is unwise. My money is on justice being served, through the courts or otherwise.

Gun Fighter said:


"the chat sites where the most intelligent of America's financial arm-chair quarterbacks toil angrily most days were today hemorraghing the thick, rapacious blood lusting of thousands of insatiable, seething carnivores. It was BLOODSPORT at it's most innate. It was Rome, the Coliseum was overflowing, and it was a bad, bad day to be a gladiator. And the citizenry, they were none too amused.

All because of taxpayer Bitches Ken Lewis and John Thain. ( Yes. We own you now. Gone are your days of leisure and spending on our children's dime. DailyBail recommendation: you should now focus on a fight to keep your name from being federal prison serial # and your suit from being exhanged for something more one-pieceish, and orange. As an aside, the quick-on quick-off functionality of your new threads will make all kinds of sense soon when Bubba comes-a-clang-clanging on your open cell door. Damn those open cell rules.) For you crossed a line today. And though occasionally appearing docile, not unlike a junkyard dog, this taxpayer does not like to be crossed. And today, Thain and Lewis (or FP# 551008001 and FP# 551008002) , MR. Bad Bad Leroy Brown woke up."

Found it on dailybail...the story linked to an article from here at clusterstock...

drew said:

In a country where poor people are convinced that the estate tax will take away their small businesses i.e. hot dog stands talking about a revolution is silly. ain't gonna happen. the investment wanker in the posts may be a jackass but he's right.

Redstone said:

Great article!

My only question is why isn't this covered by every major mainstream media outlet. This should be on the front page of the NY Times, WSJ, Time, Newsweek, Business Week, Economist, Yahoo. The only place I can get this type of information is CNBC and Clusterstock. Not enough people in this country know what's happening because the news media would rather report on Salsha and Malia's quest for a dog. I would love to see an in depth piece on exactly how the bonuses were paid, who made the decisions and whehter anyone at BofA or Merill thought about the consequennces of this getting out. C'mon 60 minutes, Dateline, 20/20! Get your head out of your asses and start doing your job!

Jonty in Outback OZ said:

Thank you for a really stimulating blog. Many of the readers' comments are worth devouring too.

For someone in another land who sees the US as a very democratic country the levels of corruption and decadence being revealed in your finance sector are mind blowing.

The excessive influence of the finance industry on the governance of the US means there is very unlikely to be much retribution for the brazen but apparently legal embezzlement of billions of dollars from taxpayers and investors.

Even when clearly illegal methods are used by someone like Madoff the response of the government seems extraordinarily slow-moving and light-handed. Presumably it is thought that even Clusterstock readers will eventually get bored with Bernie's story and the case can be spun out for years until there is a presidential pardon somewhere down the track (they are not cheap but he can certainly afford one - similar deal to Marc Rich adjusted for inflation or deflation perhaps).

Talk of the need for a revolution does not seem at all frivolous but getting enough people to recognize just how corrupt the system has become seems unlikely. The main media channels shape most of the thinking.

By the way, in 1965 Kurt Vonnegut explained how to slurp from the "money river" in "God Bless You, Mr Rosewater". I think he also uses this analogy in "Breakfast of Champions". Kurt V. would have had some very original comments on the latest revelations regarding the depravity of many of the very rich.

JohnBrown said:

Rapisits always instill fear into their victims and never reasure them that things are going to get better for them before its all over... I feel like our government and wall street could at least be honest with us all and that all these fiscal beatings are akin to a mother singing a sweet song to her child and whispering that everything will be just fine as she slides the pillow over our tiny mouths and uncle sam and some wall street guy in a three piece with a top hat lend a hand.

getta job said:

Apparently no one is in charge. Enjoy your welfare wall street, but call it what it is, welfare. The word Bonus is a mislabeling. These are welfare payments.

fresno dan said:

"We’ll lose all the greatest people if we don’t pay them."

Good post, but the above is very, VERY WRONG.

The people they paid the millions to...uh, they bankrupted the companies. Back in the old days, bankrupting companies was not considered good business. When you ran a company, you actually thought about what would happen if there was a recession, and what it would take to survive.

No, I am sorry, but Thain, Fuld, Prince, et al all had no idea of what they were doing except to manipulate short term earning to garner hugh bonuses, without regard to long term risk.

Brian Roberts said:

"Even the sharpest critics of the bailout never imagined that it would be used to make wealthy idiots even wealthier."
Actually, this statement is untrue. Guys like Mike Shedlock and Karl denninger called this one very early on. They saw through the TARP as Paulson's last ditch attempt to line the pockets of his cronies.

George Parr said:

May be someone posted something along these lines already, anyway, here is a word of explanation about "bonuses".

There are two kind of "bonuses". One is the multi-million one, which bears no relationship to the base pay. The other -for nobodies like me- is an almost fixed percentage of the base. That is: nobodies like me get a full-year pay that is broken down in base-pay (paid out during the year) and "bonus" (that is paid out at the end). This is done to ensure that I sit at my desk for the full year. But even with the "bonus", nobodies like me do not make much more (adjusting for the cost of living in NYC) than other equally qualified (i.e. with a tech PhD in the pocket) people around the country.

Also: remember that nobodies like me earn some of their compensation for putting up with the asses that run the business. They are the MBA types (not the PhD types) and they get the first kind of bonus (i.e. multi-million).

TC said:

Yeah, everyone I've spoken to (who's still employed) this bonus season uses #1 and #3 on me.

I try to be supportive, but come on, everyone's desk seems to have been profitable...yet their bonuses and headcounts are cut. The injustice!

As for #3 - spot on. If you need taxpayer bailout $, you can't be expected to keep expensive assets (ie top performers)...but come on, those clowns are going nowhere. How many killer new hedge/PE funds have you seen start up in the last 4 months?

As for claw backs -- can't we use the same legal provisions that they're using for Madoff's redeemed investors? Didn't these people benefit from a ponzi scheme?

Expat said:

Ok, so now we turn to Geithner and ask him to get the money back. Whoops, he is a tax cheat so he won't help.

Let's ask Congress. ha ha ha ha. Same scum who give themselves raises by not voting against a proposal which automatically gives them raises so they can claim they did NOT vote FOR the raises. And that is on top of all the dirty money they get from whoring for K Street.

Let's ask the SEC. Oooh, they all want to work for Wall Street later and get huge bonuses. Guess they won't help.

Hmm, anyone left? Nope

Do yourself a favor America. Find out who they are and simply refuse to serve them. When they walk into your shop, don't sell to them. If they get in your cab, tell them to get out.

Or simply accept that Wall Street and Washington will keep doing it to you until you are dead.

Expat said:

So, George Parr, you are essentially claiming that you deserve a bonus for working with assholes? Which is what your colleagues probably also say. You can follow the logic yourself.

I weep for your lowly pay packet. Please be so kind as to tell us what you do on Wall Street and how much you get paid for it. I assume you are not front desk.

C;mon. You're back office, right, and getting paid $300k a year to shuffle trade slips.

HFmanager said:

Expat, back orifice never gets paid 300K
It's 90K+10%

Zena said:

Bruno is right: the 15 billion is total 2008 comp and benefits:

The truth that "3-4 billion" was paid out in bonuses, is shocking enough.

Rebecca said:

Actually, it mostly goes back to the Ivy school mentality.

1. I went to Harvard
2. I will always have a job
3. I will start with a salary of 90,000.
4. In five years I will be making 500,000.

People who attend Harvard, Yale, Princeton (Williams, etc) are indroctinated into a skull and bones type of mysticism. The are brain-washed for four years, not educated. Grade inflation at the private schools is rampant as people expect an A if they pay 40,000 per year for school.

Individuals who've never known want cannot be expected to care for the wants of others.

Strangely enough the general public has (until now) bought into this garbage.

I suggest we burn the IVY tower down. These people take 1000 times as much as the produce.
These people do not earn their salaries. They feel they are entitled to them.

Expat said:


I worked for investment banks as a trader for several years. Back office staff were paid stupid amounts of money, though not as stupid as the traders. Hell, secretaries at Goldman were paid as much as $200k a year.

People got paid half a million bucks because they brought the head of desk hot lattes and prepared good power point slides.

[Jan 22, 2009]  Thain Forced Out, NY Attorney General Cuomo Investigating Merrill Bonuses

naked capitalism

But the noise about Thain's compensation is probably less important than how it unintentionally serves to divert attention from the real issue. Many (all?) of the big players in the financial sector are insolvent, period. Their credit losses (whether marked to market or a realistic cash flow basis) are bigger than their net worth. These firms are therefore wards of the state.

Yet we keep pretending that they are still private concerns, still keep the managements in place that created the mess, still allow them to pay themselves orders of magnitude more than average workers. As we have discussed, this is looting and the looting continues.

Why, for instance, has no one raised the issue of accounting fraud? Lehman's financial statements gave no hint that it had a over $100 billion hole in its balance sheet. Yet no one seems interested in pursuing the fraud line of thinking (save some unhappy shareholders) and one wonders whether Lehman was alone.

Financial firms took on massive leverage and with it, huge risk, to boost profits and the pay of staff and senior officers. Even the financial press was reporting that credit spreads were far too narrow (ie, those taking risk were not getting wiped out, and its bondholders should have taken a hit. Instead, Thain transferred Merrill dud assets to the public and was (until today) applauded.

Selected comments

DanyBoy said...
The fiefdom of Merrill has seen its last days.
I have always maintained that Merrill was the most cynical, corrupt and shameless of the formerly Wall Street Ibanks...
doc holiday said...
Speaking of $50,000 gold toilet seats, the foul smell of CEO's and fraud is getting stronger every day; one can pray or hope that Obama will stand up for American justice, versus sit on a golden throne and ignore all this feces:

FYI: Federal authorities indicted Ebbers with security fraud and conspiracy charges on March 2, 2004.[9][18] An amendment to the indictment on May 25, 2004 increased the list of charges to nine felonies: one count each of conspiracy and securities fraud, and seven counts of filing false statements with securities regulators. Ebbers was found guilty of all charges on March 15, 2005. On July 13, 2005, federal judge Barbara Jones, of the U.S. District Court, Southern District of New York in Manhattan, sentenced Ebbers to twenty-five years in a federal prison in Louisiana, the toughest sentence yet among other recent corporate accounting scandals.

Anonymous said...
Why has no one raised the issue of accounting fraud?


Because, it would completely upset the current "standards" of revenue recognition for ALL financial institutions, not just the failed ones.

It would make it obvious that nearly all profits were a fabrication based on the blissful ignorance and lack of adequate provisioning of the risk pile-up that made all those shiny short-term profits possible (and the nice bonuses that came along).

A banker will never call out that fraud. Nagganahappen. No way.

It will have to come from outside, it it ever does.

Anonymous said...
Video: James Chanos on US banks:
dd said...
Once the SEC was re-vamped from an investor protection agency to a management protection agency it was over. That happened when the SEC started extracting corporate fines that punished investors twice rather than the usual disgorgement that was re-directed to shareholders.
The fines were a brilliant tactic that took the heat off the SEC to sue management as it made the agency appear to "punish" bad corporations, funded the Treasury's coffers, and allowed management to remain safe and secure via "not admitting or denying" the frauds and settling the case to "avoid litigation costs."
That was when it became apparent that shareholders were not "owners" but merely unsecured claimants to a dwindling revenue stream of uncertain longevity.
Anonymous said...
Just for you doc holiday and others so inclined.

Before we end up like this.


[Jan 22, 2009]  Fed looks like one more shaky bank Jubak's Journal

After gobbling up the financial giants' questionable collateral, the US central bank's vaults are filled with paper assets that likely aren't worth what they once were. Video: Financial panic pingpong.

[Jan 22, 2009] Remember 1982 - Floyd Norris Blog -

To me, this is reminiscent of August 1982, when bearishness engulfed the Street as the Dow sank to a new low, nearly two months after the most recent low. It was the 13th month of a deep recession. A few days later, the market hit a low and then soared. The great bull market of the 1980s was on. The recession did not end until November.

Selected comments

  1. Considering this and yr previous post “Should We Force Banks to Lend”.

    Yr reasoning is based on an unproved and unlikely assumption - that consumers will borrow to resume buying if the banks will be nice enough to extend them credit.

    This will not happen.

    The economic model driven by ever expanding consumer spending is broken. And has been for some time. The first effort to hide this fact was globalization, that is, decoupling the rich consumer economy from the low cost producing, formerly colonial, economy, thus temporarily reducing consumer prices in the rich economy. This resulted in enormous commercial deficits in the consuming economies and a net asset transfer to the low cost economies.

    Innumerable parasitic intermediaries (trading companies etc) got rich in this scheme, but no value was added by their intervention. On the contrary.

    (Remember the inquiry into who put the melamine in the pet food: after 15 intermediaries were found the track petered out. The contaminators were never found.)

    However globalization led to a deeper problem. The rich economy no longer received the value added by manufacturing the goods its consumers bought. This should have led to a decrease in consumption as potential buyers no longer had the assets to continue.

    UNLESS, they were extended credit based on less and less reliable assets, which is the proximate source of the financial crisis.

    However, in the real world assets eventually sink/rise to a realistic valuation. UNLESS, these dubious assets are repackaged, given an obscure name, and revalued upwards and transferred to other owners (always upwards because profit has to made at every repackaging and transfers). The new valuations of course guaranteed by the financial professionals specially trained and trusted for this function.

    These second level cloud cuckoo land assets are then used as collateral to extend further credit to whomever, even if not creditworthy, or the system (sounds like Ponzi, doesn’t it?) will break down. Which happened.

    The ultimate cause of the breakdown of the rich countries’ financial systems is/was globalization which created the imbalances described above.

    This is heresy, but why? 40 yrs ago globalization didn’t exist. Turns out it was a diseased aberration fed by the greed of the bankers.

    We are at a parting of the ways. Maybe Americans will learn that a 1500 sq ft home is sufficient for a family. That their cars can last 10-15 yrs with a little maintenance. That two shopping centers per sq mile is enough.

    We don’t need the banks to lend because the consumer society is dead. Let the banks go down: in their present form they are dinosaurs. Shareholders with less than $50 000 equity should be bailed out by the gov’t. The big boys, who caused the problems, lose all.

    The end of the consumption society is a change so enormous that who knows how to handle it? But we better learn quick, because it is already here. And the first step is to admit it.

    Bill P

[Jan 22, 2009] Kasriel: Dubya

2009-01-21 | CalculatedRisk

From Northern Trust Chief Economist Paul Kasriel: DUBYA

No, our title does not refer to our 43rd president. Rather, it refers to the shape of an economic scenario that is beginning to look to us as the most probable going forward. The current economic environment is indeed bleak and there are precious few signs of a recovery. But we believe that if the massive fiscal stimulus package being worked up in Congress is financed largely by the banking system and the Federal Reserve, there is a good chance the economy will begin to grow by the fourth quarter of this year and continue to do so throughout 2010. And if we are correct on this, we also believe there is a good chance that the consumer price index will be advancing at a fast enough pace by the second half of 2010 to induce the Federal Reserve to become more aggressive in draining credit from the financial system. This could set the stage for another recession commencing in 2012, or perhaps some time in 2011. So, the shape of the path of economic activity we see over the next few years is not a “V”, a “U”, or an “L”, but a “W” – down, up, down, up, all within four or five years.
I think there is a good chance that the stimulus package will lead to positive GDP growth later this year (although we still need to see the details) . Northern Trust is forecasting positive GDP growth in Q4 2009.
[W]hat is our rationale for a late-2009 economic recovery and a subsequent 2011 or 2012 slowdown/downturn? Massive federal spending funded by the Federal Reserve and the banking system. The Obama administration and Congress are in the process of developing a two-year fiscal stimulus package that at last, but likely not the final, count totals $825 billion. This fiscal stimulus program will include all things to all people – traditional and non-traditional infrastructure spending, aid to state and local governments, expansion of food stamp and unemployment insurance programs, and tax cuts for households and businesses. This massive federal spending and tax cut program will be financed by issuing additional federal debt. Who is likely to purchase this debt? The Federal Reserve and the banking system.
This is an interesting suggestion. I've been concerned about rising rates because of the huge financing needs of the U.S. government. Kasriel is suggesting this debt will be bought by the Federal Reserve to keep rates down.
The implication of the banking system and the Federal Reserve monetizing large proportions of nonfinancial sector borrowing – government or private sector – is that the borrowers are able to increase their spending without any other entity cutting back on its spending. Thus, in terms of the GDP accounts, total spending in the economy increases. This is why we expect a recovery in real GDP by the fourth quarter of this year.

If monetizing nonfinancial debt were costless, economically speaking, the Zimbabwean economy would be the envy of the world. But, of course, there are economic costs. Monetizing debt means printing money. And printing money ultimately leads to accelerating prices – prices of goods, services and assets.
If we are correct that a real GDP recovery commences by the fourth quarter of this year, then we believe the Federal Reserve will cautiously begin slowing its credit creation in the first half of 2010 – that is, the Fed will begin to slowly increase the federal funds rate. We then see inflationary pressures intensifying in the second half of 2010 and the Fed reacting to this with more aggressive hikes in the federal funds rate. This is what we believe will trigger the next official recession, or at least, growth recession.

In conclusion, over much of 2009, the year-over-year change in the CPI is likely to be negative. We advise investors not to extrapolate this “deflation” into 2010 and 2011. With the massive monetization of debt that is likely to occur, increases in the CPI are expected to resume.

It is amazing how people are swinging from fears of inflation to fears of deflation to fears of inflation again.

[Jan 22, 2009] Tax Cuts, Government Spending, Public Goods, and the Stimulus Package

Until foreigners start buying lots more American produced goods and services you can't have a recovery, things are more likely to get worse than better. These rescue packages are a palliative - emergency treatment to stop the patient from dying. Full recuperation takes longer (and requires the rest of world to be healthy first).
Tax cuts won't build schools, or any other public good.

And right now, with so much of our infrastructure in need of attention, we need public goods.

We tried the tax cut approach to stimulating the economy once, we had no choice since Bush and the Republicans would not have passed any other type of stimulus package.

Guess what? It didn't work very well, and we have little to show for it. Had we, say, rebuilt water systems instead, at the very worst we'd have better water. That's not so bad in any case.

And it's been interesting, if that's the right word, to watch the same people who delayed fiscal policy for months and months and months as they insisted that we try tax cuts first now tell us that it will take too long to put the spending in place. They don't seem to realized that's because of their insistence on the use of tax cuts rather than spending. If we had started on these projects a year ago instead of enacting the tax cut package to appease the right, timeliness would not be such an issue - we might already be repairing sewage systems, rebuilding roads, and so on. I've even heard some who ought to know better argue that because forecasts say the recession will end soon, we can't possibly get the spending in place soon enough. That is, they argue that by the time the spending hits the economy, the economy will have already recovered (these are often the same people who reassured us that there was no housing bubble, and there was not worry anyway because the recession, if it hit at all, would be very mild and easily absorbed by our dynamic, flexible economy). Never mind that forecasts beyond around six months ahead are not much better than a coin flip, and they know it, some forecast somewhere says that the recession will end before spending is in place, and that's enough for them to take the argument public. What if the forecast is wrong?

Selected comments

mmckinl says...

Tax Cuts ?

We need tax increases and the Democrats should start to combat the rhetoric of tax cuts ASAP. We don't need more private investment. The whole problem with loans right now is that too much money was invested in production. And that is why we should get rid of the capital gains tax, the estate tax, the dividend tax and turn them all into regular income taxes, there is little need for capital in the private sector for new investment.

The second reason for tax increases is the budget deficit. As we all know it is skyrocketing. We have to close this gap. One could make the argument that these are taxes that Bush should have levied to pay for two wars and now the chickens have come home to roost. Before Bush, every war was accompanied by a tax increase to pay for it.

The third reason for tax increases is that it will help thwart speculation. Speculation ran rampant from 1925-1929, 1996-2000 and 2004-2006. The commonality ? Lowered tax rates ...

The fourth reason is that tax rates are historically low. A top rate of 38%, a capital gains and dividends rate are all the lowest they have been historically and that we need more receipts for repayment of war debt, social programs for the current economic crisis and to help balance the budget because of the budget neglect of 8 years of Republican rule.

It is to promote tax increases on the well to do often and vigorously for all of the above reasons and to counter the Conservative mantra of tax cuts, tax cuts, tax cuts. Without the debate the Conservatives hold all the cards ...


Loopholes! Don't get me started ... Try David Cay Johnston (born 1948) is an investigative journalist and author. Until April 2008, he was a senior reporter with The New York Times but now works as an independent author and reporter. He is the author of best-selling books on tax and economic policy, the most recently published of which is Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense and Stick You With The Bill, about hidden subsidies, rigged markets, and corporate socialism. It follows his earlier book Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich--and Cheat Everybody Else, a New York Times bestseller.[1]

Johnston received the 2001 Pulitzer Prize for Beat Reporting "for his penetrating and enterprising reporting that exposed loopholes and inequities in the U.S. tax code, which was instrumental in bringing about reforms." He also won the Book of the Year award from Investigative Reporters & Editors. Wiki

tc says...

What do you think of Michael Mandel's argument that tax cuts will reduce consumer debt levels? If borrowing too much was the cause of this crisis, and people are afraid to spend because they owe too much - then people saving their tax rebates is a feature, not a bug. The most common Keynesian arguments about how to get out of a recession don't seem to take into account the exact mechanism of how we got into one.

Posted by: tc | Link to comment | January 22, 2009 at 12:22 AM Bruce Wilder says...

No, no! You don't understand. The most vital thing is to fund bonuses for financial company management. That's what the TARP is for.


Merrill Lynch took the unusual step of accelerating bonus payments by a month last year, doling out billions of dollars to employees just three days before the closing of its sale to Bank of America.

The timing is notable because the money was paid as Merrill’s losses were mounting and Ken Lewis, BofA’s chief executive, was seeking additional funds from the government’s troubled asset recovery programme to help close the deal.

Merrill and BofA shareholders voted to approve the takeover on December 5. Three days later, Merrill’s compensation committee approved the bonuses, which were paid on December 29. In past years, Merrill had paid bonuses later – usually late January or early February, according to company officials.

Within days of the compensation committee meeting, BofA officials said they became aware that Merrill’s fourth-quarter losses would be greater than expected and began talks with the US Treasury on securing additional Tarp money...

Despite the magnitude of the losses, Merrill had set aside $15bn for 2008 compensation, a sum that was only 6 per cent lower than the total in 2007, when the investment bank’s losses were smaller.

The bulk of $15bn in compensation was paid out as salary and benefits throughout the course of the year. A person familiar with the matter estimated that about $3bn to $4bn was paid out in bonuses in December.

Of course, clawbacks would be as unthinkable as criminal prosecution. If anything, we need permanent taxcuts, so none of the worthies, who destroyed the banking system, ever has to yield any of their loot. We need to support taxcuts with entitlement reform, because we cannot afford old, sick people, after what we had to spend rescuing Merrill Lynch and Countrywide and Bank of America and Citibank. You cannot expect health care and a financial system; obviously, the country has to have a financial system, and health care and old-age pensions are optional -- fluff, really.


Hell with it, I vote for equal redistribution of wealth. And since most people's wealth is less than the national average, most people should (in their own self-interest) vote for it too :-).

Go selfishness! Ra!

(incidentally I believe this is how Obama won the presidency--with his "95%" plan. i say we finish the job.)

prufrock says...

There is no such a thing as "public goods": people propagating this ideology in the last three decades has been awarded of academic post, various kind of prizes and fees to have some lunch-conference. Maybe the point is why there has not been any real opposition to this as opposed to try to convince that kind of people that the basic of economics is NOT a derivative, an integral either. They wanted to starve the beast and they did succeed: now it is time to kill the stupid, and the robber barons/consultants too.

reason says...

Who is forcasting that the recession will be short? Haven't people read the explainations from Krugman about how we can't possibly go back to the 2005 econonomy. Until foreigners start buying lots more American produced goods and services you can't have a recovery, things are more likely to get worse than better. These rescue packages are a palliative - emergency treatment to stop the patient from dying. Full recuperation takes longer (and requires the rest of world to be healthy first).

bakho says...

It is not useful to argue with the anti-stimulus folks. They are not interested. The argument needs to be made to Congress and the American people. They don't like wealth transfer. As much as tax cuts can be directed to the wealthy, it diminishes the wealth transfer.

Word is that tax cuts have been added to the stimulus bill and public transit funds taken out. This is not right.

During recessions, people need to retrain but don't have the funds. We should be increasing education grants and grants for technical training as well as building infrastructure. A huge part of personal debt is college loans.

[Jan 21, 2009] We have every right to be angry with the bankers - Telegraph

How is it possible to rack up a loss of £28 billion and yet be worth just £8 billion?

What happened to the RBS share of the £37 billion shelled out by taxpayers last October to recapitalise the banking system? What possessed the executives of RBS to buy a Dutch financial institution for way over the odds even as the Northern Rock fiasco was unfolding?

Beyond the sheer incredulity, there is anger that the people responsible have cushioned themselves financially against the privations that their recklessness will induce in millions of others.

The people at the top may lose their jobs, but they have already paid themselves so much in bonuses and struck such lucrative pension deals that they can retire in luxury while the rest of us face penury.

Extraordinarily, the vast bonuses were paid for what at the time was hailed as success but now turns out to be abject failure. Do they get returned, along with the knighthoods and gongs?

For those of us who did not know what a derivative was until a few months ago and had only a vague idea that Sir Fred Goodwin was "something in the City", these are revelatory times.

It was evident from the steady flow of letters offering to lend money and urging us to take out new credit cards (all of which went into the bin in our house) that the banks were on a credit binge and that many people were being tempted to join in.

But surely, we all thought, they must know what they are doing. Even the near-collapse of Northern Rock after the first run on a bank since the mid-19th century, seemed like an isolated example of a badly run institution that had been led to the edge by incompetent and foolhardy executives and had to be rescued by the Government.

At the time, some cynical observers suggested that if it had been Southern Rock based in Guildford, it would have been allowed to go to the wall. But it was a big employer and an iconic institution in Labour's north-east heartland, so it had to be saved. But at least it was one-off, wasn't it? The other banks could not possibly be in the same leaky boat.

The discovery that they were sinking too has been more than a shock; it has been a betrayal. Their recklessness has bordered on the criminal. One figure from the Bank of England's financial stability report last October exemplifies the enormity of their folly. In 2000, the amount of money held on deposit in British banks and the amount they were lending was roughly comparable.

Last year, they were lending £700 billion more than they were receiving. This was the mother of all bubbles, yet the bank bosses kept inflating it, egged on by the Government, the Bank of England, the so-called regulators and, let's be frank, by those of us who borrowed way beyond our means.

In its report, the Bank said: "The seeds of this boom can be traced back to the development of financial and trade imbalances among the major economies over the past decade. Increased borrowing in a number of developed countries was in part financed with inflows of foreign capital, leading to greater integration in international capital markets. Benign economic conditions helped anchor expectations of continued stability. This, along with rising asset prices and low global real interest rates, boosted the demand for and supply of credit in a number of developed economies.

It added: "Over time, banks took on progressively more credit risk by lending to, for example, households with high loan to income ratios, leveraged buy-out firms and, in the United States, to the sub-prime sector."

There you have it in a nutshell. When Gordon Brown says that it is all the fault of the Americans, nobody forced the British banks to lend to them. And it is not only the bankers we want to see on their way to the guillotine: they should be joined by the regulators who either turned a blind eye to what was happening or were simply incapable of finding out. Were they knaves or fools?

Then there are the non-executive directors of the bank boards, happily trousering their fees without ever asking any difficult questions or calling a halt to the madcap expansion of credit.

And what about the government ministers who are trying to blame everyone but themselves, yet who presided over the economic policies that allowed this profligacy to flourish? They should be joined on the tumbrels by the central bankers whose handling of monetary policy would have been just as effectively conducted using a crystal ball and a Ouija board.

But pride of place must go to the bank bosses: to Adam Applegarth, 46, who took Northern Rock over the edge and still walked away with a severance deal worth £63,000 a month and who has a pension fund worth more than £2 million from which he can start drawing at 55; to Andy Hornby, who was paid £630,000 in 2007 to run HBOS, augmented by an ''incentive'' of £1.7 million, and who drove it into the wall; and to Sir Fred Goodwin, chief executive of RBS, who was paid about £30 million in his 10 years with the busted company and left with a pension pot worth £8.4 million.

Between 2003 and 2007, the basic pay and cash bonuses (excluding share-based payments) of just five bank chief executives totalled over £52 million.

Even though the banks are virtually nationalised, some executives still have expectations of high salaries and bonus "incentives", as though the pay is not enough. Even those for whom the party is over managed to get out with what was left of the champagne and canapés. They will be all right.

The rest of us who had shares in the banks that are now worthless or whose pensions were tied to their value will not be so lucky.

In addition, the wider economy is suffering, the pound is sliding so fast that one international financier yesterday said sterling was "finished", and we no longer have enough money to underpin the economy.

We are, as a nation, virtually bankrupt; and the potential personal liability in future taxes is, on average, more than most people earn in a year.

The age of excess is over and an uncertain future awaits. Yet those who were responsible will be insulated from its worst impact. No wonder we are angry. Once more, as in Little Dorrit, the air is laden with every form of execration.

[Jan 21, 2009] National Association of Home Builders- Prices to Fall 29% in 2009

30% decline is comparable with the loss of all stock 401K portfolio in 2008. As one Reader commented: "30% more off here in Rancho Santa Margarita means those 400K homes will be at 280K!"
Calculated Risk

The building industry trade show started today in Las Vegas. The Las Vegas Review Journal has some details: Economists say housing market to remain unstable

Selected comments

ztexas writes:
I bet the 'overhang' of houses is vastly understated... lots of people are painfully and quietly holding onto 2nd 'investment' houses. Eventually these will come back onto the market.

OCDan writes:
Now we are talking!

30% more off here in Rancho Santa Margarita means those 400K homes will be at 280K!

Sweet, with enough pain we might see 250K again.

However, I still don't know if I can pull the trigger.

250K means 1500/month on note.

Add another 250/month on HOA.

Another 300-400 on taxes, dep. on bonds, etc. that have passed.

Mortgage insurance of 50-100/month, if you don't want to spend the 50K on a down.

That means, taking the most conservative view, $2100/month.

I could swing that, but renting is so nice right now.

Besides, why should I take that debt PLUS all the liability? Does that even make sense in this economy right now?

Didn't think so!

[Jan 21, 2009] M of A - Helmut Schmidt Six steps to curb speculation

Considered for implementation by law or regulation must be these:

  1. All private financial institutions (including investment banks, mortgage banks, investment and pension funds, hedge funds, equity trusts, insurance companies, et cetera.) And all marketable financial instruments are to be put under the same banks- and financial supervisory authority. 
  2. The financial supervisory authority sets equity-minima for all sectors of the private financial institutions. 
  3. For all financial institutions any activities outside of their own balance sheet (and the profit and loss account) are prohibited and punishable. 
  4. All financial institutions will be prohibited, under threat of punishment, from dealing in any financial derivatives and certificates, that are not approved and listed at an accredited exchange. 
  5. All financial institutions are by punishment prohibited to sell any futures and options on securities and financial instruments it does not possess at the time of the sale. This is to make speculation on falling prices ('short selling') more difficult. 
  6. Financial deposits and loans in favor of companies and individuals registered in tax and regulation havens are prohibited under penalty.

[Jan 20, 2009] Transforming the Auto Industry

Jeff Sachs says a public private partnership is needed to bring about a creative transformation of the auto industry:

Transforming the Auto Industry, by Jeffrey D. Sachs, Commentary, Scientific American:

... ... ...

Fourth, and most crucially, the changeover to high-mileage automobiles must be a public-private effort. To wait for the “free market” to bring it about is to wait forever. Major technological change, such as from internal combustion engines to electric vehicles recharged on a clean power grid..., requires a massive infusion of public policy and public funding. Research and development depend on huge outlays, and many of the fruits of R&D ... will become public goods rather than private intellectual property. That’s why public financing for R&D is so vital, and has been widely recognized and practiced by the U.S. government for a century in many industries, including aviation, computers, telephony, the Internet, drug development, advanced plant breeding, satellites, GPS and much, much more.

To ... bemoan the fact that the forthcoming Chevy Volt plug-in hybrid will have a first-year price tag of $40,000 is to miss the point. The costs of early-stage ... deployment are inevitably far above those that companies can realize in the long run. Public policy should help to promote this transition...

U.S. financing of sustainable energy technologies ... has been dreadfully small ever since President Ronald Reagan reversed the energy investments started by President Jimmy Carter. ...U.S. federal spending on all energy R&D ... amounted to just $3 billion or so per year in recent years—less than two days of Pentagon spending, and roughly a tenth of ... outlays for health technologies at the National Institutes of Health. ...

The move to high-mileage automobiles is real, and the effort will shape U.S. international economic competitiveness for decades. The U.S. needs a public-private technology policy, not merely finger-pointing at the private sector. GM’s Chevy Volt, Chrysler’s new Extended Range Electric Vehicles and the large-scale efforts of GM and others to produce a fuel-cell vehicle within a decade, all require public backing... This is the future of the auto industry. It would be a mistake of historic proportions to let the industry die on the threshold of vital transformative change.

Selected Comments

bakho says...

Sooner or later, people must replace the vehicles that they have.

However, we are also seeing a surge in support for public transportation.

Light rail is still the most efficient means to deliver electric power to transportation.

[Jan 20, 2009] US living standards in jeopardy

MSN Money - Jubak's Journa

lThe Congressional Budget Office recently projected (see my Jan. 13 column, "5 stocks for even-gloomier times") that when the U.S. economy finally hits full stride again in 2015, we'll be looking at just 2.3% annual growth. We must find a way to increase what economists call the growth "speed limit" for the U.S. economy. The growth speed limit is the maximum real -- i.e., after subtracting inflation -- growth rate for an economy that doesn't let loose the dogs of inflation. A U.S. boom that produces just 2.3% growth will leave too many in the United States staring at the very unpleasant prospect of falling living standards.

Dangerous at low speed

How big a problem is a low speed limit? Huge when you're looking at an economy as big as ours. At 2.3% growth, the $14.4 trillion U.S. economy (as of the third quarter of 2008) would produce an increase in economic activity of $331 billion in a year. That activity would generate money we could use to pay off the debt we've run up to end the current crisis, to buy better education and health care, to protect the environment, to improve our living standards, to spend and, for a few, to save

[Jan 20, 2009] A Far More Fitting Epitaph

Until now, the desperate machinations by central bankers, regulators, politicians, and industry officials have been characterized as "bailouts" and "rescues." Yet the realists among us know that none of those terms accurately describes what is going on.

However, in a commentary for the Financial Times, "Prepare to Bury the Fatally Wounded Big Banks," Frank Parnoy, a professor at the University of San Diego and author of the forthcoming book, The Match King: Ivar Kreuger and the Financial Scandal of the Century, offers up an epitaph that seems far more fitting.

Friday’s bad news from Citigroup and Bank of America confirmed what many experts have long suspected: the subprime losses of 2007 were a bullet that fatally wounded the banks. Many lost so much money on toxic subprime mortgage-related derivatives that they have been essentially insolvent for more than a year. It has taken so long for these banks to fall only because of government support and some investors’ bottomless capacity for denial.

Consider Friday’s eye-popping figures. Bank of America recorded a $15.3bn (£10.4bn, €11.5bn) loss at Merrill Lynch, which it owns. Citigroup announced a total 2008 loss of $18.7bn, nearly half of which came from the fourth quarter. Even in the context of this crisis, these losses are epic.

At the same time, the US Treasury said it would inject $20bn into Bank of America and would backstop losses on $118bn of its assets. The government also sweetened its promise to support nearly triple that amount of assets at Citigroup by pledging loans of roughly $250bn from the Federal Reserve. These efforts are the financial equivalent of putting feeding tubes into dying patients.

A perusal of Citigroup’s most recent disclosures reveals that it could not survive without government life support. The losses are just the beginning. Revenues overall are down by one-third compared with 2007. Principal transactions, which include head-spinning “variable interest entity” and other off-balance-sheet deals, declined 84 per cent last year. Bank of America’s 2008 numbers were not as bad but, even excluding the Merrill losses, earnings were down by nearly $2bn.

Even worse, costs are increasing. Operating expenses were higher at both banks in 2008 than in 2007. Although commentators have focused on the bonuses of senior executives, compensation expenses overall at both banks were nearly as high last year as in 2007. Citigroup paid employees $32bn; Bank of America paid $18bn. When a company pays out more in compensation than its market capitalisation, as Citigroup did, the end is near.

Both banks also are plagued by lawsuits arising from the crisis and Friday’s news included a clue about how substantial their litigation expenses might be. In the din of reporting on new losses and rescues, few noticed that Merrill settled one subprime dispute for $475m. More will come.

The bottom line is that, given declining assets and increasing liabilities, many – perhaps most – big banks are essentially insolvent and have been for a long time. It is incredible that they lost so much money on derivatives but even more amazing that they stayed alive for so long afterwards.

The banks’ fate was sealed in early 2007, when the value of derivatives linked to subprime mortgages collapsed. A year ago, the crucial triple B rated mortgage instruments that were the surgical focus of the banks’ bad bets had already declined by three-quarters. At that time, some hedge fund managers concluded that the banks were insolvent and took short positions. The smart money said the banks already were dead, or at least close.

Although sophisticated investors recognised early on that this crisis was about solvency, not liquidity, and that the liquidity crunch arose from fear that banks could not repay their obligations, others came to this view more slowly. The last, as usual, were the credit rating agencies. On Friday, they finally rose to the pulpit to give Citigroup and Bank of America an overdue eulogy, cutting their ratings. Just as their last-minute downgrades of Enron nailed its coffin, these also might be the end, at least for Citigroup.

It is ironic that credit rating agencies still retain such power. They were a significant cause of the crisis. They helped fire the fatal bullet by giving unreasonably high credit ratings to “super senior” tranches of subprime mortgage-backed collateralised debt obligations. It is astonishing that their views would matter to anyone at this late date. Yet government regulations continue to rely on ratings.

Government intervention, like modern healthcare, can prolong the inevitable, but only for so long. Soon we will bury more banks. Their children will survive but they will not. The massive government intervention of recent months merely provides a financial hospice, to give us time to say goodbye.

[Jan 20, 2009] The Future of Banking

A significant deterioration of standards of living for the US middle class looks eminent.
Jan 19, 2009 | Sudden Debt

I would point out that a 75% collapse in their share prices is a powerful signal that they should radically transform themselves. And that's only to survive, never mind thrive.

The question is, transform themselves into what? To answer, let's start with a few premises:

  1. Permagrowth is over. Sustainable is the new socio-economic model.
  2. Lending for consumption is over. Lending for transformation is the new strategy.
  3. Lending against financial assets (i.e. margin) is over. Lending against productive assets is the way forward.
  4. Ditto for real estate.
  5. Significant dealing room gains are over. Trading will once again be a facilitator of banking operations,not a mainstay.
The conclusion is that from now on banks will have to concentrate on making loans to smart and industrious enterprises that look to the future. Forget consumer loans, credit cards, auto loans and, yes, even forget mortgages - at least the kind made popular in the last 10 years. Also, forget the chop-shop model of packaging and selling loans as securities to clueless "investors". Credit risk will simply have to stay inside the bank.

The banking business is going to be MUCH smaller. Only the smartest and fittest will survive, those that think before they lend and scrupulously follow up regularly once they make the loans. Bankers will once again need to be hard-working business analysts with sharp pencils and heavily used "LOAN DENIED" stamps.

Corollary: The politicians' current calls for banks to once again open up the lending spigots are entirely wrong and highly dangerous. Such an occurrence will perpetuate the failed business model that got us into trouble in the first place and pile on even more problems for the future

Selected Comments
Joe said...
According to ShadowStats, we have been at -GDP for the last 8 years. A recession throughout the entire Bush regime.

ShadowStates latest flash update now says we are in a Depression. A 10% move from peak to trough.

This illustrates two things to me.

1. Bogus Government statistics.
2. Total media control by TPTB.

This is going to end so badly.

Joe M.

Unsympathetic said...
Don't forget to add one to the endless list of reasons to be annoyed with GWB: In his closing speech, he actually took credit for the economic *turnaround* - while, naturally, claiming that the economic crash itself was an Act of God. The God that GWB talks to daily, of course.

January 19, 2009 9:33 AM

Anonymous Anonymous said...
I believe there is merit in the assumption that the average house price in a country can only be (in a perfect world) max 4 x the average income. F.i for Holland that would mean € 30.000 (av. income) x 4 = € 120.000. The average house prices are at the moment € 240.000, so they still have € 120.000 to go.

But reading your article and your prediction of a total lack of future consumers loans, the factor 4 could well be 2 or 3.

This would mean a wealth destruction for individuals beyond comprehension. Also, this cannot go unpunished for any society.

January 19, 2009 9:40 AM

Blogger Joe said...
According to ShadowStats, we have been at -GDP for the last 8 years. A recession throughout the entire Bush regime.

ShadowStates latest flash update now says we are in a Depression. A 10% move from peak to trough.

This illustrates two things to me.

1. Bogus Government statistics.
2. Total media control by TPTB.

This is going to end so badly.

Joe M.

January 19, 2009 10:17 AM

Blogger Edwardo said...
Bush and Cheney are both criminals. The former is a callous, semi-addled, overgrown adolescent, and the latter is simply a nefarious fat bastard. Both deserve to be vilified and shunned upon their imminent departure from office.

Now, on to banking. I'm so glad you asked the question, Hell. What is (and should be) the future of banking? It's a wonderful question, but right now I'd like to suggest that we address the present state of play with respect to banking. Banking, especially cartelized banking, has become a super sized menace as we all know.

To wit:

Right now the Federal Reserve System (Comprised of the Fed, the regional banks, and its most favored insider member commercial banks) are looting, with the complicity of the (bought and paid for) legislative and executive branches, all that they can get their hands on.

As such, I assert that these banks have forfeited their right to exist, since they are, in the aggregate, engaged in acts of grand fraud and theft. Furthermore, as they have utterly corrupted two branches of government, and by extension the third, they must be seen as enemies of the state. DOWN WITH THE BANKS AND THEIR GOVERNMENT LACKEYS! WE MUST MARCH ON WASHINGTON AND, IF NECESSARY, SHUT DOWN THE GOVERNMENT, BUT THE LOOTING MUST BE STOPPED, NOW!

January 19, 2009 11:35 AM

Blogger Joe said...
"The last official act of any government is to loot the nation."

This is the end-game play, now underway.

Joe M.

January 19, 2009 12:10 PM

Anonymous dink said...
"Banking, especially cartelized banking, has become a super sized menace as we all know."

Whatever evil intent the banksters may have had seems to have become a moot point. The system has spiraled out of their control; out of anyone's control.

I imagine the bankster's are now in the same boat as their previous prey and pondering the exact same questions. What's the future system and how do I act to survive/thrive in it? Given their past errors I wouldn't hold any more faith in their forecasting than I do in mine.

Sustainable industy investing looks good so long as people behave lawfully. Little can be built without that foundation.

January 19, 2009 3:54 PM


Blogger Thai said...

Isn't the question "... transform themselves into what"? really the same you asked in an earlier post: "investors will be better off looking for The Next Big Thing. What's that?".

Were I to put your two recommendations together, e.g. "alternative energy" + "... those that think before they lend and scrupulously follow up", I might come to the conclusion you want banks to get into alternative energy business analysis.

And while I am a little more 3-D than only alternative energy, I do like the idea (Kudos... Indeed it is not all that dissimilar to my suggestion the other day "companies that figure out how to further specialize labor and get those specialists to work well together as a team... (will do well).")

It kind of reminds me...

A friend of mine, a managing partners at a large IT consulting firms, once commented on how there is a vast small business IT consulting services market, but the cost of sales and account servicing always made entry into the space prohibitive. He always felt the person to "crack that nut" would become the richest person in all IT.

It seems your banking observation is really the same as his IT consulting observation. And (at least to me), it seems both problems have a "bottleneck" in our educational system. For the high cost of modern education, with a minimum expected ROI, means that ANY student who goes through our educational system at current prices must earn a minimally high salary to justify their education or the opportunity costs kills their investment (and government subsidies do nothing to change this fundamental fact). Below certain "recovery salary points", where educational ROI would be very poor at current prices, education is simply not worth the $/time.

So it seems to me the solution is to lower the cost of education and it further seems you might have a commons to your alternative energy agenda with people interested in educational reform.

... Of course you will have to overcome a big hurdle today, which is how we have entwined breeding fitness advertisement (i.e "have my children, my genes are good, I went to Harvard" with basic social engineering issue of "how do we educate people effectively and inexpensively".

Alas in a fractal world, one problem is always related to another.

But if you really believe what you write, things like "Lending for transformation is the new strategy", focusing on education would be one strategy suggestion. And I would improve educational productivity, not focus on increasing educational subsidies (as one would work and the other wouldn't).

... Though the cynic in me still thinks they are going to repave potholes in Suburbia ;-)

January 19, 2009 9:56 PM

Blogger Hellasious said...
Reason for hope?

I watched as CNN interviewed Obama last week, his last b4 today's nomination. Location was the floor of a wind turbine factory in Bedford Hts. OH.

Politics? Of course. But I like his choice much better than Bush's choice of a nuclear aircraft carrier.

...and yes, banks should be looking to finance the Sustainable future, not hoping for a return of the Permagrowth-A-Go-Go. It ain't gonna happen, anyways..

January 20, 2009 4:21 AM

Blogger Cottonbloggin said...

You wanna know how to offer high quality education on the cheap?

Think PBS meets Wiki-Youtube.

But... without the stigma of BORING attached to the PBS part. I don't know if you've ever seen Leonard Bernstein's Young People's concerts, but I lived with a conductor in Prague, and I got addicted to them (that and his 'The Unanswered Question: six talks at Harvard').

I started illiterate and ignorant to everything musical (ok, that's a slight exaggeration), but Bernstein was able to explain everything from the ground up in a simple (though not simplistic) way.

I see no reason (other than political ones) why a national education board couldn't find quality professionals to do something similar for THEIR field of 'expertise'. Now, I don't trust the government not to feed my unborn child state propaganda (the communist "potato bug" videos are fun to watch, but dangerously indoctrinating) So. After a K-12 video curriculum had been created, they could be put in use (as a supplement to normal classes), and then turned over to the public wiki style.

If the "expert" who originally made the film left out a critical piece of information, OR if someone else could explain/ present the info better, they are free to create a video.

At the end of every school year, a board of teachers (the larger the number the better, and divided by subject) could review any submissions and VOTE on which is the most educational.

The 'winner' is given a one time stipend,

And over the course of a generation (?), we would have created an incredible educational infrastructure (supplement). Which would form a (relatively) unbiased and BALANCED system of education. It levels the playing field by nullifying some of the effects of BAD teachers, and frees GOOD teachers to improvise and HELP students focus on their strengths and interests.

Utopic, Maybe? Flawed, for sure. But it's an IDEA, and I only thought of it fourteen minutes ago... so cut me a little slack.

Anyway... Thai... watch the bloody Bernstein videos. Music is (obviously) fractal, and at one point Bernstein actually describes Mozart's compositional style AS fractal, but without using the word (since I don't think it was even dreamed of in the fifties / sixties). You'll probably enjoy it.

January 20, 2009 6:33 AM

Blogger Cottonbloggin said...
AND... come to think of it, forcing geometry teachers to sit around all summer and review videos of the same subject they teach during the school year is probably the best form of teacher training out there.

They would see what does and doesn't work in terms of teaching style for THEIR subject


it could all be posted for free on a specially designed .gov website, so that adults could go back and get a refresher course... think, JOB TRAINING for the unemployed.

January 20, 2009 6:43 AM

Blogger Hellasious said...
MIT has been putting courses online for FREE, for several years now.


January 20, 2009 6:50 AM

Anonymous François said...
The banker job is certainly not a smart and sexy one in normal economic times.

Delivering economic value is...

I just hope that "delivering economic value" jobs will be delivering decent remuneration to the holders of those positions.

If that were not the case, US may - as well as EC by the way - discreetly run into some sort of "latin America - old style version"...

The more they dump money on banks, the longer they forget about jailing the auditors of 2007 bank P&L and fetching the bonus money back ... the more chances we have of such a situation.

They are alas extremely high. At least on medium term - 2 to 5 years.

[Jan 20, 2009] Roubini: U.S. Credit Losses may reach $3.6 Trillion

Jan 20, 2009 | CalculatedRisk

From Bloomberg: Roubini Predicts U.S. Losses May Reach $3.6 Trillion

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”
Professor Roubini has been steadily increasing his estimate of total U.S. credit losses, but I think this estimate might be too high.

I think the U.S. residential credit losses will be in the $1 to $1.5 trillion range and additional credit losses from corporate loans and bonds, commercial real estate, credit cards, and other consumer loans will probably add close to another $1 trillion in losses. That is still well short of Roubini's $3.6 trillion estimate - although give Roubini credit - he has definitely been right so far!

[Jan 20, 2009] Bush’s Economic Mistakes By Barry Ritholtz

January 20, 2009 |  The Bip — brought a return to permanent deficits.
2. Iraq: Even if you think the war did bring benefits to the U.S., they would have to be pretty gigantic to justify the costs of $1-3 trillion dollars;
3. Tax Cuts for the Rich: Bush came to Washington facing almost diametrically opposing economic conditions, yet he offered up the same solutions as Reagan.
4. Financial Regulation: What is true is that most Bush-era financial regulators were less than enthusiastic about the very act of regulating, and that Bush’s “ownership society” push glossed over a lot of potential dangers.
5. Telling Us to Go Shopping: After the 9/11 terrorist attacks, President Bush didn’t call for sacrifice. He called for shopping.
6. Energy Policy: Not much to say here, except that there wasn’t an energy policy.
7. A State of Denial: Every Administration spins and sugarcoats the economic truth. But the Bush White House took this disingenuousness to new levels.
8. The Muddled Bailout: The main problem has been the ambivalence with which both Paulson and the White House have approached the financial rescue.

Selected comments

Through the Bush years, the Republicans proved that they were complete frauds. They claimed to believe that the government that governs least governs best, yet at every opportunity, acted to expand the scope, depth and power of the federal government, both internationally and domestically.

There is not now, and hasn’t been for some time, anyone in Washington that represents the unwashed masses in flyover land. The Republicans claimed to represent the people, but were really only representing their own interest in being power brokers.

Where’s Andrew Jackson when you need him?

[Jan 20, 2009] The Veep's Curious Investment Portfolio: Is Cheney Betting On Economic Collapse?

As one commenter noted &quotI feel pretty confident that as more facts surface and the financial misery compounds, the pressure to seek retribution will intensify."

July 5, 2006


Wouldn't you like to know where Dick Cheney puts his money? Then you'd know whether his "deficits don't matter" claim is just baloney or not.

Well, as it turns out, Kiplinger Magazine ran an article based on Cheney's financial disclosure statement and, sure enough, found out that the VP is lying to the American people for the umpteenth time. Deficits do matter and Cheney has invested his money accordingly.

The article is called "Cheney's betting on bad news" and provides an account of where Cheney has socked away more than $25 million. While the figures may be estimates, the investments are not. According to Tom Blackburn of the Palm Beach Post, Cheney has invested heavily in "a fund that specializes in short-term municipal bonds, a tax-exempt money market fund and an inflation protected securities fund. The first two hold up if interest rates rise with inflation. The third is protected against inflation."

Cheney has dumped another (estimated) $10 to $25 million in a European bond fund which tells us that he is counting on a steadily weakening dollar. So, while working class Americans are loosing ground to inflation and rising energy costs, Darth Cheney will be enhancing his wealth in "Old Europe". As Blackburn sagely notes, "Not all bad news' is bad for everybody."

[Jan 19, 2009] What Obama Left Out of His Economic Recovery Plan by Mike Whitney

At last some badly needed realism in accessing the situation. People who remembered Great Depression died and new elite was unable to comprehend the risks... A learning experience is one of those things that says, 'You know that thing you just did? Don't do that.' Douglas Adams


Barack Obama and Co. are planning to launch their own version of economic "shock and awe" in the opening weeks of the new administration. Aside from the $825 billion stimulus package, which will be used to create 3 million new jobs and make up for flagging consumer demand; Obama is planning a financial rescue operation for banks that are buried under hundreds of billions of dollars of troubled assets. Spearheaded by Treasury Secretary Timothy Geithner and White House economics chief Lawrence Summers, the new program will create a government-backed "aggregator" bank that will purchase mortgage-backed securities (MBS) and other problem assets for which there is currently no active market. The proposed "bad bank" will do what the TARP program was supposed to do; wipe clean the banks balance sheets so they resume lending to consumers and businesses. Until the credit mechanism is fixed, the economy will continue slip deeper and deeper into recession.

This is not a normal recession where the mismatch between supply and demand will work itself out over time. The banking system is clogged and dysfunctional, the Wall Street funding-model (securitization) has broken down, global markets are in disarray and falling, and unemployment is steadily rising. The system is broken and can't be fixed without intervention. The question is, what parts of the present system are salvageable and which parts should be scrapped altogether. So far, too much attention has been devoted to re-inflating the credit bubble and not enough to off-balance sheets operations, over-leveraged assets, SIVs, opaque hedge funds, unregulated derivatives contracts and a financial system that operates without guard rails or oversight. The Obama team is more focused on treating the symptoms than curing the disease. That suggests that their ties to Wall Street make them unsuitable for the task at hand. The job requires competent people who are free from institutional and class bias which prevent them from acting in the public interest.

While it is true that the banks need emergency triage; the underlying problem is falling demand brought on by stagnant wages. This can't can be solved by making credit more easily available. In fact, credit expansion is what led to the present crisis. There needs to be a rethinking of wealth-distribution so that future crises can be avoided. The only way to maintain a healthy economy, without producing destructive speculative bubbles, is by strengthening the middle class via higher wages. That's the key to sustained consumer demand. The recent attempt to bust the auto makers union indicates that many members of Congress believe that the economy can thrive even though a disproportionate amount of the nation's wealth goes to the upper 5 percent. The current economic crisis illustrates the flaws in this argument.

Presently, the banks are sinking faster than the government's efforts to bail them out. That's why Obama asked Congress for the remaining $350 billion of the TARP funds. He knows that he'll need to be ready to provide emergency funding for capital-starved financial institutions (like Bank of America) as soon as he is sworn in. The market for mortgage-backed securities, credit card debt, car loans and student loans is frozen. The Fed has started to purchase large amounts of these toxic assets, but to no effect. Bernanke's purchase of agency debt--Freddie Mac and Fannie Mae--has pushed the 30-year fixed mortgage below 5 percent for the first time, but housing prices continue to tumble and sales are at record lows. The Fed's monetarist lifeline has done nothing to slow the pace of defaults, foreclosures or bankruptcies. Money supply alone cannot reverse the effects of a collapsing credit bubble.

Economists are finally making realistic projections of the costs of the meltdown. According to the Wall Street Journal:

"Estimates from Goldman Sachs: $1.1 trillion from residential mortgages, $390 billion from corporate loans and bonds, $234 billion from commercial real estate, $226 billion from credit cards, and $133 billion from auto loans."

Roughly $2 trillion in losses for financial institutions. Originally, experts thought the losses would be no more than $200 billion, a small sum considering that 65 percent of mortgages were securitized between 2003 to 2007 representing roughly $4 trillion in additional mortgage debt. Clearly, with housing prices plummeting, foreclosures skyrocketing and millions of mortgages under pressure from negative equity; losses were bound to be significantly larger than originally predicted. The banks have no way of making up the $2 trillion of lost capital, which is why economist Nouriel Roubini says, "the banking system is basically insolvent."

Up to this point, Secretary of the Treasury Henry Paulson has tried to keep critical banks functioning through capital injections. In theory, this allows the bank to lend even though it may be holding billions in toxic assets that are downgraded with every reporting period. As it happens, the injections have not increased bank lending at all. According to a recent report, the banks increased their reserves by over $600 billion in a matter of months. In other words, the banks are taking money from the Fed's lending facilities and hoarding it for the tough times ahead. Naturally, this has angered Congress which feels that it was duped into giving away $350 billion with no guarantees about how it was to be used.

Summers and Geithner have decided to abandon the capital injection program and buy the bad assets directly. The costs to the taxpayer and future generations in terms of larger deficits, higher interest rates, less capital for private investment, and lower standard of living will be astronomical. Even so, the plan is expected to zoom through congress without any serious opposition just like the TARP.

Between the massive stimulus package and the so-called "bad bank" program; the economy could show signs of life by the 3rd Quarter, (If there is not a run on the dollar!) but who's really served by these deficit-producing fiscal policies; working people or bankers?

Will these solutions address the growing wealth gap, which is greater than anytime since the Gilded Age? Will they "level the playing field" or create opportunities for upward mobility? Or are they just a quick-fix to get the country through a rough patch without social upheaval?

The Obama economic recovery plan is a misreading of the real problem, which is not the availability of credit, but debt. Bernanke, Summers and Geithner are approaching the issue from the wrong end; they want to stimulate the economy through credit expansion and more red ink. This is just more of Greenspan's bubblenomics; the endless boom and bust cycle triggered by low interest crack sold to credulous speculators. The only ones who benefit are the Wall Street insiders who know how the cards are marked and then vamoose before the bubble pops. Easy money won't reverse the deflationary slide from a deep recession. It's time to rebuild on a solid foundation of rising wages, a stronger workforce, and a revitalized middle class. There's only two ways to grow the economy; higher wages or credit expansion. The latter option has already been tried and it ended in disaster.

Still, don't expect the Fed or the Treasury to be dissuaded by the facts. The Fed is presently purchasing mortgage-backed junk from Fannie and Freddie to push down interest rates so it can seduce buyers into going deeper into debt. Fortunately, most people are wise enough to see that it is not in their best interest to buy a home during the biggest real estate crash in history. In fact, most people already have more debt than they can handle, so they're cutting back sharply on spending. Falling stock markets, battered 401Ks, and loss of job security have caused a fundamental change in consumer attitudes. Frugality is making a comeback while consumer confidence is at its nadir. It's hunker-down time in USA.

The Fed's low interest rates and other credit-enhancing inducements have been unable to stimulate spending. According to the Wall Street Journal:

"U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.

That has resulted in a rise in the personal saving rate, which the government calculates as the difference between earnings and expenditures. In recent years, as Americans spent more than they earned, the personal saving rate dipped below zero. Economists now expect the rate to rebound to 3% to 5%, or even higher, in 2009, among the sharpest reversals since World War II. Goldman Sachs last week predicted the 2009 saving rate could be as high as 6% to 10%.

As savings increase, economists say, spending is likely to contract further. They expect gross domestic product to decline at an annualized rate of at least 5% in the fourth quarter, the biggest drop in a quarter-century."

(Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woe, Kelly Evans, WSJ)

Summers and Geithner should pay attention to what's going on in the country and change their approach. The US consumer will not lead the way out of this economic downturn. It's physically impossible. The country is undergoing a generational shift from profligate consumerism to thriftiness. Stimulus alone won't get people spending. Salaries will have to go up to make up for losses in retirement funds and housing prices; and the face-value of mortgages and credit card debt will have to be written-down. Otherwise, spending will continue to falter and the economy will tank. No economic recovery plan has a chance of succeeding if it doesn't address these two key issues; higher wages and debt relief.

Naturally, the Federal Reserve does not want to deal with the underlying causes of the crisis. After all, they're in the credit-peddling business. The Fed's job is to generate business for the financial community, which means creating a favorable environment for credit expansion. In recent weeks, the Fed has provided billions of dollars to GMAC (General Motors finance arm) so that prospective buyers of GM vehicles can secure 0 percent financing even though they have bad credit scores. This is how the Fed stealthily perpetuates subprime lending even though it leads inevitably to disaster. The Fed is working a similar scam through the FHA where according to Business Week:

"The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more...

"As if they haven't done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy.(FHA-Backed Loans: The New Subprime, Chad Terhune and Robert Berner, Business Week)

Unbelievable; one Fed sting after another. And when they blow up, as they often do, the taxpayer foots the bill. This shows that the Fed has only one arrow in its quiver; easy money. Bernanke's panacea for joblessness, falling demand, plummeting asset prices and deflation is credit expansion--one size fits all.

In a recent Financial Times op-ed, Lawrence Summers showed that he's resolved to tackle the central issues head on. This comes as something of a surprise since Summers was one of the main proponents of deregulation. Here's what he said:

"We need to reform tax incentives that encourage financial risk taking, regulate leverage and prevent government policies that give rise to a toxic combination of privatized gains and socialized losses. This offers the prospect of a prosperity that is more firmly grounded and more inclusive. More fundamentally, short and longer-term imperatives come together with respect to policies that seek to ensure that any future prosperity is inclusive. The policies that are most effective in helping to support demand are those that help households struggling either because of low incomes or because they have recently lost part of their income. Recent events also remind us that individuals can become impoverished or lose health insurance through no fault of their own. This reinforces the need for people to have basic health and retirement security protection regardless of what happens to their employers." ("The pendulum swings towards regulation", Lawrence Summers Financial Times)

Summer's article is an indictment of the finance-driven system that he helped create. He sounds more like Robert Reich than Milton Friedman, but has he really changed that dramatically or will he continue to serve the interests of Wall Street once he's in office?

The test for Summers will be how he goes about fixing the banking system. That will prove whether he's sincere or not. As expensive as it may be, recapitalizing the banks and purchasing their bad assets is the easy part. The hard part is to establish a facility, like the Resolution Trust corporation (RTC), and use it as a morgue for winding down insolvent banks. It requires someone who can ignore political and institutional pressure and be impartial in deciding whether a financial institution can be saved or not. The bad banks have to be put out of their misery. It's is a tough job, but it has to be done. Otherwise, zombie banks will suck up vast amounts of public money even though they're unable to effectively distribute credit to consumers and businesses. That's what dragged Japan's economy into the "lost decade".

Anil Kashyap, of the University of Chicago Booth School of Business summed it up like this:

"Policy makers should stay focused on recapitalizing the banking system.... Financial firms won't start lending again until their balance sheets are in better shape. But BAD BANKS SHOULD BE SHUT DOWN or nationalized more aggressively. "It is a complete waste of taxpayer money to bail out somebody who is insolvent".

The good news is that there is a solution. The bad news is that it will be an excruciating undertaking to turn out the lights at hundreds of banks where the liabilities greatly exceed the assets. But that's what it will take to get the banking system back on its feet.

The Obama stimulus package is a good place to start, but it skirts the core issues of wages and debt relief. Both of these will have to be factored into any plan that, as Larry Summers says, "seeks to ensure that any future prosperity is inclusive."

[Jan 19, 2009] Barron’s Mea Culpa

January 18, 2009 | The Big Picture

One of the criticisms I regularly make about the Financial Media is their lack of accountability for their own bad advice, as well as that of the many awful guests they have on.

Its a wonder that some people get quoted or appear on television so regularly, given their lack of acumen, insight and terrible track record. But some people are entertaining (Jim Cramer), others fit a particular political agenda (Don Luskin) and others merely refuse to go away (Ben Stein) — despite their money losing advice.

So whenever a major media outlet fesses up for their past advice — good and bad — the rarity of the event nearly make it a cause for celebration.  Such is the case with Barron’s annual review of their print magazine and online picks and pans.

Selected comments

  1. Moss Says:

    Please don’t forget Larry Kudlow. While he makes no specific picks he is the most misguided MSM voice I have ever witnessed. He refuses to face the new realities and digs in simply because that is who he is. A supply side free marketer. I guess he has no other choice since so much of his persona has been aligned with that mantra for so long. He deals in skewed opinions, not facts, and that is very irresponsible. As I have said before the incumbent economic orthodoxy has failed. The failure has been systemic and complete. It is time for many to face the facts of this and let go of many of their long held beliefs which they still perceive as truths.

  2. AGG Says:

    I just read this in the NYT in regard to hedge fund managing talent:
    “There’s any number of good violinists, but how many people are good enough to be considered to conduct the Philharmonic?” he says. “The whole concept of hedge funds was always and still is this very high bar, that you were never allowed to say it was a tough market. Come rain or shine, you were supposed to do well — even in tough markets.”

    This bullshit about skill and talent never ends. It’s really a crap shoot and it always will be. Everything else is huffing and puffing. This is all cover for irresponsible risk taking.

    Trust is gone. The lawyers need to go back to 25$ an hour, bicycles and home offices. The “success” code words like “aggressive” and “bold” need to be highlighted for what they are: lies and brazen lies. Until some humility and transparency comes back (was it ever there?) to money managment, plumbing has a better future.

    And yeah, people sue for all kinds of frivolity. Lawyers make money off this and judges are lawyers. What a raquet!

[Jan 19, 2009] Cost of Borrowing Zooms Higher for Corporations By JACK HEALY and VIKAS BAJAJ

January 19, 2009 |

Like consumers and homeowners, America’s corporations binged on easy credit when times were flush, racking up huge debts. Now the bills are due, and paying them back will not be easy, or cheap.

This year alone, more than $700 billion in corporate loans will come due, according to Standard & Poor’s. That is the size of the federal bailout of the financial sector. Many companies were counting on being able to borrow more money to meet those obligations and kick their debt further down the road.

But with the credit markets still tight, corporations are being forced to pay much higher interest rates than they did a few years ago, putting more strain on balance sheets already hammered by falling profits and a grinding recession.

... ... ...

The higher interest bill may be too much to bear for some companies. “Can existing business models support the significantly higher cost of debt that exists now?” asked Max Bublitz, chief strategist at SCM Advisors, an investment firm in San Francisco. “That’s a real issue.”

[Jan 18, 2009] How Far Can You Throw an Economist?

I wasn't completely happy with my discussion in Can Economists Be Trusted? Are There Any Wrong Answers in Economics?. I talked about cherry picking results to serve political aims, but I didn't talk about or come down hard enough on the misrepresentation of results for political purposes. So I'm glad to see Andrew Gelman continuing the discussion:

"Can economists be trusted?," by Andrew Gelman: Mark Thoma has an interesting discussion of the challenge that the economics profession, and individual economists, have when they give policy recommendations.

Mark's basic point goes as follows. Consider the following four stages of a model:

(a) assumptions about fundamental principles of how the world works,
(b) normative principles (that is, fundamental goals, views about how the world should be),
(c) conclusions about the likely effects on policy,
(d) recommendations about policies.

In any rigorous economic model, there should be a mapping leading from (a) to (c). Further reasoning (possibly mathematical modeling, as in cost-benefit analysis) will take you from (b) and (c) to (d).

That's all fine. But Mark's point is that the reasoning can go the other way too: start with (b) and (d), and then you can figure out what (c) needs to be, and then you can go back one more step and figure out what model (a) you need to get started! Even if economists are not doing this reasoning-from-conclusions-to-assumptions explicitly, you could well believe it's going on implicitly as well as being induced by various pressures such as the selection of what research results to report and even what problems to work on.

This is inevitable, and I discuss it in ... Bayesian Data Analysis. We call it the garbage-in-garbage-out problem: If you can come with any decision you'd like by just altering the inputs of your analysis, then what's the point of decision analysis (or, by extension to the above-linked example, economic modeling) at all?

My answer is something that I call "institutional decision analysis," which has two principles:

1. It can be a good idea to provide reasoning to justify your decisions. ...[A]n institution--whether it be a business, a government agency, a nonprofit organization, or some other grouping--often needs some path of bread crumbs connecting assumptions to recommendations. ...

2. As Mark noted, an overall decision recommendation on anything important is likely to be so dependent on assumptions to such an extent that it's probably fair to say that the analyst is reasoning from conclusions to assumptions (from (d) to (c) and then to (a), in my above notation). But, even then, formal decision analysis can be useful in making relative recommendations. This is the point that we made in our article about decision making for home radon. In the economics context, this might suggest that economists of different political persuasions could still give useful recommendations about how to spend money or cut taxes, or where in the economy such policies would make more or less sense.

There's always a temptation to act as a lawyer - to use theory and empirical evidence, your own if necessary, to make the best possible case for the policies you would like to see enacted. Lobbyists certainly do this, consultants do this in some cases (though they ought to advise their clients of the full spectrum of evidence), politicians don't hesitate to shade things to make themselves look good, and some think tanks are also fully engaged in this type of activity (in a few cases, to the point of blatantly misrepresenting theory or evidence in order topromote their point of view ).

But lawyer like advocacy for preferred policies is not how academic economists ought to present evidence to policymakers and to the public. This does not mean economists should always end up in some wishy-washy, on the one hand, on the other hand position due to unavoidable uncertainty involved in the decision-making process, they can still come to firm policy recommendations. And in this regard point 1 above - connecting assumptions to recommendations - is helpful in explaining the basis for the decision (I'd add the connection between the empirical evidence and the recommendations as well). But I'd also like to see a bit more than that, including how robust the recommendations are to changes in the assumptions, whether there are other common assumptions that lead to different outcomes, and if so, why these assumptions were ruled out, and the strength of the empirical evidence being used to support the policy position.

[Jan 18, 2009] Krugman- What Obama Must Do

Paul Krugman with What Obama Must Do, A Letter to the New President:

lark says...

I agree with Krugman that we have a jobs crisis. I think the stimulus is a fix for the short term, necessary but insufficient. Krugman here does not address the Chinese peg that makes American manufacturing uncompetitive. He does not address the presence of 12 million illegals. He does not address the issues of 'fair trade', outsourcing, and the like. Our jobs meltdown is a result of our economic priorities and policies, in all these areas. We can't have a long term fix until we change these.


At the end we will have private bankruptcy in case of no government intervention or the public bankruptcy in case too much government intervention. The best solution is the change in rule and regulation. We should not bailout every private investors but can build the system to ensure that the economy can go on with the suitable system. CITI and BofA can go bankrupt if we have the system to protect the risk of system. The bailout of CITI and BofA is the way to help bond and equity investors under cost of public and no one knows when the bailout would end, that I think CITI and BofA would go bankrupt even if government support them because of the further huge hidden bad debts.

[Jan 18, 2009] Steve Waldman: First, Let's Shoot All the Lenders

naked capitalism

Steve Waldman offers a radical and unconventional cure to our financial mess.

Stop lending.

Waldman is deadly serious and thinks our attachment to lending is based on dangerously flawed premises:

... ... ...

But with the exception of war, no still-practiced human institution provokes catastrophe as regularly or as grandly as the misuse of debt. We ought to phase out banks as we've known them since before Bagehot's time, and move to a regime of what are lately referred to as "narrow banks" (banks that lend only to the government that issues the currency of their deposits). We should encourage the development fine-grained equity markets and local-market investment funds to replace bank financing.

The rush to ramp up "consumer credit" is particularly dumb. Usually, financial investing involves funding wealth generating projects in exchange for a share of the anticipated wealth. Consumer credit funds current consumption in exchange for a share of, um, what exactly?

In theory, there's a good answer: consumer credit funds current consumption in exchange for a share of anticipated future wealth that is believed to be endowed already. Economists talk about consumption smoothing, how it may be optimal for a consumer whose income is volatile to borrow during periods of low income and repay (or save) during periods of high income in order to maintain a constant standard of living. That's very well in models where consumers know the true distribution of their future income, where the spread between borrowing and lending interest rates is not very large, and where consumer preferences are time-consistent. In practice, none of these conditions hold even approximately...

There are obvious wrinkles and objections — What about credit for cars, or home mortgages, or education? The analysis changes when the borrowing is exchanging one pre-existing long-term liability for another. (We are born short basic shelter, and, in much of America at least, short a cheap car as well.) Education can be viewed as an ordinary, wealth generating investment project that in theory could be equity rather than debt financed, but that might be too tricky in practice. It's not my intention to suggest that consumer credit is always bad, only to defend the commonplace notion that for many people and under many circumstances, even loans that will be never be defaulted can be positively harmful, and as a matter of policy we should not be exhorting banks to issue or consumers to accept credit.

Note that in this deliberately provocative post, Waldman does not mention business borrowing. Presumably, business borrowing is to fund investment in profitable activities, be it financing inventory or the purchase of new equipment. But that may be more than a bit of a shibboleth. Consider this analysis from the New York Times' Floyd Norris:
It is now becoming clear that the great news on the dividend front from 2004 through 2006 was not an indication of solid corporate performance; it was just another sign of lax lending standards. Lenders who willingly handed out money to homeowners with bad credit were even more generous to corporate borrowers....

From the fourth quarter of 2004 through the third quarter of 2008, the companies in the S.& P. 500 — generally the largest companies in the country — reported net earnings of $2.4 trillion. They paid $900 billion in dividends, but they also repurchased $1.7 trillion in shares.

As a group, shareholders were paid about $200 billion more than their companies earned over that four-year period. Suffering investors who held onto their shares during the 2008 plunge may want to reflect on the fact that investors who were dumping shares got roughly twice as much of the money as the loyal holders did.

In case you think this view is overstated, I heard repeatedly from people advising big corporations (lawyers, consultants) during the supposed good years that their clients were very reluctant to make investments of any kind, even expenditures that one would deem to be necessary to maintain brands and revenues, such as advertising. So while money is fungible, there is a lot of anecdotal evidence to suggest that big companies were non only not investing (in aggregate), they might have even been dis-investing.

Waldman does not elaborate on the need for more equity-like arrangements. One can argue that that comes from the fact that lenders take too much comfort from their status at the top of the capital structure, that it things come a cropper, they have the first crack at the carcass. But given the regularity with which banks rack up credit losses big enough to impair their survival, the due diligence is (over time) wanting. And to justify the cost and effort of more scrutiny, an investor would need more potential upside. But the flip side is a lot of businesses would be loath to give up equity (some of my lawyer buddies advise strongly against taking in angel investors if there is any way to borrow instead. If you have to go to the well too often, it is very easy for the founder group to wind up minority shareholders, and in every situation I have been close to save one, they have been forced out not long after that happens).

Now, the alert reading is thinking, if we let private borrowing shrink, we'll have a horrid deflationary collapse! But Waldman has another remedy:

But if we let consumer credit contract, and if investment demand is derived from consumption demand, doesn't that spell macroeconomic disaster? There is an alternative. It is called "transfers".....The world is full of human want, which we should strive to meet by working to increase our capacity to produce. Problems arise when want and purchasing power are misaligned. We can improve that by redistributing some of the purchasing power from those with lesser to those with greater use for current consumption. If that sounds Commie to you, note that is precisely the function that consumer credit traditionally serves, just without all the residual claims, a large fraction of which will prove to be illusory (at least in real terms). That is, transfers are just a more honest way of doing precisely what a credit expansion does, except without the trauma that comes from learning that much of the money lent to fund current consumption will never be repaid.

I'm trying to come up with a reasonable opposing view, a case for pushing consumer credit but opposing transfers. Perhaps you can help, because I just can't do it. One might argue on philosophical grounds against coercive transfers, but coercive transfers are a precondition of restarting bank lending, and we've already made transfers to banks on such a scale that banning them now would be like robbing a jewelry store, then piously arguing future looters should be shot. One might argue that bank lending is "smarter" than public transfers would be, that the patterns of consumption and investment that result from private sector credit allocation will lead to superior productive capacity and more sustainable patterns of consumption than direct transfers. Given the awful quality of aggregate investment this decade and the volatility now faced by consumers who were recently credit flush but who under any reasonable lending standard must now be credit constrained, it is hard to be enthusiastic about the special wisdom of bank-mediated credit allocation.

Of course, once we start redistributing purchasing power, there's the thorny question of who gets what. I have an answer to that, it is my new mantra. Transfer flat. Cut checks to every adult in the economy of interest, regardless of whether they pay taxes or have a job. Flat transfers are easy to understand and they pass the smell test for "fair"....

Yves here. I have no doubt some readers are patting themselves on the back. They have argued it would have been better to take the TARP money and just hand it out on a per capita basis (it come out to over $2000 per person). Unfortunately, it couldn't quite be that tidy, since some money would have to be spent to clean up the dead banks.
We want an economy that serves some people dramatically more than others, in order to preserve incentives to produce and excel. But we also want an economy that meets every person's basic needs, even those of people who are unable or unwilling to offer marketable goods or services. We won't let people starve, so why not fund a basic income, however miserly, rather than relying on an inefficient social services bureaucracy or taxing the virtuous by relying on charity?

Tax Pigou and progressive. Transfer flat. Encourage equity. Contain the banks.

Recall that Milton Friedman and Richard Nixon advocated a negative income tax, which is pretty close to this construct.

Unfortunately, there is a completely different set of reasons that we have (and are likely to continue to have) an overly large financial sector. As Niall Ferguson discussed in his book The Cash Nexus, access to credit has long been important to war-making ability. The reason that England was able to punch above its weight in the 1700s and 1800s was that it was able to borrow more cheaply than France, even though France was the bigger economy. The English had professional tax collectors, who were far more effective in gathering revenue than the often corrupt French tax "farmers". Thus there are reasons apart from the health of the economy to have an oversized credit machine at hand (although it isn't clear to me how the securitized mortgage apparatus could be repurposed for war finance.....). At a minimum, financiers will inevitably have the ear of the government, which gives them considerable advantage in pressing their agenda.

[Jan 18, 2009] Borjas Advice on Immigration

Economist's View

Some Advice for President Obama, by George Borjas: Immigration, both legal and illegal, was the silent issue in the presidential campaign--despite the rapidly deteriorating economic conditions.

I suspect that the worsening labor market will force President Obama to wrestle with the immigration issue sooner rather than later.

It'll be hard to justify a system that lets in nearly 1.5 million new immigrants each year at a time when millions of Americans are losing their jobs.

[Jan 17, 2009] An important new report on regulating the financial industry How to fix finance

 The Economist  
WITH the fires still raging, scorching industry after industry, it might seem premature to ask what should rise from the ashes. But policymakers are understandably keen to start work on redesigning their financial systems. If 2008 was the year when the flaws in the old model became painfully clear, 2009 is likely to be the one when governments embrace re-regulation in an effort to fix it. A weighty report published on Thursday January 15th is sure to play a crucial role in shaping the agenda.

The Group of Thirty’s “Financial Reform: A Framework for Financial Stability” is important both because of the concreteness of its 18 recommendations and because of who was involved. The authors were led by Paul Volcker, a former head of the Federal Reserve who, as an economic adviser to Barack Obama, has the president-elect’s ear. Other members of the G30 include Tim Geithner, Mr Obama’s nominee for treasury secretary, Larry Summers, another economic adviser, and Jean-Claude Trichet, president of the European Central Bank. Although they recused themselves from direct participation, they are understood to support the bulk of the findings. “Everyone stands behind the report in spirit. No one disowned it,” says an insider.

And muscular stuff it is. Under the proposals, banks that are deemed systemically important would face restrictions—in the form of “strict” capital requirements—on high-risk proprietary activities, that is bets made using their own money. While this would not quite mean a return in America to the separation of commercial banking and investment banking that ended with the repeal of the Glass-Steagall act in 1999, it would strongly encourage the investment-banking arms of universal banks to focus on client businesses, such as merger advice, rather than trading. One reason for separating these functions is that they seem to be “unmanageable in financial conglomerates”, says Mr Volcker.

The report also calls for raising the level at which banks are considered to be well-capitalised. This should be expressed as a broad range, it says, with the expectation that banks will operate at the upper end when markets are frothy.

The recommendations concerning non-bank financial institutions—the so-called “shadow” banking system that has contributed so much of the pain—are no less radical. One proposal is sure to make the hair stand up on hedge-fund managers' necks: pools of private capital that live on borrowed money should have to register with a regulator and produce regular reports, disclosing things such as leverage and performance. The biggest of them would even be subject to capital and liquidity standards. The report even recommends bank-like regulation for money-market funds that give assurances about maintaining a stable net-asset value, as most presently do. And it calls for legislation in America to set up a mechanism for dealing with non-bank failures, the lack of which has caused no end of regulatory consternation. For banks and non-banks alike, the report calls for a more refined analysis of liquidity in stressed markets and more robust contingency-planning.

Central banks should have a stronger role in policing such things, the authors argue, and need to be especially vigilant in good times, when credit is expanding quickly. They should also be more involved in supervising bank safety and soundness—although, to safeguard central-bank integrity, the role of chief firefighter is best played by others once trouble ignites. Central bankers “need to be more concerned about financial stability, but less involved in crises,” says Tommaso Padoa-Schioppa, one of the G30.

Of the other areas covered by the report, three are particularly eye-catching. It advocates a formal system of regulation for over-the-counter derivatives, such as the type of credit swaps that sank American International Group, an insurer. It urges regulators to force banks to hold on to a significant portion of credit risk when they package loans into securities and sell them on, in order to curb reckless underwriting of mortgages and other debt. And it calls for a rethink of certain accounting principles that may exacerbate downturns through pro-cyclicality, including the practice of marking assets to the current market value; “more realistic guidelines” are needed for illiquid instruments and distressed markets. It also wants to see more flexibility in guidelines for loan-loss reserves. Some regulators take a dim view of banks that squirrel away extra reserves in good times, on the grounds that this constitutes earnings manipulation, even though it leaves them better prepared to ride out the bad times.

The other important message is that a global crisis requires a global fix. International co-ordination should go beyond rule-making to closer harmonisation, including enforcement, say the authors, and more needs to be done to curb the uneven application of international rules at national level—although they shed little light on how this could be achieved.

It is quite a package. At the press conference to unveil the document Mr Volcker was typically modest, insisting it was more an agenda for discussion than a hard-and-fast blueprint. But, given his closeness to Mr Obama, it is hardly far-fetched to imagine much of it becoming official policy. All that talk of the biggest overhaul of financial regulation since the 1930s just took a step towards reality.

[Jan 17, 2008] British Banks Deemed "Technically Insolvent"

Of course, it takes one to know one. The no-doubt accurate call on the health of British banks comes from one of their own, Royal Bank of Scotland. Funny how no US bank is willing to make the same call.

Blogger naked capitalism

Anonymous said...
Well, we have had economic cycles before, and the banks may well have been technically insolvent before. But that was not (always) terminal for financial equity holders as there was always the prospect of recovery.
Now that the shadow banking system is collapsing around us, there are grave doubts about the feasibility of returning to the business patterns of recent years. Thus, I fear, the prognosis for financial equity is correspondingly bleaker than it has been in the past.

January 17, 2009 2:44 AM

Anonymous Glen said...
It never was a liquidity crisis - it was always about solvency.

January 17, 2009 3:32 AM

Anonymous Anonymous said...
Consumer confidence, the great oxymoron of the day.

Where are my squid eyes when I need them, they don't retain retinal images like ours, thus can defeat advertising and subliminal programing.

January 17, 2009 3:42 AM

Blogger polit2k said...
It looks like the US banks will get the same treatment. Either GB/BB or full nationalisation. All shareholders hosed, debt holders will get severe haircuts. Management will be shown the door empty handed. Let 'em sue ...

Putting a decisive floor under wholly discredited financial institutions is way over due. Volcker won't piss around like Paulson.

[Jan 16, 2009] Promises vs. Realities

Many Americans still believe that their country is about "truth, justice and the American Way." But if they took a good look around, they would discover that circumstances are a far cry from what they were (or, at the least, were imagined to be). In fact, some would say that the world's "sole superpower" is looking more and more like a banana republic every day. In a post at EconLog, "The Pattern," Arnold Kling highlights the kinds of failings that define a nation in decline.

Actor The Promise The Reality
Financial Executives Brilliant Risk Management Catastrophic Losses
Eliot Spitzer Mr. Clean, Financial Reformer Celebrity Prosecutions, Real Abuses Untouched, and Not So Clean
Sarbanes-Oxley Financial Responsibility Large Costs, No Apparent Benefits
Basel Capital Standards International Coordination, Sound Banks Worldwide Banking Collapse
Fannie, Freddie Stable Mortgage Credit Fed the Boom, Stuck Taxpayers with the Bust
TARP Unclog the Financial System Zombie Banks
Big Fiscal Stimulus Put the Economy on a Better Path Wait and See

The pattern is big egos, big money, and big power offering big promises, getting big media play, and making big mistakes (Spitzer's mistakes were relatively small, to be honest). To me, the fiscal stimulus represents yet another redistribution of power away from ordinary people and toward the elite, when already the imbalance is too high. I am more worried about rot at the top of society than at the bottom.

Selected comments

I agree, see my 8 January 2009 post, link:

Posted by: Independent Accountant | January 16, 2009 at 12:39 AM


"...(Spitzer's mistakes were relatively small, to be honest)..."

Well, generally, I agree, and I do applaud Spitzer's actions against that despicable POS Maurice "Hank" Greenberg of AIG...however.

If this article linked below has merit, and I believe it does, Spitzer was ignoring perhaps the most onerous criminal cabal I can think of in America:

Might want read this after, better than any fictional "whodunnit" I ever read:

These two articles simply are the most explosive things regarding "Wall Street" crimes I have ever read. Incredible, actually boggles the mind.


Posted by: farang | January 16, 2009 at 02:29 AM


I just wonder " are we paying down the national debt ?" , cuz , it seems to be "less debt " every time that I look at the debt-clock lately ?
If so , who/ what part of it are we paying off ? Anyone know ?

Posted by: scott | January 16, 2009 at 10:51 AM

All these atrocities have one thing in common. Ivy league graduates were at the helm. Harvard and Yale (and their ilk) have successfully brain washed the US public into believing.

1. All new companies and ventures must have one of their graduates at the helm

2. Their graduates are socially responsible.

3. They are 'better' than the average Joe.

The fact Obama is essentially saturating his new administration with Harvard grads should be cautionary. They will restructure America in a form which creates an Ivy plutocracy.

If you think this is not the problem, you haven't been looking too closely. This society goes back to the same filthy pool, again and again when what it really needs is to pave the pool over.

America is a large, complex society that cannot be governed by people who have no concept of real work or real accomplishments which support the greater society.

They shove that piece of paper in others faces and expect to have riches lavished on them.

What those degrees are is a license to steal!

[Jan 16, 2009] Merrill Lynch reports $15.3bn loss

Merrill Lynch, which has been taken over by Bank of America, today reported a record loss of $15.31bn for the fourth quarter, while Citigroup posted an $8.29bn loss.

Merrill's loss amounted to $9.62 a share, driven by big writedowns which were described by its new owner as "severe capital markets dislocations".

BoA alone posted its first quarterly loss in 17 years and slashed its dividend. It lost $1.79bn in the fourth quarter, or 48 cents a share, compared with a profit of $268m a year earlier.

The bank cut its quarterly dividend to a cent from 32 cents, and chief executive Kenneth Lewis said net losses may be at or above the fourth-quarter level for several quarters.

[Jan 16, 2009] The 10 most unethical people in business - MarketWatch

8. Robert Rubin. Rubin, like it or not, became one of the faces tied to the 2008 financial crisis. His position of deregulation when he was Treasury secretary is now faulted by some for many of the problems of today. He also became the fall guy for Citigroup's business strategy of leveraging more risk.

[Jan 15, 2009] THE BEAR'S LAIR A triumph of wishful thinking By Martin Hutchinson

The psychological roots of policymaker wishful thinking are many-fold. The long bull market dimmed memories of recessions - those of 1990-91 and 2001-02 were both atypically mild. The Clinton administration's success in solving the 1980s' deficit problem suggested that it hadn't been that important or difficult to solve. Rapid monetary expansion without inflation suggested that the old monetary cautions of the 1980s were excessive - after all, until 2006 the great maestro Alan Greenspan was still there as chairman of the Federal Reserve to give expansion his blessing.

Cheap money and rapidly rising asset prices suggested that old verities about saving for old age were wrong; there was little concern about the perennial US near-zero savings rate. Indeed, free-market economics in general became somewhat reputationally tarnished, as globalization's side-effects produced declining living standards for the US middle class while infinitely enriching Wall Street. Finally, there was a general disdain for Bush and admiration for then presidential candidate Barack Obama; as 2008 wore on, the belief grew that inspirational new leadership could solve all problems.

... ... ...

The more interesting question is where all this wishful thinking will lead. In the short term, record levels of monetary and fiscal stimulus should produce a rapid economic blip upwards. If the entire US banking system was still so lacking in capital or fearful of bankruptcy as to constipate markets, it might cause a lending stoppage that would negate the effect of rapid money creation. However, there is no evidence that this is the case; in the weeks since the bank bailouts, loans have been readily available, probably too much so.

It thus seems that the next few months will see a gradual return to historically normal levels of monetary velocity. In that case, economic activity should push sharply upwards. Whether or not president-elect Obama's fiscal stimulus is implemented in time to add to that effect, the fiscal easing already in place with the record 2009 budget deficit should be amply sufficient to boost economic activity further.

Thus after a very weak fourth quarter of 2008, I would expect the first quarter of 2009 to show resumed economic growth and the second quarter to show quite strong growth. The stock market will correspondingly be strong, while gold and to a lesser extent other commodities should rebound in price. (Since both fiscal and monetary stimuli have been applied on a worldwide basis, their effect will be global.)

The apparent rapid recovery will cause much rejoicing among the punditocracy. However, it won't last long. The most probable mechanism for collapse will be the bond market, whose power was celebrated by political strategist James Carville in 1993 but has been ignored since.

The combination of reappearing inflationary trends and a soaring budget deficit will cause "buyers' strikes" at Treasury bond auctions, sending interest rates through the roof. Indeed, the first such buyers' strike has already occurred, in Germany, where a 6 billion euro (US$8 billion) 10-year issue on January 7 was only 85% covered by bids. The rise in Treasury bond rates and decline in prices is likely to prove self-reinforcing, as "safe haven" investors conclude that the obligations of a nation with 20% monetary growth and a $1 trillion deficit aren't so very safe after all.

The rise in long-term interest rates will choke off economic recovery while the resurgence of inflation caused by excessive monetary growth will force the Fed to reverse its policy and increase short-term rates to some margin above inflation. The economy will at this point go into a second decline.

The second decline will be concentrated in the real economy rather than the banking system. Banks will fail, but only those whose operations during the bubble years were most misguided and whose assets are thus most vulnerable to the erosion of recession. However, monetary policy will be tight to fight resurgent inflation while fiscal policy will be tight because the Treasury will have great difficulty funding its massive deficits.

Hence the second decline will be deeper than the first, and recovery from it will be extremely slow - the W of recession will be very "lazy". There will be a severe danger of the US economy sinking either into a decade-long slump, if public spending is insufficiently restrained, or into a decade of stagflation if monetary policy is insufficiently tight.

A nastier version of the 1970s is more likely than either the 1930s or the Japanese 1990s, but does it really matter? Needless to say, the erosion in US living standards produced by globalization's equalizing influence between rich and poor countries will be only too apparent during this period of sluggish growth and insecure monetary values.

House prices will almost certainly sink somewhat further during the second downturn and the stock market will fall far below its November low, with one caveat - if inflation is sufficiently rapid, the erosion of real value will be more concentrated among creditors than debtors, allowing nominal price declines to be less though the total wealth destruction may be greater.

The emergence from the decade of wishful thinking represented by the and housing bubbles was bound to be unpleasant. However, misguided wishful thinking has made the long-term prognostication considerably worse than necessary.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at

(Republished with permission from Copyright 2005-09 David W Tice & Associates.)

[Jan 14, 2009] M of A - The Ukraine Lost The Gas Dispute

The Ukraine did not pay for some of the natural gas it received last year from Russia and did not agree to a more market oriented higher price for future deliveries. Russia therefore stopped to deliver the gas the Ukraine needs. The Ukraine then siphoned gas off the transit pipelines that go from Russia through the Ukraine to other European countries.

Alarmed as some of its members are very dependent on reliable gas delivery from Russia the European Union stepped in. While the U.S. reliably accused Russia in this game the EU effectively took the Russian side

Selected comments

Ukraine paid off most of its gas debt (i believe only the debt for december deliveries is outstanding, and maybe even not that by now - this is what Ukraine claims and Russia does not contest). The conflict is primarily about future prices.

Transit payments - Ukraine has a contract that requires it to provide transit for $1.7/thousand cubic meters for 2 more years. European rates are about $4.7. The majority of transit expenses are costs of technological gas (it takes 5-7% of gas stock to move the remainder from eastern to western border of Ukraine), so transit costs are somewhat proportional to gas cost. The contract was written with the assumption that Ukraine would get its gas with deep discount, but it does not say so explicitely. So now it is a deathtrap - if Ukraine has to buy transit gas (as it contractually should) at market rates (as Russia now demands), it will lose $2.5 bn per year instead of earning money from its most reliable cash source.

I do not expect Russia will really demand this - this is obviously unfair, and while Ukraine was stupid to sign a contract like this, forcing it into financial suicide would be unwise - it will get a new transit contract at market rates, and will have to pass nearly all that money back to Gasprom for gas.

One final thought is that if EU monitoring comission is established permanently, and Ukrainian sovereignity over transit network, and ability to divert gas, is limited, it is no longer neccessary to build Nord pipeline that bypasses Ukraine under baltic sea. Russia has its gas production slowly falling, so old pipelines are sufficient for short-to-medium future. Since Nord costs something like $10-15bn, and Russia is now unexpectedly cash-strapped, perhaps this was the motivation behind the unusually uncompromising confrontation with Ukraine.

Posted by: Andrey Subbotin | Jan 13, 2009 3:51:08 AM | 14


Thanks for the information, Andrey.

I think the point that I was trying to make is how little the Ukraine is a party to a dispute in its own country.

The dispute is between Russia and those (including Europe) who seek to weaken Russia.

Despite our ideals, many nations have limited sovereignity, and must attach themselves to a bloc in order to survive.

As Bob Dylan once sang about Medgar Evers, "I'm only a pawn in this game."

Posted by: Malooga | Jan 13, 2009 4:34:41 AM | 15

Malooga wrote: The mysterious rise and crash in the price of oil demonstrates that the US is still the marketmaker. That is to say, the US still controls the two lifebloods of civilization: oil and money, and the two are integrally related.

As Malooga implies, it is well nigh impossible to dope out the mechanisms. Yes, it controls money, I agree, that seems a reasonable statement. About oil, its price, I think not. Remember that all (practically all?) commodities boomed at once, and then all sank...There is (was) a huge chunk of money sloshing and slushing around with no place to go and what happened is that another bubble arose, with traders riding it on the up slope (and no doubt down as well, etc.) Petrol traders went banoonies as my Brit friend says. They made out like bandits! according to them (40% of them live on my doorstep.)

Peak oilers like to lay stress on ‘demand destruction’ to explain the lower prices, but in fact, imho, until just very recently (building, manufacturing, trade, thus transport, etc.) not much of that took place though one can always find stats. that look impressive. It was a speculative bubble, a reaction to the expiration of the other bubbles, imho, worldwide, and not ‘controlled’ by anyone. As for the other aspects of the ‘oil industry’ the US’ problem is precisely that it controls nothing much. It doesn’t control the investments bigoil can or will make, and has no grip on Nationalized fossil fuels (Russia, Venez, Iran, etc.) outside of some ME countries. Therefore it’s frustration, aggression, war-mongering, etc.

My impression. Who knows!

thx for the update Andrey

Posted by: Tangerine | Jan 13, 2009 8:40:43 AM | 17


This is a quick sketch, not a developed case, which I don't have time for at the moment.

If it was the mother of all speculative bubbles, built on all previous, and they made out like bandits, meaning that there is an even bigger ball of capital looking for a home, where did all the money go? It just vanished into thin air.

I am not doubting that speculation was going on and that some, possibly many, did not profit handsomely.

But the bubble itself made no sense whatsoever: the underlying fundamentals were all wrong; only the propaganda was right.

It formed after it was clear that the world economy was tanking, indeed on the verge of collapse. It formed with all indicators going down. It formed while worldwide reserves were full. It formed, and THEN Bush announced the US was going to buy MORE oil for its reserves while oil was at market peak. The people who make these decisions are not that stupid.

It formed when the US desperately needed Iran's help in pacifying Iraq. It formed, and Russia and Venezuela started spending money like water, investing in projects which only make sense while oil remains over $60/bl. (Along with China, our current "axis of evil" -- as oppossed to our democratic oil-producing friends like Kuwait, Saudi Arabia, and the gulf sheikdoms who are busy building air-conditioned sand beaches and islands shaped like palm-trees for Hollywood's brainless glitterati with their filthy lucre -- I kid you not!)

It formed, and NPR -- the biggest source of disinformation I know -- kept running story after story, expert after expert, "catapulting the propaganda," as they say, about how China was responsible, allowing China to be falsely demonized throughout the Olympics (Not to mention the eternal Tibetan shenanigans). (In any event, since the West buys the vast majority of Chinese production, and since they used the off-shoring of that production to lower their own CO2 emissions and increase their corporate profits, why is China responsible for anything?)

It formed, and suddenly very supicious, faux progressive, astroturf, "peak oil" groups began forming around the country. Posed as "leftist progressives," these people, many of whom could barely quote Kunstler, much less think up a program of action, were advocating a straight right-wing agenda: Curtail lower middle class living standards, no vacations, no heat, bigger oil tax on the poor, etc. But no talk of the wealthy being taxed more; of air travel or second homes or fifth cars; of a highly progressive tax on oil which would only kick in after people's basic needs to survive and commute to their job were met; no talk of the poor whatsoever. (I attended one meeting of the group in my town of 20,000 -- they sure didn't like what I had to say about the poor!)

And curiously, the past Christmas (one year ago), I was intrigued when a local interfaith group, which holds "progressive" events hosted a local speaker at the most influential church in the area: a non-Unitarian, Unitarian Church member here in Connecticut, who just "happened" to work for the CFR in DC! (not making this up), and waddaya know: the same talking points! What a coinkydink! (By the way, they are Obama's talking points before he even said them. "We are just all going to have to sacrifice -- not the ultra-wealthy who are showered with free money beyond historical precedent.)

We know that the government announced the desire to "stabilize," that is to say, control, markets after 9-11. And we know that every government would like that ability.

The fact that the US does not own the majority of production is irrelevant. Does the poor coffee or cocoa or cotton or orange juice producing nation control the price of their commodity? Of course not! It is controlled, outside of natural forces, at the other end, by the consumers, and even more so by the financiers.

Why are impoverished countries, not only encouraged, but suborned by debt and bribe, to destroy their societies in order to continually invest in more and more export-oriented production, even when the market is at surfeit? Simple, control.

I watched as the oil market stayed suspiciously low throughout the early nineties, below $20/bl., every company simply hemorraging money (while I was working in the industry), until, and just until the big players bought up enough of the small ones to control the market, and then the price of oil, and more importantly corporate profits, took off to levels never seen before in the history of the planet. Look at fat-assed Lee Raymond -- does he look like that sharp a businessman to you? Sharper than Bill Gates?

(By the way, oil technology, which is far simpler and older than the internal combustion engine, is considered proprietary technology and workers are required to sign non-disclosure agreements. Doesn't anyone think it strange that Saudi Arabia, which has had oil money dripping out of their fat corrupt ruler's ears for an entire lifetime, never thought to invest in aquiring the technology controlled only by US, Russia, and to some extent, France and UK/Dutch? Doesn't anyone think it strange that the West and Russia have completely different theories about where oil comes from?)

We know that if the planet really does need more energy -- as every energy producer and astroturf green group tels us -- that it is essential that oil reamin steady above $60/bl. for the proper long-term investments to be made. And we know in what countries those investments need to be made in, and what our success has been in controlling those countries.

We are continually told that there has been much production damage recently, in Nigeria, in the Gulf of Mexico, Kunstler never stops reminding us that Saudi Arabia is past peak, and of course, in Iraq, where we knocked whole percentage points off of world production.

If all of this is so, then why is oil now almost artificially low? How long will it stay that way? Until there is an (unforeseen) energy crisis or until we topple the leadership in those countries that we don't like -- that is, those that attempt a semblance of an independent foreign policy?

I worked with oil for five years. I love oil. I thought I understood oil, just like I once thought I understood the world. After Clinton's impeachment, the stolen 2000 election including the unbelievable Supreme Court decision, 9-11, 7-7, the housing "crisis," the oil bubble, and the financial "crisis," I realized that the world was not as I was told it was.

Oil is a commodity which all too often seems to behave opposite to how we are taught commodities should. So very, very strange.

Posted by: Malooga | Jan 13, 2009 12:06:24 PM | 18

Thank-you Taras for that insightful post. I know much more is going on in this dispute then gas. My own personal feeling is that Ukraine is bankrupt. The economy is in tatters, and they have exhausted the IMF loan. They simply do no have the funds to pay the debts nor are they in a position to pay market prices for gas. I also do not believe they have the reserves they claim. In desperation, they are siphoning. The EU may provide them with a loan in the short term but what about the long term ? Back to the IMF ? The IMF when they lend you money forces you to adopt their economic policies which can be disastrous. Ask Argentina about that.

As to the larger picture and Russia's relations with the west we shall have to wait and see. Now with the buffoon Bush out of office, I expect calmer relations with Obama. Germany, has a tremendous amount of economic ties with Russia and cannot afford to see it collapse economically. Italy and Austria are Russia's best friends. Let us see how things play out.

Where is the poetry from ?

Posted by: Cyric Renner | Jan 13, 2009 1:25:50 PM | 19

Germany, has a tremendous amount of economic ties with Russia and cannot afford to see it collapse economically.

That is exactly why they would be happy to see it collapse economically. Just as when Eastern Europe collapsed, and Yugoslavia, it represents a tremendous opportunity to pick up ailing assets for pennies on the dollar, extending economic hegemony over the region. Remember that throughout the entire Soviet collapse, throughout mountains of human pain and suffering, shipments of gas and strategic minerals to Western Europe never faltered.

By the way, the post was from me, Malooga.

Taras Shevchenko is the national poet of the Ukraine. I find his work very moving.

Posted by: Malooga | Jan 13, 2009 1:53:08 PM | 20

Russian energy giant Gazprom has hinted that the United States might have persuaded Ukraine to block Russian gas supplies to Europe.

"One gets the impression that this whole musical which is happening in Ukraine is being conducted by a completely different country," Gazprom deputy chief executive Alexander Medvedev said on Tuesday.

Posted by: Malooga | Jan 13, 2009 7:07:48 PM | 21

[Jan 14, 2009] Too Big To Succeed . . .By Barry Ritholtz

January 14th, 2009

If they are too big to fail, make them smaller.”

-Nixon Treasury Secretary George Shultz about Fannie Mae and Freddie Mac

The operative expression about many of the bailouts we have seen — AIG, JP Morgan (via Bear Stearns), Goldman Sachs, Fannie/Freddie and of course Citibank — is “Too Big To Fail.”

Perhaps the better expression is “Too Big to Succeed.”

[Jan 14, 2009] America vs. Small Business (1-0)

OK, this is a bit off my usual business bent, but I am, well, bent. What’s got me all bendy?

It stems from the fact that I now live in a country with socialized insurance. Heck, I can't even get socialized medicine for my workforce, lol.

Actually, it’s not the insurance bail-out in particular I care about. It’s *all* of these damn bail-outs. I know, I know… many of you had AIG insurance so you avoided [insert personal crisis].

I know, I know…if we didn’t bail out the airlines after 9/11 [insert portend of doom and gloom].

I know, I know… if we didn't bail these behemoths out, our economy would have [picture of Chinese army pouring down Main Street, USA].

I get it, people.

I get that these bail-outs are great short term fixes to prevent nasty slumps on the “Street” and to protect our “Nation’s Interest”. (BTW, is there a secret room somewhere where a council of wizened druids decide exactly what our nation finds “interesting?”)

So, yah, something about all of this has been bugging me for a few days and, finally, while at lunch with some of my beloved engineers the other day; I was able to put my finger on it. The convo went something like this:

Chris to engineer: “So, what do you think of the bail-outs this week?”

Engineer: “I dunno, when can we get bailed out?”

Me: “When we get to $10B in sales.”

Then it struck me. These bail-outs are so ANTI-innovation and so pro-corporatism. Anyone will tell you that the strength of the American economy was founded on the innovation, guts, and entrepreneurialism of the small business owner. Look at Microsoft and Google - they were both small businesses not too long ago. But, by bailing out these big guys it provides a strong incentive for them to take stupid risks and have the government carry the note on the downside. If your smaller, more nimble, more innovative companies (that’s you, Dear Reader) can’t take those same risks, then well, tough noogies. Score a competitive advantage for the big boys — upside with no downside. Whoopee!

I realize that not every huge company gets bailed out. Lehman Brothers, for instance, has gone the way of the dodo bird. The truth is: you have to be both huge *and* considered of strategic import (infrastructure/economy/etc). But the innovation-stifling point holds:

You can bet they would bail out AT&T and not Vonage. Vonage is the innovator here.

They did bail out the airlines after 9/11. But, my buddy’s small airline went bankrupt recently. He was an innovator, with a great concept of affordable business-class non-stops from NYC to London. *poof* gone.

Isn’t innovation the pith of American DNA and shouldn’t our government stimulate and not squelch it?

What exactly *does* it say to our supposedly beloved SMB (small and medium sized business) when our government bails out only the humongous companies? It doesn’t say anything. Instead it gives them the finger. Well, three fingers:

  1. It provides a safety net for just the big boys. As stated earlier, this allows them to take greater risks because daddy will be there to bail them out.
  2. It rewards bad behavior by removing the consequences for poor planning. This will always create broken systems.
  3. It makes small business tax payer dollars cover their bigger competitors while they get no same coverage on their own business. Huh?

As an advocate of small business innovation, it just stinks. So, I ask the small business owner, besides SBA loans and the like, what other things could our gov’t due to bail you out and level this tilting playing field?

Selected Comments

The worst aspect of all of this is....
Submitted on Tuesday, September 23, 2008 @ 4:05pm by Gerry Gilmore (not verified)

... the continuing loss of faith in the broader American public for the basic tenets of capitalism.

Over the last 20 years or so, as more and more Americans have seen the largest corporations behaving in truly shameless fashion via: insane CEO compensation packages (think Carly Fiorina who destroyed half of HP's value while sacking 20,000 employees before being fired herself - with a $40M severance package paid for by the shareholders whose value she destroyed.); idiotic deal-making (GM and Delphi; GM and Fiat;....) that loses billions of dollars each; massive layoffs with no concern at all for those displaced (I used to attend Al-anon meetings where virtually every guy in there had been laid off by their companies after 20-30 years of loyal service - the anger and loss of faith was palpable.); and all the while the "leaders" of these companies waltz around in private jets and lecture people on how they just need to adapt, while they lead their companies off a cliff.

Don't mis-understand - I am a proud capitalist pig but - as was pointed out earlier - when companies become "too big to fail" or, even, become a crucial part of the national well-being (think the oil companies) then they should be subject to a greater degree of regulation and control than the normal laissez-faire approach relevant to "regular" companies.

We're all seeing what happens with gas prices when the religion of "deregulation" allows speculators to drive the price of oil to unreasonable levels, almost destroying the airline and trucking industries. At some point, the madness must stop.

The right approach, in my opinion, then is to allow the small and medium-sized businesses that are at the heart of American capitalism to be allowed to grow unfettered by having to pay for the sins of those who are destroying the financial foundations of our economy. Even more then the saps who took out those sup-prime loans, those who should have known better must be made to pay the price of their sins.

Re: America vs. Small Business (1-0)
Submitted on Thursday, September 25, 2008 @ 3:00pm by Marc (not verified)

Chris-It's a simple axiom in business that you already know, but choose to whine about...those who carry the most weight usually get what they want from Washington...when Fonality becomes the size of GM, then you can call "W" and order your own bailout...the small businessman is like a Haitian in a hurricane...fighting day to day to stay alive...and if you're one of the lucky few, who due to an exhorbinant amount of hard work, plus a little luck and good timing, make it to the big leagues..then you get the brass ring....and have earned the right to be the big swinging anaconda in the room....the Wall Street Behemoth's demise can have rippling effects throughout the world's economy...if a small businessman can't get a loan from a local bank, VC, or entrepenuer..then where's the new innovation funded from? China pumps a billion a day into this economy...and they want to know that their money is it or not, the US is a debtor nation now..other than the auto industry, we no longer make anything tangible on a grand scale...we're a nation of services, skimming a percentage from every transaction we can my friend, it's time to get back in the fighter and load up a few Side-Winders for your competition...once you bested them and become the IP-PBX industry leader, you can enjoy the fruits and "benny's" of being the big anaconda on the block. Sincerely, your new channel marketing manager...that it once you hire me...Marc

[Jan 13, 2009] 5 stocks for even-gloomier times - MSN Money - Jubak's Journal

"...the U.S. economy won't return to its full annual trend growth rate until 2015. Worst yet, that trend growth rate for the U.S. economy will be just 2.3% a year..."

What did the Congressional Budget Office say?

It's that last item that constitutes unanticipated bad news. That projected schedule for a recovery lags well behind the already gloomy timeline from the Federal Reserve at its Dec. 15-16 meeting that called for GDP "to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010." And the 2.3% trend growth that the budget office projects is well below the 2.5%-to-3% speed limit the Fed projected for the economy before the crisis.

... ... ...

Almost no one is considering the possibility raised by the Congressional Budget Office projections: that we could be looking at a long period where economic growth will be below both the long-term and the 10-year averages. A period of lower-than-average economic growth would lead to lower-than-average earnings growth. In that kind of environment, I'd expect-lower-than average price-to-earnings ratios, too. If that's what we're looking at, the market as a whole certainly isn't cheap yet.

[Dec 12, 2008] Leading economist fears decade of weakness in US - Times Online

One of the world's leading economists has given warning that the United States is facing a decade of financial misery, with the number of unemployed Americans set to continue to rise for years.

Robert Shiller, Professor of Economics at Yale University, who predicted the end of the internet bubble seven years ago, said: “We could have many years of a very weak economy. Big recessions are followed by years of weakness and typically unemployment keeps rising.

“To say that this will last years is not a dramatic statement. What is happening now is much worse than 1990. We could be facing a decade of real weakness.

“This is no ordinary recession. There are signs that people see this as a different story. People are talking about a depression, something that we haven't seen previously.” Professor Shiller's comments come as the unemployment rate in America is rising astonishingly fast.

Last week official figures showed that the US lost 524,000 jobs in December, with the overall unemployment rate rising to 7.2 per cent — the highest level for 16 years.

With about 11.1 million people out of a job, the total number of unemployed is about 50 per cent higher than a year ago.

Some economists, such as Kenneth Rogoff, the former chief economist at the International Monetary Fund and now a Professor of Economics at Harvard University, believe that America will be lucky if unemployment peaks at 9 per cent of the workforce and that there is a high chance that it will reach at least 10 per cent.

Professor Shiller, who said that he has talked to the incoming Obama Administration about possible solutions to the housing crisis in the US, took a swipe at the Federal Reserve.

He said: “This recession is by no means mechanical. People have lost a sense of confidence, a sense of trust in institutions and in each other. It is very hard for a central bank to address that by just cutting interest rates.”

If the L shaped outcome Prof Shiller discusses is realized it will be exceedingly difficult to extract the stimulus that has been injected. At some point political leaders will need to raise revenues to retire the high levels of debt that are being amassed. I am ever more doubtful they will do so.

Paul , Memphis, USA

[Jan 10, 2009] Why So Little Self-Recrimination Among Economists?  by Yves Smith 

Why is it that economics is a Teflon discipline, seemingly unable to admit or recognize its errors?

Economic policies in the US and most advanced economies are to a significant degree devised by economists. They also serve as policy advocates, and are regularly quoted in the business and political media and contribute regularly to op-ed pages.

We have just witnessed them make a massive failure in diagnosis...


But if a doctor repeatedly deemed patients to be healthy that were soon found to have Stage Four cancer that was at least six years in the making, the doctor would be a likely candidate for a malpractice suit. Yet we have heard nary a peep about the almost willful blindiness of economists to the crisis-in-its-making, with the result that their central role in policy development remains beyond question.

Perhaps the conundrum results from the very fact that they are too close to the seat of power. Messengers that bear unpleasant news are generally not well received. And a government that wanted to engage in wishful, risky policies would want a document trail that said these moves were reasonable. "Whocouldanode" becomes a defense.

But how economists may be compromised by their policy role is way beyond the scope of a post.

... ... ...

Acemoglu's paper had a couple of other eye-popping items: Even though he gives lip service to the idea that the economics was unduly infused with ideas from Ayn Rand, he then backtracks:

On the contrary, the recognition that markets live on foundations laid by institutions— that free markets are not the same as unregulated markets— enriches both theory and its practice.
"Free markets" is Newspeak, and the sooner we collectively start to object to the use of that phrase, the better. Because it is imprecise and undefined, advocates can use it to mean different things in different contexts. I cannot take any economist seriously who uses "free markets" in anything more rigorous than a newspaper column (and even there it would annoy me). It has NO place in an academic paper (save perhaps on the evolution of the concept).

We also have this:

A deep and important contribution of the discipline of economics is the insight that greed is neither good nor bad in the abstract.
This reveals that Acemoglu has been corrupted by Rand more than he seems willing to recognize. No one would have dared write anything like that even as recently as ten years ago. Let us consider the definition of greed, from Merriam Webster:
a selfish and excessive desire for more of something (as money) than is needed
Greed is different than, say, ambition. "Greed is good" was famously attributed to criminal Ivan Boesky, and later film felon Gordon Gekko.

Put more bluntly, greed is the id without restraint. Psychiatrists, social workers, policemen, and parents all know that unchecked, conscienceless desire is not a good thing. Acemoglu calls for external checks ('the right incentive and reward structures"), when the record of the last 20 years is that a neutral to positive view of greed allows for ambitious actors to increasingly bend the rules and amass power. The benefits are concentrated, and the costs often sufficiently diffuse as to provide for insufficient incentives (or even means) for checking such behavior. Like it or not, there is a role for social values, as nineteenth century that may sound. The costs of providing a sufficiently elaborate superstructure of rules and restrictions is far more costly than having a solid baseline of social norms. But our collective standards have fallen so far I am not sure we can reach a better equilibrium there.  


JB said...
Hi Yves. I visited a friend the other day and in their spare bedroom they'd stacked up an old pile of The Economist magazines. During a quiet moment, I picked up a couple of magazines. Some things don't change, the French were striking and the Gaza strip and Israel seemed devoid of leadership. It was odd to look back at the Technology sections even things from 2001 looked so dated.

But I also came across an "Economics Focus" article on the housing market in the US by a couple of well known economists from Harvard. House prices were rising fast but they declared there was "no bubble" because of "free markets". They stated that since the housing markets were liquid and that all participants had access to plenty of information, there could be no bubble, the prices were perfect.

Just reading the article alarmed me. It was like discovering a stone tablet on astronomy where an ancient race believed the sun rotated around the earth. But this "Economics Focus", mainstream thought brought to you by The Economist was only a few years old yet it was totally wrong!

This wasn't greed, we really had top brains at Harvard unable to spot a bubble and perhaps blinded by a bit of ideology?

January 12, 2009 3:40 AM
ndk said...
Why is it that economics is a Teflon discipline, seemingly unable to admit or recognize its errors?

As an outsider, I perceived modern economics the same way I perceived modern meteorology. They both study extremely complicated, chaotic systems that consist entirely of unrepeatable experiments and limited to no control over the inputs. They both model reality with increasingly complex systems that are matched against empirical results.

But as I got into it, the very strange thing is that some primary economic theories are only weakly supported by empirical data, or not at all. That baffles me. Could that be the effects of groupthink, or politics? It's a much stronger effect than I've seen in any other discipline. Usually there's a more concerted attempt at reconciliation of data with theory.

Anyway, I think of most professional economists the same way I think of most TV weather forecasters. They're just a smiling, pretty face, and if their forecast as generated by those simple models happens to be wrong, their job is never at risk.

The academics are different. They simply repeat what they've learned, seeking not to upset the boat, because frankly an academic striking out with novel theories does so at great peril to their career. The salaries for professors are quite good, but probably nothing compared to what is on offer at think tanks and private firms. That leads to our old saying, which I deplore for its grains of truth in some cases:

"Those who can, do. Those who can't, teach."

You won't get the best talent at most universities, where they could do the most good, until it's an appealing career choice both socially and financially. I've worked in academia most of my life, though with consulting work outside of it, and that above phrase seems to capture common perception pretty well. It brings in neither women nor money: you have to do it for the love of school, teaching, and the ideas themselves.

January 12, 2009 4:00 AM
IF said...
Yves: Having come to the US about nearly 10 years ago, I am shocked to read your claim (repeatedly) that things were different 10 or 20 years ago. I can't judge it. I wasn't around. I thought society and values have always been the way they are now.

When I think about it, the few older people (>50 years) I know are often more down to earth, and may I say, more reasonable (to me). More appreciative and humble. It is in my and the younger generation that I found (before the crisis) a faith in the continuity of the good times that just appeared surreal to me. It still shakes me that some kids (smart kids, top 10 school, non rich parents) purchased a house - or even just a fancy car - on credit first thing they came out of college.

Maybe they are just like me? Having no history to measure against. Not knowing what was before.

January 12, 2009 4:19 AM
Anonymous said...
Yves said,

"our collective standards have fallen so far I am not sure we can reach a better equilibrium there. "

Thank you for striking the nail square on the head. No one will face up to this, because they can't. That's why the ship will sink.

January 12, 2009 4:36 AM
Anonymous said...
ndk said,

"I think of most professional economists the same way I think of most TV weather forecasters. They're just a smiling, pretty face"

That's funny! When I see pictures of "learned" economists, I see (mostly) aged fat men. Not too many "pretty faces" in this crowd ;-)

January 12, 2009 4:37 AM
Yves Smith said...

In the movie Wall Street, "Greed is Good" Gordon Gekko is clearly a bad guy (although charismatic in a creepy sort of way) and goes to jail. A straight up morality tale. That was released in 1987.

There was a also a good deal of reflection on the bad behavior of the late 1980s in the wake of the S&K crisis (early 1990s) Didn't last long.

Although the "every man for himself" ethos has largely been on an upward trajectory since the mid 1980s (with that early 1990s blip), it really took off in the mid 1990s. That was in part fueled by options-based pay for CEOs, which sent their comp into the stratosphere (and created an industry of sycophants to justify it) and more and more Wall Street firms going public (which led the leadership group to put their pay over prudent management of capital, when the latter had been their top concern when they were private). And the insane amounts of money made (and in most cases lost) in the dot com era fed into this pattern.

The comment was directed at an academic defending the concept of greed in a paper, as opposed to a popular medium. Those tend to lag shifts in the general culture.

January 12, 2009 4:41 AM
donebenson said...
There is a wonderful quote from Keynes on bankers:

"It is for this reason that a decline in money values threatens the solidity of the whole financial structure. Banks and bankers are by nature blind. They have not seen what was coming....A "sound" banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him."

I think that comment could easily apply to economists as well.

From my over 35 years of experience on the 'buy side,' there is a tremendous amount of pressure on Wall St. economists and analysts to be positive, since most investors are optimistic, and only wish to hear good news. What makes tenured academic economist to be the same escapes me.

In contemporary economics [with few exceptions] there seems to be an ignoring of history and a strong emphasis on mathematics. For me, economics can never be reduced to a set of equations, no matter how hard economists try.

January 12, 2009 4:59 AM
mmckinl said...
Economists and Financial Writers Newest and Biggest Failure ...Our Banking System is Insolvent yet Mum's the Word!

The fact is that almost All Wall Street Banks are insolvent, broke, bust -- ~~~ As most economists and writers missed the housing bubble, now almost all are missing the gaping hole in our solvency and indeed in the trust necessary for the proper operation of financial marklets. This can only be restored with tough transparent audits.

FDR did it successfully, as did Sweden and Norway. What is it ? Bank Balance Sheet scrubbing that restored trust and solvency to the system. It is called the Swedish Plan or a Bank Holiday

As it stands now we can't even get any answers on the $9 Trillions in Tax Payer Money that has been loaned or used as underwriting for our financial system.

William Greider wrote in The Nation over 6 weeks ago about this whole situation. Well it has only gotten geometrically worse. At that time , we, the tax payers were only on the hook for a couple of trilllion dollars. Now just weeks later , we, the tax payer are on the hook for over $9 trillions and counting.

Time for a Bank Holiday by William Greider @ The Nation

Here is what Greider wrote 6 weeks ago:

"From the outset of the crisis, the essential fallacy shared by governing influentials has been a wishful assumption that quick interventions with tons of public money would somehow restore the system to "normal" without disturbing free-market principles. Replenished banks would start lending again and lead us to recovery. "Normal" is not going to happen. If the new president does not break free of the denial and act decisively, his administration will be dangerously compromised from the start.
Obama can begin by declaring a "bank holiday" like FDR's in 1933--an opportunity to put the hard facts on the table and assume temporary control of the entire financial system. Nationalizing the banks sounds more radical than it is, since banking law already empowers regulators to impose extraordinary controls and close supervision over troubled institutions. Facing facts will be painful, but it's better than continuing a costly charade."
And yet, here we are, six weeks later, with a deafening, damning silence including the economists and financial reporters from the left.
January 12, 2009 5:03 AM
bg said...
If you ever spent any time trying to make a point on a discussion board for investors you quickly learn that there are exactly two sides to every trade and everyone has a dog in the race. The arguments quickly degenerate, and if someone actually presents a bit of tangible data, they are personally attacked.

Although extreme, I do not think that this is entrirely different than all debate in our ancient social structures. Yes there are a few places where safe dialog can occur (look at this blog, for example). But as soon as someone has power or a stake all bets are off.

What is at stake for economists? what power do they have? I like the old statement about college faculty politics: They fight because there is so little at stake. Buiter and Roubini may be our heros, but I am sure they would be barely tolerated if only slightly more wrong.

Do a little mind experiment. Give yourself their responsibilities and burdens. What would you have done?

Creative destruction exists for a reason.

January 12, 2009 5:15 AM
Anonymous said...
Suggestion for journalists:

Try to get the court records for the Savings and Loan debacle opened up. Most of them are kept secret. Look up the big names.

Look into the deals made that the courts kept secret, look into how the big ones who got rich bankrupting S&Ls were able to walk away with lots of money and go on to bankrupting other businesses to their own ongoing profit and that of their bankers.

January 12, 2009 5:55 AM
Jojo said...
"Why So Little Self-Recrimination Among Economists?"

The answer is simple. Why should there be?

People forget that almost all economists are employed by corporations and nearly all corporations want a positive market.

The real reason economists exist in the real world is to massage the statistics in a positive matter so as to help their companies make money.

In most recent history, their job was to proclaim that there were no bubbles and that yes, stocks, houses, everything could really keep going up forever. Refer to Yves past post titled "Bullshit Promises".

January 12, 2009 5:58 AM
Timo said...
By reading economic articles for one year any guy would eventually realize most of the economists are just full of shit. Now those idiots (mainly Anglo economists) wanna quick "just throw money at it and it will go away"-solution.

No deep analysis, no challenging the "groupthink", nothing, nada, zip. Luckily those monkeys DO not build bridges or planes, they just fuck up the economy! Only few "outsider" economists tell the real story but they are considered "weirdos" or "doom&gloomers" etc.

With their free market (except the other guy did keep the trade barriers) naive ideology they are destroying both UK and US economies.

For every greedy rich guy one economists but also be hanged. At least it doubles the demand of lamp posts...

January 12, 2009 6:00 AM
Nico said...
I think you should also have a look to Steve Keen's latest post.

January 12, 2009 6:08 AM
Irene said...
ndk says and I could not agree more:

"The academics are different. They simply repeat what they've learned, seeking not to upset the boat, because frankly an academic striking out with novel theories does so at great peril to their career."

Economics is a fraudulent discipline and academic economists are fully aware of it. Economic models never embed a realistic description of the monetary system. Actually, even in the standard models used by central bankers, money is irrelevant. As are all decisions to create or allocate money. The current crisis is beyond the Economists' realm because it originated at the monetary level which they ignore on purpose. So they feel self-entitled not to care. They keep playing the part that was assigned to them. If they didn't, no tenure protection in any University would possibly hold.

January 12, 2009 6:18 AM
Anonymous said...
The problem is that there are two competing paradigms on the core problem of the economy. One focuses on the lack of government oversight and regulation. The other focuses on the existence of a central bank and fiat currency. IMHO the latter is more formidable. The former, without considerable qualification, implies a superior insight into economic realities on the part of government bureaucrats. Both more regulation and existence and utility of central banks are part of the "progressive" consensus which, still suffering from the influence of Marxist superstitions believe that the business cycle refutes capitalism and that therefore it simply must, must be possible to design an economic system that transcends this cycle. It is the philosophy of the triumphant sovereign will.
January 12, 2009 6:51 AM
Anonymous said...
"They are quick to oppose anything that undermines free trade, by contrast, and have had substantial influence doing just that."

There is the answer. A world economy so warped by disasterous trade policy destroys itself trying to mitigate the destruction. Same with monetarism.

January 12, 2009 7:01 AM
Anonymous said...
"our collective standards have fallen so far I am not sure we can reach a better equilibrium there. "

Here's a good Economic Theory, now being proven in practice and demonstrated daily all around us:

"Looting is restrained on the Way Up, it ACCELERATES on the Way Down." Fat Tony would understand this in a flash.

January 12, 2009 7:15 AM
January 12, 2009 7:47 AM
titi said...

I think one of the reasons is that most economics live anyhow in a permanent state of denial. So-called Nobel prizes (there is no Nobel for economy to start with) have been handed out to economists that proved that markets can't function on their own, that a move from imperfect to perfect market makes you worse off, that there is no such thing as well-informed consumers, etc etc. You cited Willem Buiter the other day: "Economic policy is based on a collection of half-truths. The nature of these half-truths changes occasionally. Economics as a scholarly discipline consists in the periodic rediscovery and refinement of old half-truths".

Economists know all these half-truths, but because they don't have anything better to propose, they continue to pretend the untruths to be true. Why they do so, is perhaps more Freudian than I can muster.

January 12, 2009 8:05 AM
Maineiac said...
I think the real question is how do we select economist to advise us. The answer is that they are selected by organizations which are corporate controlled. Financial institutions of course, but also the media and academia. You don't bite the hand that feeds you.
January 12, 2009 8:17 AM
datadave said...
Jeesum, Yves. Not much to add to your criticism of the economics profession. I come from a Poli-Sci background where ideology is also very much all important in whether one gets a 'job' or not after getting a degree.

I consider Economics as being politicized. There are 'left-wing' economists but they are less likely to be hired no matter their grades, mental heft or writing ability. Also, the over-use of statistics and math also conceals a lot. Returning to a Political Economy model of education like the Brits had might be a more honest way to educate economists.

January 12, 2009 8:18 AM
Anonymous said...
I think you drew a bad analogy between economists and doctors/malpractice suits.

Economists have done the diagnoses properly - NBER declared us to be in a recession. Check. What you are asking for is a prediction which is not the same thing as a diagnosis of an event that has occurred. How many doctors do you know who can accurately predict cancer 5 years before a patient actually gets it? And if you want a profession that does not self-examine, look no further than the medical profession. Got family members in the field and the amount of carelessly among many doctors is appalling. People die simply because of simple sloppiness and most perpetrators can give a flying fvck (so long as there is no malpractice suit forthcoming).

January 12, 2009 8:27 AM
DownSouth said...
mrmetrowest said...
"My view is that economics is a science which attempts to use mathematics to derive models of economic behavior that can be used to predict and prescribe."

My view is that economics is a pseudoscience which attempts to use phony mathematics to derive models of economic behavior that can be used to exploit human nature and manipulate human behavior.

January 12, 2009 8:33 AM
Woland said...
Your post on the failure of economists reminds me of
the "scandal" of the autism facilitators, who by holding
the hand of an autistic person, with a pencil, were able
to write out thoughts of said person. These facilitators
were convinced that they were indeed conveying the
thoughts of their "clients" , which made them heroes to
the parents of the afflicted children. Everybody was happy, until the tests were done which disproved that
anything other than projection was taking place.
January 12, 2009 8:37 AM
Anonymous said...
Phil hubb, exactly!
There is corruption at every level and singly out one profession is ridiculous. Our entire society whether it is finance, economics, medicine, our food system is rotten to the core.
January 12, 2009 8:43 AM
Stuart said...
Institutions and Professions have never governed themselves well or allowed themselves to be subject to outside rebuke without getting extremely defensive. No different than the average person. Critique them, their first reaction is to defend their actions irrespective of considerations of fault. They just don't like it.
January 12, 2009 8:43 AM
eco said...
Looks like one economist is going against the grain and suggesting that things are starting to turn for the better.

Signs of a Thaw

James D. Hamilton is Professor of Economics at the University of California, San Diego

January 12, 2009 9:02 AM
River said...
Yves, great post, thank you.

What can an economist hope for in their career? To earn tenure at a 'good' school, be recognized by publishing esoteric thoughts on already accepted economic theory? If their papers are recognized as supporting already accepted theory then the economist might possibly be invited into a government post. From the gov post it is possible to make the next step to big business and big money, possible speaking engagements, invitatiions to meetings in exotic locations, if all goes well and the boat is not rocked. Note that nothing that the economist does while in academia or the government is going to cost investors money directly because said economist is not acting as an 'investment advisor' in a business setting.

If the academic economist eventually reaches a high paying Wall St job they will be totally unprepared. Their experience is in classrooms, theory and economic history where on Wall St they are faced with learning to be a hustler, and liar, Wall St style. The one asset that the academic economist carries from school to Wall St is the knowledge that it is unwise to step out of the mainstream. There lies danger to career advancement opportunity. Above all, keep one's real thoughts to one's self.

The few contrarians that are willing to speak out against the mainstream are probably in possession of conscience to a greater degree than most. Alternatively or in conjunction with conscience these contrarians might have a better grasp of real vs bs economics because they might be more intelligent and apply themselves with more vigor. The contrarian in any field often finds that intelligence, conscience and an urge to speak out and inform is a terrible burden to bear. Remember, the economists are already under the strain of knowing that their field of endeavor is suspect to real scientists and much of the public.

Suppose an economist cries 'wolf' and then stands with contemporaries while the wolf comes, grabs a sheep, and runs away and then the crowd watches only to see everyday activity return to 'normal'. The economist that cried wolf will probably be shunned because no six sigma event took place, no huge pack of wolves arrived to take away the entire flock of sheep. The people and sheep returned to 'normal' activity.

What would be the future career prospects for such an economist that cried wolf?

January 12, 2009 9:07 AM
reason said...
I think this post deserves a better comment thread. But yes something is rotten in the heart of the profession. But my guess is that it was always so.

Money is so corrupting that it is really hard to avoid letting passions get in the way.

As I see it the problem is that there is no model of the real economy that properly integrates the financial realm.

I see on the right lots of people who seem to not get the idea that current problems have something to do with bankrupcy (they seem to think prices are out of line or something). On the left, lots of people who don't recognise that the solution to too much debt is not more debt.

I'm reading Steve Keen and Herman Daly at the moment, and while some of their ideas are good, it still seems to me that there is something missing.

Yves, what direction do you think things will take now. After all Keynes emerged from the last mess, even if some of his important were ignored.

January 12, 2009 9:18 AM
reason said...
As for Wall Street economists, don't forget that Steve Roach and Andy Xie from Morgan Stanley were consistently on the bear side.
January 12, 2009 9:21 AM
joebhed said...
Thanks for laying out another part of the discussion that is missing, more like: "what the F do economists REALLY know, especially when it comes to money?".
May I point out to readers that finally a progressive pol in Dennis Kucinich is tackling the financial and economic crisis head on with a call for substantive monetary reform.
Here is his speech last week on the House floor in discussing the crisis and the Stimulus.

What we DO need is a new debt-free money system.
We do not need Basel II and we do not need globs of Keynesian thinking - so passe for this time.

January 12, 2009 9:29 AM
Anonymous said...
"Why is it that economics is a Teflon discipline, seemingly unable to admit or recognize its errors?

Simple. It's not a discipline. It's an apology.

January 12, 2009 10:02 AM
Anonymous said...
There is little self recrimination of economists because they - like everything else in scamerica - have been co-opted by elite neocon control freaks. It was, and still is, easy to co-opt them (and all other disciplines/societal groups) because scamerica functions under ‘crumbunism’ -- obey and promote the gangster line and you get your daily crumbs -- rather than the abstract decoy, bullshit construct, ‘free market’ capitalism that they constantly tout as the ideal.

I would take the beginning of this well orchestrated global coup - more pernicious than plain old vanilla gangsterism - back to Reagan and the PATCO strike. The publicly avowed goal of the elite neocons behind the curtains is to forge an elite two tier ruler and ruled world with the ruled in a state of perpetual conflict with each other. A global population limit of eight billion is a key part of their plan, and yes, domestic populations are fair game.

In addition to crumbunism, compartmentalization of knowledge facilitates their evil scheme. People tend to stay in their little boxes of ‘expert’ knowledge and therefore limit themselves. What is needed is to break down the walls of all disciplines and connect the dots.

All of life is political.

Deception is the strongest political force on the planet.

i on the ball patriot.

January 12, 2009 10:19 AM
Jesse said...
It's difficult to assess the outcomes and quality of a game if one does not understand the rules, but even moreso if one does not understand the objective.

The objective of recent economics, at least in the short to intermediate term, is not truth, but power, measured in money, grants, and influence, with a heavy element of factionalism.

It is a social science, with murky experimental methods and difficult to measure theories with 'grading periods' too widely interspersed to be meaningful.

Tenue is a weak consolation to the ambitious person. It can be at worst a kind of exile.

But is economics so much the problem? What about now? Where is the outrage, where is the objective analysis of what went wrong?

In a few blogs, and even there, it can be a measure of money and power and influence at times.

So let us not blame economics so much for not being virtuous, because there were too few both then and now, if one defines a 'virtuous' as one who tells the truth, come what may as the facts and their analysis leads them.

Our society does not value the truth, it worship money and power. That is both the long and short of it.

Things will change, and probably for the better. I have some optimism for economics, which like psychology in the Soviet period and medicine in the Nazi period, became sciences subject to what some might call 'deep capture.'

January 12, 2009 10:27 AM
Anonymous said...

[quote]"Yves' analogy with doctors certainly holds: it is not the cancer that doctors are required to predict, but rather death, having first observed the cancer. When the financial sphere suddenly died, economists should be open to criticism for having failed to diagnose the financial cancer."[/quote]

Yves analogy still does not hold under your scenario. The key here is the difference between diagnosis and prediction. All you did was change the event to be predicted. Fine, if we go from predicting the onset of cancer to predicting life expectancy after diagnoses, we are still making a *prediction* rather than a diagnoses. And doctors are notoriously inaccurate at predicting life expectancy after first observing cancer.

And btw, you don't have to go back to 1850 to look for cracks in the medical complex. Modern medicine may rely on modern scientific principles, but the principles are often misapplied. Doing controlled studies by assuming that we can isolate treatment effects to specific parts of the body or symptom has directly contributed to the emergence of big pharma. Americans are now more focused on popping pills and living with side effects rather than engaging in true healing. And the few doctors that do look at the body as a system rather than separate parts that can be isolated from each other are branded as quacks by the mainstream for practicing "holistic medicine." Being a contrarian is tough no matter what field you're in.

January 12, 2009 10:55 AM
Anonymous said...
Here is our problem:
JMK famously said:
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.
If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.

And for fans of economic history, this from James' Galbraith's 2002 review of *Perilous Progress*
Bernstein, a trained economist and professor in history at the University of California at San Diego, details a largely unknown and even unsuspected history of how our [economist's] professional associations and journals strove from the beginning to engage the important questions, and of how they in the end lost the ability to do so.
And so we end where we started. Of the American Economic Association meetings in 1915, the President of the New York Federal Reserve Bank (no less) wrote that the participants were a "`rather impractical lot. Here is a world crisis, the greatest in a half a thousand years, or more,' and economists did not even deign to discuss it." No present day observer would be surprised.

January 12, 2009 11:03 AM
But What do I Know? said...
Thanks for calling the economists out over their lack of mea culpas, but the real point is that even if they issued them nothing would change, they would still be quoted and tenured and cosseted in the sweet stagnant attic of academia. These "wise men" are configured as experts because the system needs someone to reference--even if an academic admits that he knows little or nothing, his admission will be taken as wisdom--"look how wise he is to admit that he knows little or nothing."

As for greed, in all societies it is necessary for those on top to not be greedy--or at least short-term greedy. They have always had the potential to do so, but when the elites refrain from exploiting their advantages to the fullest, then society can thrive.

January 12, 2009 11:09 AM
Just another social scientist said...
This is an argument which, unfortunately, seems to have already been beaten to death - largely because the people it's directed at simply have no desire to even acknowledge its legitimacy.


Economics as a discipline is based on a simple paradox:

1) Prediction is superior to realistic assumptions. This is Friedman's explicit view of science and in turn Economics as a scientific discipline.

2) Social phenomena are not ergodic like natural phenomena.

The reason physics, chemistry and biology can follow Friedman's approach is because the fundamental assumptions which underlie physical laws do not change. Understanding of these phenomena can thus be considered synonymous with prediction - the underlying mechanisms and assumptions are irrelevant to the patterned outcomes, so long as these foundations do not change. Economics as a discipline acts as if this is also the case for human behavior. Since this is the commonly accepted definition of the scientific method, they feel absolutely no need to defend their perspective in the face of failed models - eventually, as in other fields, they will asymptotically approach reality.

I'm sure most people who deal with the real economy recognize that this is utterly ridiculous. We have not returned to the same economic equilibrium we had 200, 100, even 50 years ago, but this facade of scientific credibility provides an inestimable amount of self-delusion and/or protection from real criticism.

Personally, I feel pretty good about where I'm at in this disciplinary fight. Friedman's approach to social science is pretty thoroughly over, as far as I can tell. Whether they know it or not, economists are now weak enough and other methods are strong enough that critics like Mandelbrot should gain some vindication in witnessing new and renewed interest in network analysis, complex systems and a great deal of other appropriately nuanced approaches. 50 years ago we just didn't have the computing power to even big this project, and now we will probably get the chance to really start working on it.

January 12, 2009 11:35 AM
Anonymous said...
Rumsfeldian logic stated there are the knowns, the known unknowns and the unknown unknowns.

I read this blog to try and get a handle on the problems ( the knowns) where they are leading to ( the known unknowns) and where economic analysis reaches its limits ( the unknown unknowns). I wish economists could predict with some certainty the outcome of some known unknown ( say when a bubble will burst or when deflation will give way to inflation) but that is probably dependant on which unknown unknown happens to precipitate the predicted outcome.

I think anyway.

January 12, 2009 11:43 AM
Anonymous said...

To paraphrase Karl Popper, science is fallible because science is human, and humans are fallible. Many acknowledged great scientists, Einstein, for one,held similar opinion. Yet, we worship the "absolute external truth" that science proclaims. Humberto Maturana states that hard science does not speak to us, scientists do. Scientists, even when claiming empirical work, proceed from emotions, versus the claim of the rational, because scientists also validate similarly as we do. We validate based on what we find to be harmonious and pleasant to us.

That is how we create our individual realities. Subscribing to an absolute external truth is to submit to the imperialism and tyranny of the claimant.

Doble M

January 12, 2009 12:08 PM
Anonymous said...

I'm going to keep at this because not only do I think Yves' analogy is correct, I think it would do great good in the world if it were to gain traction.

I believe you are being sophistic to suggest that because doctors can't cure cancer reliably, we are still dealing with the problem of prediction. Clearly, many, MANY outcomes of health have been changed since doctors began to focus on accurate diagnoses, EVEN THOUGH they are obviously still attempting closed solutions to open systems, and EVEN THOUGH cancer is one of the most intractable diseases. I believe the same would be true of economics: Yes, there would still be intractable problems, but there would also be many cures. The economics profession desperately needs a re-examination of its assumptions, just as the medical profession once did, so that the methods of science and mathematics are not uselessly applied, as they clearly are now.

January 12, 2009 12:12 PM
GloomBoom said...
One difference between economics and meteorology is that with economics you can't look out the window and see if it is raining or not. One economist says there is a bubble and the next says all is fine.
Today many economists are saying that we have hit the bottom and others that the worst is yet to come....
January 12, 2009 12:24 PM
Anonymous said...
Thanks for the posting. Economists should be ashamed of themselves and their slice of the social sciences. If economists had any morals they would be out there pounding the table talking about imperialism. They would be be screaming about the lack of transperancy of the derivative market. They would also be shedding light on how fascism exists in America and its effects.

But none of this is happening.

January 12, 2009 12:29 PM
lineup32 said...
"Jojo said...
"Why So Little Self-Recrimination Among Economists?"

The answer is simple. Why should there be?

People forget that almost all economists are employed by corporations and nearly all corporations want a positive market."

Brilliant out of box thinking is the exception in all fields rather then the norm. Jojo's comments reflect the reality of our economic life which is driven by the political,financial and media interest of the multi-national corpoation. Far more serious problems await our attention but the search for the guilty much like the witch hunts of the past provide the emotional expression currently coming to a boil.

January 12, 2009 12:54 PM
donna said...
Within each school of economics there seems to be a standard line. In my mostly Keyensian economics class in college, I asked if we were going to talk about Austrian economics or different economic schools of thought, and when the teacher said, "no", I turned off my brain for the rest of the semester.

Most economists can't seem to think outside of whatever basic version they learned, and seem a bit brain dead to other ideas, really. Sad. As an engineer, I find economics a pretty boring discipline. In engineering, if you don't consider failure modes, you're a very poor engineer.

January 12, 2009 1:16 PM
Anonymous said...

I still disagree with your take on Yves analogy and I suspect we aren't understanding each other because my benchmark for success has nothing to do with curing cancer. My point about prediction vs diagnosis was pretty simple I thought, but I'm done arguing about the analogy.

If your main point is that economists need to examine their assumptions, I wholeheartedly agree. I think this should be true of all individuals, scientists, organizations, professions, etc. I just found it highly suspicious that our benchmark for success would be doctors, who are some of the worst offenders at sloppy science and making unreasonable assumptions. It would be like saying Al Capone is corrupt because he doesn't conduct his business like the Vito Corleone.

January 12, 2009 1:38 PM
Anonymous said...
I want to thank you for your posting of Palley's thoughts. You (I think) have posted this more than once, and it richly deserves it. There is a select group of economists who saw our approaching storm. Of these Palley is the only one who understands the political underpinnings of our "free market" and in particular, the anti-worker, anti-labor base. You rarely seem him quoted, probably because he has consulted for unions. (What would the profession be like, if economists who consulted for the financial industry and MNCs were never quoted??)

My belief is that the job losses will surprise to the upside. They will go on and on and on, until we learn the POLITICAL lesson, that we have allowed our economy to become dangerously unbalanced, towards finance & the MNCs, and away from American citizens. This may well be traumatic.

Obviously you cannot have a consumer society when wages and benefits and job security are diminished for decades. It's been a War of Attrition, and the credit bubble allowed it to go on. Now the consumer is defeated.

Economists have been building fantasy castles. Now reality has destroyed them. As the reality of this sinks in, there will be changes in the ideological lay of the land.

January 12, 2009 1:43 PM
doc holiday said...
Re: "But how economists may be compromised by their policy role is way beyond the scope of a post .. "

>> The point here is obvious and it is related to the outcome of stock picks from people like Faber, or random daily whining from shills on Wall Street, and tips from avon ladies, taxcab whores, your in-law, your butcher, your baker, your goat herder and your drug dealer, maybe even your Mom or Dad, maybe someone by a slot machine or near a lotto machine, maybe, just maybe, this whole matter is related to the greatest number crunching economist to ever walk upon the infinite paths of Earth:

Raymond Babbitt

Also See: Qantas never crashed

January 12, 2009 1:43 PM
doc holiday said...
I forgot to include the final point, that I was attempting to make in my last point, i.e, the point being, that while some people win others simply don't.

There is obviously no difference between the observations of autistic savants and Wall Street economic experts and the people paid to be shills that fabricate false and misleading bullsit. You can take that to the bank, because the proof is priced into the pudding!

January 12, 2009 1:56 PM
locust said...
Man is not inherently honest. If he were, there would be little to no use for laws and regulations.
January 12, 2009 2:01 PM
RoadRunner said...
My own view is that the econs you're allowed to see/hear in MSM are generally cheering for the regime, or othewise trying to herd the populus in a certain market direction to suit the needs of the elite. That is, this is a political job, at least for the ones who make it. For all the econs out there, how many of them trade in the markets or otherwise make their fortune? Would you take fishing advice from a guy who never ventures past the jetty?
January 12, 2009 2:01 PM
Anonymous said...
"that seems peculiar given that many prominent policy influencers are tenured."

Get rid of tenure. No school which accepts government grants should be permitted to hand out tenure.

Topple the IVY tower.

It is socialism for the rich, IVY league graduates.

Market fundamentalism took us close to disaster in 2008 - Times Online by Anatole Kaletsky

What went wrong? In the last Economic View every year, I look back at what I predicted here in early January, to try to shed some light on the events of the previous 12 months. This is nearly always a humbling experience that brings to mind J.K. Galbraith's oft-quoted remark when he was asked about the outlook for interest rates: “There are two kinds of economists - those who don't know the future and those who don't know they don't know.” This year, however, the routinely humbling experience has turned into a ritual humiliation. How else can I describe the public confession that I am now compelled to make:

I hereby confess that on or about January 14, 2008, acting of my own free will, not under the influence of any drug and aware of the consequences of my actions, I wrote the following statements in The Times: “The global credit crisis, far from taking a turn for the worse, is now almost over” and “There will be no US recession” and “Stock markets around the world will rise in 2008”. Some of my other points now seem less stupid: that Britain and Europe would suffer worse housing and consumer slumps than the United States and that sterling would fall against every leading currency. However, these pale in comparison with my basic misjudgment and I must apologise to anyone misled by my analysis.

Having admitted my guilt, now let me enter two pleas in mitigation.

First, the predictable excuse that others were also guilty. Almost everyone underestimated this year's disasters - apart from the Jehovah's Witness economists who had been predicting the end of the world every year for the past decade. Even people with enormous personal stakes and access to inside information failed to see what was going on. Most obviously this was true of James Cayne and Dick Fuld, the chairmen of Bear Stearns and Lehman Brothers, who lost their entire fortunes overnight. But consider even George Soros. In his book The New Paradigm for Financial Markets, Soros precisely anticipated and described the dynamics of a gigantic “super-cycle”, driven not only by too much borrowing but also by too much faith in deregulated market forces. Yet Soros bought shares in Lehman just days before its collapse.

An even more spectacular case came to my attention in an e-mail I received in mid-November, when global stock markets hit their low-point (so far). Royal Bank of Scotland, my reader pointed out, spent $100 billion to buy ABN Amro, the second-biggest bank in the Netherlands, in October 2007. If only the directors of RBS had been a bit more patient, this is what they could have bought for the same $100 billion a year later: Citibank ($22 billion) plus Goldman Sachs ($21 billion) plus Merrill Lynch ($12 billion) plus Morgan Stanley ($11 billion) plus Deutsche Bank ($13 billion) plus Barclays ($13 billion). And RBS would still have had $8 billion left over to buy a golden parachute for Sir Fred Goodwin, its discredited chief executive.

However, “everyone else was doing it” is hardly a justification. So let me move on to my second, more substantial, excuse. Almost all predictions for 2008 turned out to be wrong because economics ultimately is driven by unpredictable human behaviour, not by fixed scientific laws - and this is especially true in a crisis. The biggest surprise this year lay not in economic events but in the reactions of financiers, businessmen, regulators and politicians.

As the charts show, economic activity, consumer confidence and even housing and financial conditions all began to stabilise in March, when the rescue of Bear Stearns ended the first phase of the credit crunch.

It was only in mid-September that “the world changed completely”, as Mervyn King and other policymakers subsequently admitted. The reason for this change was perfectly clear: the sudden seizure of Fannie Mae by the US Treasury and the even more unexpected decision to put Lehman Brothers into bankruptcy triggered a collapse of confidence in every major financial institution in the world. Suddenly all the banks and insurance companies previously considered “too big to fail” were exposed - not only to a deterioration in economic conditions, but also to an attack of bearish stock market sentiment or even to an unexpected change in regulatory demands.

It was only when the entire world financial system suffered this unprecedented nervous breakdown that the real economy of consumption, jobs and industrial orders fell off a cliff. The corollary is that the world economy might well have avoided a serious recession had it not been for the Fannie and Lehman blunders, which triggered the greatest banking panic the world had ever seen.

To say this is not to deny that financial conditions in many economies had become dangerously unstable and that drastic reductions in debt and leverage were required. But most of the excess borrowing had been undertaken by banks and hedge funds - and not by households and non-financial companies. It was, therefore, possible for most of the deleveraging to be achieved by financial institutions repaying their enormous debts to one another, instead of strangling the non-financial economy with a much tighter credit squeeze. Indeed, this orderly unwinding of debts within the financial sector was exactly what happened between the Bear Stearns rescue and the meltdown of mid-September.

Why, then, did everything go so disastrously wrong at that point? I would suggest three reasons, all related to accidents of human behaviour rather than to irresistible economic pressures.

The first big accident was the surge in oil and food prices in spring and early summer. This actually did more harm than the original credit crunch to consumer and business confidence and, therefore, to the prospects for economic recovery. We now know that this surge in commodity prices was a purely speculative phenomenon, unrelated to any real shortages of supply. But because of the quasi-religious faith that “the market is always right”, politicians and regulators refused to intervene directly in the oil market to curb speculation, leaving consumers and businesses severely weakened when the Lehman crisis hit.

The second accident was the series of regulatory blunders that climaxed with the Lehman fiasco but began several years earlier with the adoption of “mark to market” accounting and the perverse incentives created by “market-based” capital requirements determined by private rating agencies' potentially corrupt judgments. These blunders, all of them ultimately motivated by the fundamentalist credo that “the market is always right”, continued throughout the credit crunch. Instead of quickly implementing a government-led Plan B to end the credit crunch, as I had expected, politicians kept waiting for implausible market solutions and refused to intervene until it was almost too late.

The third and perhaps most damaging misjudgment has been to subsume macroeconomic management into political morality. As a result of moralistic witch-hunts against debt and consumption, pragmatic Keynesian solutions to the credit crunch have been thwarted by an unholy alliance of ideological monetarists who believe that the market is always right and ideological Marxists who believe that it is always wrong. Even worse, consumers and businesses have started to see recession as a moral retribution for past excesses, rather than a technical problem that macro-economic policy could - and should - readily resolve.

Behind all these misjudgments was the naive belief that markets are always right and that interfering with market forces is always wrong. This boom in “market fundamentalism”, which Soros brilliantly described in his book, has now turned to an equally dangerous bust in capitalist self-confidence, just as he predicted.

My biggest mistakes this year all came down to the disagreement with Soros that I described here in January: I believed that the instinct of self-preservation among politicians would prove much more powerful than market fundamentalist ideology. The credit crunch would, therefore, be ended quickly by a government-led Plan B, involving wholesale credit guarantees, bank nationalisation, regulatory forebearance and debt forgiveness. This is now happening, but only after the boom in market fundamentalism brought the world much closer to disaster than I ever imagined possible.

For what I imagine possible next year - rightly or wrongly - please return to this column on January 12.


99% of the problem can be placed on debt. People, Companies, Banks and Govts all took on too much debt. I moved to the UK in 2005 and was startled by the amount of risk people would take to 'own' a home - if we dont buy now we will never be able to afford one!... Crazy when you think about it now.


Harvey, London, England


It is good to admit it when you get it wrong (horrifically). Some of the points in your analysis are good, but blaming mark-to-market is absurd. Having to confess losses empowers shareholders. If you think they overreact it should offer you an investment opportunity. Most haven't overreacted yet.


Marc, Antwerp, Belgium

[Jan 10, 2009] Millionaires Say They Were Failed by Advisers in Crisis By Barry Ritholtz

January 9th, 2009

I found this data intriguing:

Nearly two-thirds of U.S. millionaires say their investment advisers have failed them during the global recession, according to a recent survey by Spectrem Group.

Only 36% of respondents were pleased with their advisers performance last year. The poll was conducted in November of 750 U.S. households with more than $1 million in net assets.

14% said they’ll increase their use of financial advisers.

U.S. millionaires lost an average 30 percent of their assets last year, with 17 percent of respondents saying their assets declined by 40 percent or more, Spectrem said. The Standard & Poor’s 500 Index dropped 38 percent last year, its worst since 1937, and global stock markets surrendered $28.7 trillion of their value, or 47 percent.


Is it surprising that high-net worth individuals are not being well served by their advisors? It turns out that getting good advice requires more than being able to pay for it — you need to learn who to avoid and who to listen to.

There was a huge pushback to the Apprenticed Investor column that urged people to “own their portfolio” and take responsibility for their trades:

“He who blames others has a long way to go on his journey. He who blames himself is halfway there. He who blames no one has arrived.”

– Chinese proverb

That’s good advice for investors.

[Jan 9, 2008] Roubini: Two Year Recession

1/08/2009 | CalculatedRisk

From Rex Nutting at MarketWatch: Roubini forecasts recession will last 2 years

The U.S. recession will last two full years, with gross domestic product falling a cumulative 5%, said Nouriel Roubini, ... For 2009, Roubini predicts GDP will fall 3.4%, with declines in every quarter of the year. The unemployment rate should peak at about 9% in early 2010 ...
Roubini is forecasting a pretty serious recession, but far short of a "depression" which is usually defined as a 10% decline in real GDP.

The concensus (and the Fed forecast) is that the economy will bottom in Q2 2009 with a sluggish recovery in the 2nd half of this year.

[Jan 8, 2008] PIMCO - IO Gross Jan 09 Andrew Mellon vs Bailout Nation

... As outlined in these pages, the U.S. and many of its G-7 counterparts over the past 25 years have become more and more dependent on asset appreciation. Under the policy-endorsed cover of technology and somewhat faux increases in financial productivity, we became a nation that specialized in the making of paper instead of things, and it fell to Wall Street to invent ever more clever ways to securitize assets, and the job of Main Street to “equitize” or, in reality, to borrow more and more money off of them. What was not well recognized was that these policies were hollowing, self-destructive, and ultimately destined to be exposed for what they always were: Ponzi schemes, whose ultimate payoffs were dependent on the inclusion of more and more players and the production of more and more paper. Bernie Madoff?

As with every financial and economic crisis, he will probably go down as this generation’s fall guy – the Samuel Insull, the Jeffrey Skilling, of 2008.

But Madoff’s scheme has a host of culpable look-alikes and one has only to begin with the mortgage market to understand the similarities. Option ARMs or Pick-A-Pay home loans allowed homeowners to make monthly payments that were so small they did not even cover their interest charges. Two million mortgagees either chose or were sold this Ponzi/Madoff form of skullduggery, believing that home prices never go down and that shoppers never drop. One can add to this the trillions in home equity/second mortgage loans that extracted “savings” in order to promote current instead of future consumption, and one begins to realize that Bernie Madoff and  our cartoon’s Wimpy had company all these years.

What about the shabby performance of the rating agencies? Were they not equally at fault for perpetrating a giant charade that was bound to end in tears? Of course: Aaa subprimes structured like a house of straw; Aaa monoline insurers built like a house of sticks; Aaa credits like AIG, FNMA, and FHLMC where only a huff and a puff could expose them for what they were – levered structures dependent upon asset price appreciation for their survival. Ponzi finance.

I will go on. Municipalities with begging bowls now extended for over a trillion of Federal taxpayer dollars, based their budgets and their own handouts on the perpetual rise in home prices, the inevitable upward slope of sales taxes, and the never-ending increase in employment and personal income taxes. To add injury to insult, they conveniently “balanced” their books with a host of accounting tricks that Bernie Madoff could never have come up with in his wildest imagination. Now, with cash flow insufficient to meet current outflows, they are proving my point that we have met Mr. Ponzi and he is us – all of us: auto companies that siphoned sales dollars to make labor peace instead of research and design expenditures; hedge funds that preposterously billed investors for 2% and 20% of nothing; a President and politicians who thought they could fight a phony war for free and distract the nation’s attention from $40 trillion of future social security and health care liabilities. Ponzi, Ponzi, Ponzi.

Still, future policymakers must confront the reality that is, not the one that should have been. And investors must do likewise, casting aside personal philosophies for a clear-headed view of the future horizon. PIMCO’s view is simple: shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond. Anticipate, then buy what they buy, only do it first: agency-backed mortgages, bank preferred stocks, and senior bank debt; Aaa asset-backed securities such as credit card, student loan, and auto receivables. These have been well-advertised PIMCO strategies over the past 6 months but there are others in clear sight. An Obama administration will quickly be confronted by the need to provide those hundreds of billions of dollars to states and large municipalities. Their requests total nearly a trillion dollars and to think California or NYC would be allowed to fail is, well – unthinkable. Municipal bonds then, selling at historically high ratios relative to U.S. Treasuries, offer attractive price appreciation potential, or at the very least a defensiveness with high carry that a 2½% 10-year Treasury cannot.

Here’s another thought. While TIPS or inflation-protected securities cannot logically be a recipient of Uncle Sam’s checkbook over the next 12 months, they can benefit if and when the government’s efforts to reflate begin to take hold. 2½% real yields cannot possibly be maintained unless deflation as opposed to inflation becomes the odds-on favorite. What bond investors know as “breakeven inflation rates” are currently signaling a future where the U.S. CPI averages -1% for the next 10 years. Possible, but not likely. As an additional strategy, global bond investors should recognize the value in high-quality investment-grade corporate bonds in many markets. Yields of 6%+ for intermediate maturities are still common and readily available.

There is legitimate concern as to the ultimate destination and outcome of our “bailout nation.” Realistically, quantitative easing, a two-trillion-dollar expansion of the Fed’s balance sheet, and the near certainty of future budget deficits approaching 6-7% of GDP should alert bond investors to once again become vigilant as was the case in the 1980s and 90s. Vigilantes we should be, but that is a battle to be fought in the Treasury market where low yields offer little reward and increasing risk.

For now, our Ponzi-style economy and its policy remedies encourage bond investors to mimic Uncle Sam and its global compatriots. Buy what they buy, but get there first. Andrew Mellon would surely have disapproved. Liquidation was his game. Wimpy? Well, he’s gonna have to start paying for those burgers on Monday, even in a bailout nation.

[Jan 8, 2009] Ugly Day The Big Picture#comments

  1. Steve Barry Says:

    The economy, housing and the stock market are rotten to the core. Record credit to GDP…not by a little, but off the charts. Record low manufacturing…auto sales are not in a Depression, they are in collapse…if Shiller’s charts are right, housing has 40% more to fall. It should be a surprise when the market RISES, not falls.

    The market has way too much bullishness for where the fundamentals are…it rallies only when volume is on fumes. There is hardly any short interest. I cannot find a single thing that makes me think stocks will do well this year.

  2. ottnott Says:

    I think the market was vulnerable after a pretty good run from the recent lows.

    If the economy is still falling off a cliff, it is hard to trade on expectations that growth resumes in 6 months time. It will take a massive effort just to slow the fall.

  3. AndrewShaw Says:

    I’d like to know, but I think it was the half-hearted responses from Obama to the press conference. Methinks he is a better speech-reader than a leader, but still sorta hoping for the best, but way long term, like 4 years out.

    Stopped out of SSO at the open, got back long in the early drift lower, then 3% loss stopped out again. That’s enough of that fun, so I’m short again. It was a cynical play anyway. I think the thesis for me now is we are without methods that can sustain our bubble and our leader will be doing nothing different than Bush, how many holdovers from the Bush Admin again? Hard to believe. The O man is bought and paid for by the same freakin bankers as the last, what a waste.

  4. AndrewShaw Says:

    From Drudge right now, “China may balk at buying more US debt… Developing…” in the dreaded red ink. No link to any story yet.

    Maybe the news leaked into todays market, like news always does.

    P.S. See U.S. debt is losing its appeal in China - International Herald Tribune

  5. KidDynamite Says:

    it’s called REALITY!

    barry - you’ll love this cartoon:

  6. TrickStarr Says:

    I like bonds. Bill Gross makes some good (albeit biased) points. I bought bonds this week. Including junk.


[Jan 6, 2009] Fed Fears Long Recession

The Fed projects GDP to decline in 2009 "as a whole", and unemployment to "rise significantly into 2010". The Fed also expects disinflationary pressures to continue into 2010.

From the FOMC Minutes:

Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010.

[Jan 6, 2009] Online When the pawnshop has it all by Julian Delasantellis

Looks like Panarin tried to compete with Masha Lipman, the most clueless and corrupt of the current generation of "Sovietologists"...  When you read writing of those clueless jerks about the country you know well it's not funny it is reprehensible and suggests the advanced level of degradation of power elite. I am convinced that Mash Lipman would be a valuable member of CPSU and Panarin can easily find a lucrative job in Bush or McCain teams.

Asia Times

Starting with the fall of the Berlin Wall 20 years ago, and ending with the dissolution of the Soviet Union at the end of 1991, the Russian people suffered a national humiliation virtually unprecedented among nations that had not been conquered by an invading army. The Russians may have indeed hated their communist rulers, but that didn't mean they didn't feel pride in being the rulers of an empire that stretched from Germany to the Pacific Ocean.

In economic terms, the breakup of the nationwide production and exchange system established during the Soviet era's 70-year reign was just one more factor that contributed to the Russian people's economic misery, culminating in the Russian bankruptcy that spurred the 1998 Long Term Credit Management crisis and prevailed in Russia up until oil prices started to rally as the 20th century ended.

In the West, conservatives viewed the Soviet imperial dissolution and subsequent hardship of the Russian people with total glee; at Georgetown holiday celebrations in 1989, little chunks, wrapped with a festive bow, of the Berlin Wall were a particularly welcome party favor. Liberals such as Harvard's Jeffrey Sachs knew that Russia, especially the nuclear-armed-to-the-teeth Russia, could not be allowed to descend into chaos and brigandry; they introduced plan after plan to help the country.

None of these schemes ever made it much past the stage of a headline in the Financial Times; the Russians saw through it all to see these would-be saviors for what they all really were; condescending, haughty Westerners looking down and taking pity on poor, helpless Mother Russia, treating the country more as a dysfunctional African basket-case rather than a world superpower with 1,000 years of proud history behind it. In 2000, Vladimir Putin won the Russian presidency and used petro revenues to restore the nation's pride, and, increasingly, its swagger.

So, how the Russians must now love reading Panarin. "Think having your country carved into little pieces is so great?" they ask America. "See how you like it when it happens to you."

But even if the financial crisis does not lead to the breakup of the United States, it is almost certain that, as the crisis continues and it deepens, it will leave a lasting mark on the face of America, and, indeed, of the entire world financial system.

As 2009 begins, the ongoing US recession is entering its 14th month. Some observers see this as good news, in that, as the average length of post-war US recessions has been only around 11 months, good times must surely be only around the corner.

Those that advance this proposition display fundamental ignorance about what's really going on. The current crisis cannot be compared to other post-war experiences since today's difficulties originated as a financial crisis, not from a rise in oil prices or a temporary turndown in aggregate demand. Crises of the present type traditionally last much longer, and are much deeper, than standard recessions.

After analyzing 22 worldwide financial crises from 1929 to 1997, economists Kenneth Rogoff of Harvard and Carmen Reinhart of the University of Maryland predict that the US unemployment rate, currently at 6.7%, will rise to over 11% by 2011. (For my account of how this economic downturn will be much more severe than those previously experienced during the postwar period see A nasty blizzard, Asia Times Online, October 30, 2008.)

US real estate prices, where the crisis began three years ago, are continuing to decline; indeed, according to the most recent monthly Case/Shiller real estate sales data, the price declines are accelerating. Last winter, Jamie Dimon, the chief executive of JP Morgan/Chase, said the crisis would last for as long as house prices were falling; if that's true, any lights at the end of the tunnel this year should be seen only as Robert McNamara's proverbial headlight of the oncoming onrushing train.

Falling house prices lead to deleveraging, which I've written about many times at this site. Many observers are claiming that this year deleveraging will strike particularly hard at average Americans, as that we will soon see banks and other credit card companies cutting back sharply, even to those who have used their credit cards wisely, on card spending limits previous willingly and generously granted.

Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at

(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

[Jan 5, 2009] Willem Buiter Calls for Less US Stimulus, Expects Collapse in Price of Dollar Assets

Buiter tackles the problem from a different angle. He looks at the standing of the US in the world, economically and financially. He does not argue the Cowen angle, that deficit spending might not lead to growth. His point is different: the US is pretty close to the end of its rope, in terms of relying on the rest of the world for financing. He sees it as a no-brainer that a massive fiscal deficits, whether they are narrowly successful or not, will relatively soon (he estimates 2 to 5 years) lead to a collapse in prices of dollar denominated assets.

Now that point of view might not seem radical; some investors have spoken for some time of the likelihood of a dollar implosion. But among respectable economists, this would have been treated as a lunatic fringe view. But Buiter makes his argument using data and recognized economic constructs.

I am particularly taken with the intro to Buiter's piece:

Economic policy is based on a collection of half-truths. The nature of these half-truths changes occasionally. Economics as a scholarly discipline consists in the periodic rediscovery and refinement of old half-truths. Little progress has been made in the past century or so towards understanding how economic policy, rules, legislation and regulation influence economic fluctuations, financial stability, growth, poverty or inequality. We know that a few extreme approaches that have been tried yield lousy results - central planning, self-regulating financial markets - but we don’t know much that is constructive beyond that.

The main uses of economics as a scholarly discipline are therefore negative or destructive - pointing out that certain things don’t make sense and won’t deliver the promised results. This blog post falls into that category.

An elite economist who is willing to say that economists really don't know all that much deserves a hearing just for his commitment to intellectual integrity. As Will Rogers said, "it isn't what you don't know that will hurt you, it's what you know that ain't so." Questioning accepted wisdom is vitally important, yet too often dissenters are ignored and marginalized.

It is going to be very interesting whether Buiter's comments are addressed by the economists supporting the Obama program, or are politely ignored. His post is quite long, I strongly urge you to read it in its entirety, and I excerpt key sections below:

Much bad policy advice derives from a misunderstanding of the short-run and long-run impacts of events and policies. Too often for comfort I hear variations on the following statements: “the long run is just a sequence of short runs, so if we make sure things always make sense in the short run, the long run will take care of itself.” This fallacy, which I shall, unfairly, label the Keynesian fallacy, compounds three errors.

The first error is the leap from the correct assertion that a long interval of time is the sum of successive short intervals of time to the incorrect impact that the long-run impact of a policy or event is in any sense the sum of its short-run impacts. The second error is the failure to recognise that our models (formal or implicit) of how the economy works are inevitably incomplete. Parts of the transmission mechanism - positive or negative feedbacks and other causal links between actions today, future outcomes and anticipations today of future outcomes and future actions - that can safely be ignored when we consider the impact of a policy over a year or two can come back to haunt us with a vengeance over a three-year or longer horizon. The third error is that, when economic agents, households, firms, portfolio managers and asset market prices are even in part forward-looking, the long run is now. More precisely, the long-run consequences of current policies can, through private sector expectations and through forward-looking asset prices influence consumption behaviour, employment and investment decisions and asset prices today.

Matching the Keynesian fallacy is the view that just because a certain set of policies is not sustainable, in the sense that it cannot be maintained indefinitely, such policies should not be implemented even temporarily. I will call this the sustainability fallacy.....

Yves here. One of Buiter's weaknesses, having been in elite policy roles at various points in his career, is sometimes to expect more of government than it can deliver. The real danger, in my mind, of policies that ought to be temporary, is that political processes and human inertia mean that they do not get reversed quickly enough. For instance, Janet Yellin today noted (in effect) that the Fed has no exit program for its fancy alphabet soup of facilities even though they were all supposed to be temporary. If the Fed is afflicted with this problem, imagine how hard it is to turn off programs that are implemented via legislation. That does not mean that they should not be tried, but in evaluating them, one needs to take a hard look at what happens if they persist well past their sell-by date.

Back to Buiter (boldface ours):

First, the fiscal policy actions pursued thus far by the Bush administration, but even more so the policy proposals leaked by Obama’s proto-administration are afflicted by the Keynesian fallacy on steroids. They appear to exist outside time, with neither the long-run consequences of the actions like to be implemented over the next couple of years, nor the history that brought the US to its current predicament, the initial conditions, being given any serious attention....

Even before the crisis erupted, around the middle of 2007, the US economy was in fundamental disequilibrium. The external primary deficit (the external current account deficit plus US net foreign investment income) was running at around five or six percent of GDP. The US was also a net external debtor, Its net external investment position (at fair value, or the statisticians best guess at it) was somewhere between minus 20 percent and minus 30 percent of annual GDP. The US economy managed to finance this debt and deficit position quite comfortably because it gave foreigners an atrocious rate of return on their investment in the US - a rate of return much lower, when expressed in a common currency, than the rate of return earned by US-resident investors abroad.....

The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally. Even the most hard-nosed, Guantanamo-bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed. Key wholesale markets are frozen; the internationally active part of its financial system has either been nationalised or underwritten and guaranteed by the Federal government in other ways. Most market-mediated financial intermediation has ground to a halt, and the Fed is desperately trying to replace private markets and financial institutions to intermediate between households and non-financial operations. The problem is not confined to commercial banks, investment banks and universal banks. It extends to insurance companies (AIG), Quangos (a British term meaning Quasi-Autonomous Government Organisations) like Fannie Mae and Freddie Mac, amorphous entities like GEC and GMac and many others.

The legal framework for the regulation of financial markets and institutions is a complete shambles. Even given the dismal state of the legal framework, the actual performance of key regulators like the Fed and the SEC has been appalling, with astonishing examples of incompetence and regulatory capture.

There is no chance that a nation as reputationally scarred and maimed as the US is today, could extract any true ‘alpha’ from foreign investors for the next 25 years or so. So the US will have to start to pay a normal market price for the net resources it borrows from abroad. It will therefore have to start to generate primary surpluses, on average, for the indefinite future. A nation with credibility as regards its commitment to meeting its obligations could afford to delay the onset of the period of pain. It could borrow more from abroad today, because foreign creditors and investors are confident that, in due course, the country would be willing and able to generate the (correspondingly larger) future primary external surpluses required to service its external obligations. I don’t believe the US has either the external credibility or the goodwill capital any longer to ask, Oliver Twist-like, for a little more leeway, a little more latitude. I believe that markets - both the private players and the large public players managing the foreign exchange reserves of the PRC, Hong Kong, Taiwan, Singapore, the Gulf states, Japan and other nations - will make this clear.

There will, before long (my best guess is between 2 and 5 years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury Bills and Bonds are still viewed as a safe haven by many. But learning takes place. The notion that the US Federal government will be able to generate the primary surpluses required to service its debt without selling much of it to the Fed on a permanent basis, or that the nation as a whole will be able to generate the primary surpluses to service the negative net foreign investment position without the benefit of ‘dark matter’ or ‘American alpha’ is not credible....

The US Federal government has taken on massive additional contingent liabilities through its bail out/underwriting of the US financial system (and possibly other bits of the US economic system that are too politically connected to fail). Together will the foreseeable increase in actual Federal government liabilities because of vastly increased future Federal deficits, this implies the need for a future private to public sector resource transfer that is most unlikely to be politically feasible without recourse to inflation. The only alternative is default on the Federal debt. There is little doubt, in my view, that the Federal authorities will choose the inflation and currency depreciation route over the default route.

If I can figure this out, so can anyone in the US or abroad who follows recent economic developments. The dawning of the realisation will lead to the dumping of the assets....

I now anticipate a Federal deficit of between $1.5 trillion and $2.0 trillion for 2009 and something slightly lower for 2010...

Those familiar with the post World War I and post-World War II public debt levels will not be impressed with even a doubling of the public (Federal) debt held by the public as share of GDP, from its current level of around 40 percent of annual GDP (gross public debt, including debt held by other government agencies, like the Social Security Trust Fund, stands at around 70 percent of GDP).....Following World War II public debt stood at more than 100 percent of annual GDP.

That, however, was then. The debt was incurred to finance a temporary bulge in public spending motivated by a shared cause: defeating Japan and the Nazis. The current debt is the result of the irresponsibility, profligacy and incompetence of some. Achieving a political consensus to raise taxes or cut spending to restore US government solvency is going to test even the talents of that Great Communicator, Barack Obama.....

So will the Keynesian demand stimulus work? For a while ( a couple of years, say) it may. When the consequences for the public debt of both the Keynesian stimulus and the realisation of the losses from the assets and commitments the Fed and the Treasury have taken onto their balance sheets become apparent, the demand stimulus will fade and may be reserved as precautionary behaviour takes over in the private sector. My recommendation is to go easy on the fiscal stimulus. The US government is ill-placed financially and fiscally, to engage in short-term fiscal heroics. All they can really do is pray for a stronger-than-expected revival of global demand, without any major stimulus from the US...

Given the bad fiscal position of the US Federal government and given the vulnerability of the external position of the US and its growing reliance on foreign funding, the scope for expansionary fiscal policy in the US is much more limited than president-elect Obama’s advisers appear to realise. Underneath the effective demand problem is a deep structural rot, especially in household sector and financial sector balance sheets. Keynesian cyclical policy options that would be open to more structurally sound economies should therefore not be tried on anything like the same scale by the US authorities.

Selected Comments

Waldo said...
This financial and soon to be economic typhoon has not yet come ashore here in America.

But I think the underlying cancer creating its largess and historical implications do not rest simply in economic terms. What I mean is that we as a nation have been so morally just (as compared to the rest of the globe) that we have always benefited from that asset. But in the last 8 years the Administration has extorted that asset away from us.

This being a truly moral crisis it is very difficult to see this by financial models and economic benchmarks.

At best we can call it an economic anomally. But it exists and is destroying American capital (hard earned).

I do not see a true way to stop the economic destruction until our new Administration begins to address the legal infractions by the current Administration. We all know that historical moral abuses have occurred. The enemy is within.

January 5, 2009 12:58 AM
ndk said...
Wow. That was stark, even for Buiter. I feel like I've been slapped even though I deeply agree with him. Stepping through with specific commentary and critique...

He highlights the fundamental imbalances very wisely and well. I'm highly suspicious of the NIIP data, and he even notes that too. One thing he fails to mention is that most of our international investment is in equity, and most of our international liabilities are in debt. Setser did a lot of work on that in sunnier days, but I can't find the writings now. That might explain prior outperformance, but makes the present more... interesting.

(and possibly other bits of the US economic system that are too politically connected to fail)


There is little doubt, in my view, that the Federal authorities will choose the inflation and currency depreciation route over the default route.

I continue to lack confidence in our ability to engineer a clean and effective inflation more generally and evenly across the economy. However, when it comes to seigniorage, it's pretty fcking straightforward, so I'll second Buiter here. I don't believe we can get enough of it without a collapse, though.

it is unlikely that some, not insignificant, resource transfer from the private to the public sector will have to take place.

He probably means "likely", and this excludes the fact that seigniorage is just such a transfer, in different clothes.

public (Federal) debt held by the public as share of GDP, from its current level of around 40 percent of annual GDP

This still isn't a great measure. Buiter realizes this, with his earlier points on our off-balance-sheet obligations, so I'm disappointed this section is in here with no explanatory caveats.

As regards shifting production towards tradables, this will not be easy.

Major understatement, but a key point. We're dicking around on the financial side of the economy and throwing together whatever the Presidential soup du jour happens to be as the target. Keynesianism affords that flexibility, since under the theory it doesn't matter much what you do with the money. Nothing I see in the Bushbama plans improves our export sector much. It might reduce our imports in the longer term(energy/oil), but it might not. Hard to say, since there are so many failed carcasses along the side of the non-ICE car road.

The effect of quantitative easing and qualitative easing on the exchange rate are ambiguous.

Excellent point, but I wish he'd mentioned China's peg and the extent to which they can't get out from under it either.

The private sector in the US is, at last, saving.

Sorta. Not to the mid double-digits yet. Also, pour yourself an extra drink: via mp and Conjure Bag at CR, check the trend in household deposits since 03 and non-financial businesses since 07Q4. There's a bit of savings (like an 800% increase) to be done, to put it mildly, just to return household checking deposits to '03 levels. Might have a small impact on spending, too.

That might be viable if the US private sector and the US policy makers had the necessary credibility to head south when the destination is north, because they can commit themselves to a timely reversal.

I don't think it's just credibility. We're very close to the firmer limits of possibility. I still disagree about US Keynesian stimulus being even effective in the short run.

My biggest disappointment is that he talks very little about the practical and technical limitations on "printing" money. "We'll just monetize it" has become a rallying cry, without any understanding of the limitations, just like "stimulus" is an obvious solution as well.

The main uses of economics as a scholarly discipline are therefore negative or destructive - pointing out that certain things don’t make sense and won’t deliver the promised results. This blog post falls into that category.

You should frame that quote on your own damn homepage, Yves. :D

All in all, a salutory article that will be ignored and savaged in the short run, that might just be seen as prescient in the long run. Funny how that rhymes with his own thesis.

January 5, 2009 1:39 AM
Blissex said...
«His point is different: the US is pretty close to the end of its rope, in terms of relying on the rest of the world for financing. He sees it as a no-brainer that a massive fiscal deficits, whether they are narrowly successful or not, will relatively soon (he estimates 2 to 5 years) lead to a collapse in prices of dollar denominated assets.»

Well, this argument has been made repeatedly in a louder voice by Denninger:

well before Buiter.

But it is an obvious argument, and I am surprised that it has to be made.

"Keynesian" anti depression tactics are not universally applicable, they are based on the assumption that there is underused production capacity due to excessively low demand.

Whether the USA or the UK and other big consuming, big importing economies have any underused production capacity as opposed to underused consumption is not that clear.

In particular because the industrial policy of both USA and UK has been to export primary and secondary industries and keep only tertiary industry that depends on demand generated by the former, not by consumers, for its sales.

Some decades ago the elites of USA, UK and others decided to pursue an unofficial "industrial policy", which was to eliminate existing unionized manufacturing industries, exporting them to countries with lots of non union labor, and to push instead on non unionized service industries (finance, software, movies, ...) as well as keeping some military/space manufacturing sector.

This resulted in a strategy which I call "headquarterization" where countries like the USA and the UK come "capitals" of the world, with company headquarters, served by typical "capital city" service industries like finance, law, business consulting, marketing, public relations, lobbying.

"Headquarterization" has happened within countries as well, as productive stages of industry have moved to the periphery of each country (NYC and London used to do quite a bit of manufacturing) and the "headquarters" have moved to the center (there used to be quite a few regional stack exchanges for example).

The problem with "headquarterization" is: what do "capital" cities or countries export to "production" regions in exchange for the products they consume?

In a single country with a single currency and a single political system no problem: the "capital" owns the "production" periphery and receives income from it.

The goal of the industrial policy of the USA and UK governments was based on an international division of activities where 2nd/3rd world countries would have "production" business that would then pay top dollar to 1st world country service businesses to be listed on 1st world country stock exchanges, to be banked by 1st world country banks and stockbrokers, to have contracts drawn by 1st world lawyers, to have marketing plans created by 1st world MBAs, and so on.

In other words, the USA and the UK to become capital exporting and rentier countries, earning money in the form of profit and rent on the exported capital and the management of that capital.

The world as a big plantation. Just as in the 18th century London rentiers often lived off sugar plantations in the Caribbean, managed by local agents.

This plan has some terrible flaw, arising from the fact that it cannot work that well without political and monetary union.

In particular, Denninger's and Buiter's argument can be reinterpreted as follows.

You can do keynesian stimulus all right in the USA and the UK, as there is manifestly a large unused production capacity for services in banking, stockbroking, marketing, legal advice, and all other "headquarters" industries.

The problem is that people don't eat or use derivatives, shares, marketing plans, legal briefs, etc.

That is, if a country's economy is based on financial services, one must stimulate demand for financial services, and if the source of demand for financial services is abroad, then it is the economies abroad that must be stimulated.

If you pump a lot of money into the USA economy, will this lead to unused production capacity being put to work? Sure, but in China and in India, because that's where the secondary sector is (and in Arabia and Russia and Australia and Chile as that's where the primary sector is).

Then maybe as a later consequence the demand for "headquarters" services from China and India to the USA and UK will recover and NYC and London will make a lot of money again.

But in the meantime the currencies of the USA and UK will collapse, as there will be a significant lag between resurgent demand for imported products and an increase in the demand from abroad for "headquarters" services.

Now if the USA and the UK and China and India used the same currency and the same central bank and treasuries it would be much easier. But in effect international trade is conducted in yen and swiss francs and euros, and the policies of China and India and USA and have quite different goals.

But it just happens that this is not the case. Even worse, in the long term neither the Indians nor the Chinese are idiots, and it is far from clear why they should import "headquarters" services from NYC and London instead of having their own in Mumbai and Shanghai.

So far the only good reason remaining is that both places are "business friendly", in effect they are to India and China what Switzerland is to them: an offshore postbox where to hide from the Chinese or Indian taxman and politician.

But in the short term the health of the sector of the USA and the UK depends strongly on exports of service industries, which are only in demand if the underlying production industries in China and India (and Arabia and Russia etc.) sell. For many years this has been arranged by large scale "vendor financing", where China (and Arabia ...) have been lending a lot of money to USA and UK consumers to buy their products and thus generate demand from Chinese and India companies for banking, broking, marketing, advertising services in the USA and the UK.

But this cannot continue indefinitely without currency readjustment...

Put another way, the USA and the UK have geared up to earn a living by selling ("headquarters") services to rentiers owning primary and secondary industries, and their internal base of rentiers is too small for everybody to earn a living servicing them, so they must sell also to foreign rentiers, and foreign rentiers will only buy those services if their primary and secondary industries are selling well, and they aren't, and stimulating demand for primary and secondary products in the USA and the UK is a very, very expensive way to indirectly trigger demand for tertiary services from abroad.

Live by the financial services, die by the financial services...


[Jan 4, 2008] Fed's Yellen- Recession "longer and deeper" than "Garden-Variety"

the financial and economic firestorm we face today poses a serious risk of an extended period of stagnation—a very grim outcome. Such stagnation would intensify financial market strains, exacerbating the problems that triggered the downturn. It's worth pulling out all the stops to ensure those outcomes don't occur.

RallyMonkey writes:
Risk-aversion in financial markets remains exceptionally high;

come on, was she high friday?

RallyMonkey | 01.04.09 - 2:42 pm | #

RayOnTheFarm writes:
come on, was she high friday?

The stock exchange isn't a financial market, its a casino. Didn't you get the memo ?
RayOnTheFarm | 01.04.09 - 2:44 pm | #

Comrade Byzantine_Ruins writes:
If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now.

with all due respect, I think there are three critical issues to consider here. If Ms. Yellen is reading this, I hop she can take some time to at least consider these points, if not respond.

1) What was the role of previous fiscal stimulus packages in engendering the financial crisis that Ms. Yellen speaks of?

I.e., to what extent was the flight to yield bubble engendered by the stimulatory response to 9/11 and the tech bubble the cause of this crisis?

If it was contributory even in a significant part, how will additional encouragement to indebtedness act to correct this, and will it accomplish anything of lasting note?

2) Regardless of if this is desirable from a domestic economic perspective, can the US raise sufficient funds for this massive fiscal stimulus regimen? Funds available for lending on a global basis should be a well-known quantity to Fed & Treasury officials. How does Treasury borrowing square with the available funds in the context of a massive global fiscal stimulus campaign?

3) Can Ms. Yellen describe to me in objective terms what a "normal" economy looks like? In other words, the US has been subject to various artificial economic stimuli since the mid-90s when the tech bubble began. This is over a decade.

Can we actually call a halt to this program in a timely fashion, or will a distorted image of the US' "normal" economic performance send us headlong into a major bout of inflation?
Comrade Byzantine_Ruins | Homepage | 01.04.09 - 2:45 pm | #

Anonymous writes:
Abject and complete fear in Yellen's statement. In essence she's saying we don't have the luxury to worry about the near term, we have to do something now to stave off a complete systemic collapse.


[Jan 3, 2009] Economists Who Blew It Agree Prosperity Just Around Corner

It is true that the folks who work for major investment banks didn't see it coming. Historians will eventually determine whether this is because the major investment banks uniformly employ boneheads, or, more likely, because, when you work for an investment bank, it is easier to conclude that now is always a good time to buy stocks.

In any event... the New York Times reports that economists who work for major investment banks now think that prosperity is just around the corner.  Hard to tell whether this is good news or bad news. For what it's worth, Nouriel Roubini thinks that prosperity is a good deal farther down the road. 2009 will be a washout, says Nouriel. And even 2010 will be crappy.

[Jan 3, 2009] naked capitalism

Interesting 09 prediction and analysis in Bears Lair by Martin Hutchinson "2009 looks like another Bear year". To the guts;

"Most important, the recent increases in the U.S. money supply would be working their way rapidly through to inflation. Conventional Bernankeist wisdom is that only deflation is a threat now, that rapid increases in the money supply are needed to combat a decline in money’s velocity and that those increases can be withdrawn quickly when inflation looks like turning up.

One look at the statistics will tell you that’s nonsense. The broad money supply, for which the St Louis Fed’s MZM series (which takes into account currency, checking, savings and money market accounts but not certificates of deposit) is the best available proxy, has risen at an annual rate of 16.6% in the last two months or 10.1% in the last year; removing that amount of money quickly is clearly likely to be difficult. More startling still, however, is the behavior of narrow money in the form of the monetary base, which had been increasing at 3-to-4% per annum in the period to September, but has gone completely haywire since then, increasing at an annual rate of 990.9% in the three months to December. No, that’s not a typo, in those three months the monetary base has been increasing at almost 1,000% per annum. Over the last year, its average rate of increase is 86% per annum, but that reflects nine months of gentle increase followed by explosion."

Thus it appears that the vast amounts of liquidity being pumped into the system could be starting to take effect and thus explain such anomalies, as we've pondered, as the current stock market gains and commodity prices rising both against fundamentals.

What will the Fed do? "The Fed will not reverse course when inflation appears, but will instead act feebly as it has in every inflationary manifestation since 1995. Inflation will thus get a good grip; based on the usual temporal relationship between money supply increases and inflation we should expect consumer prices to be increasing at an annual rate of more than 10% within 18 months of today.

Given the rest of the world is in a similar state, the effects will be felt in those nations running deficits. Overall, a fairly good call. Be interested to hear some opinions. Link to the full article below.

River said...
Glen, I have also been following the increases in MZM and narrow money.

Bernanke probably beleives that most of this newly created money will go into securities or will reenergize consumer spending, but Ben has already admitted that he is now experimenting.

Ben is playing with fire. If inflation really takes off and consumers refuse to hold quickly inflating dollars there will be lots of consumer in hyperinflation.

The ramifications of hyperinflation are too obvious and numerous to name. Let's just say that regaining control would be very difficult and might destroy the dollar and treasury issues.

What will it take to get a grown up to run the Fed and let Ben go experiment in his own little sand box? Maybe Ben could go to Zimbabwe and lend a hand there?

[Jan 2, 2009] The Most Distrusted Institution In America - Forbes

"Financial pedophilia" is something new...

For my last column of the year, let me offer three provocative political predictions that I see as mortal--and in some cases moral--locks for 2009.

Prediction No. 1: Wall Street is about to become the new Catholic Church--the most distrusted and vilified institution in America. It's hard to top priestly pedophilia (and bishops covering up for them) for sheer despicability, but Bernie Madoff and his fellow hucksters are giving the men of clod a close run for their--and our--money.

Prediction No. 2: This wave of well-deserved populist bloodlust will become the most potent political force in America. In fact, I sense that the recent takedown of the auto industry rescue bill was just an opening act, and that the anti-Wall Street anger will be felt in multiple and even more muscular ways next year.

Prediction No. 3: The first political party to see that second prediction coming, and to adjust its leverage accordingly, will have a distinct and likely decisive upper hand in the next two-year cycle. Forget about the office-park dads and the security moms--the voter du jour in the 2010 mid-terms will be the bailout buster.

Now, you may ask, what's so provocative about these prognostications? Wall Street was already on its way to dirty word status a couple months ago as the facts behind the market meltdown emerged--and that was before the bailout backlash and the Madoff scandal. Today the outrage and mistrust is palpable across the political spectrum and targeted across the banking industry.

To wit, when Americans were asked the week before Christmas if they thought the Madoff ripoff was an isolated case or common behavior among financial advisers and institutions, 74 percent told CNN they thought it was the norm. That is truly staggering: three-quarters of Americans believe that Wall Street is rife not just with ethically challenged behavior but with outright criminal fraud.

Who can blame them, especially after reading articles like the front-page dissection of Washington Mutual's mortgage chicanery in Sunday's New York Times. The poster child for WaMu's brazenness was a mortgage processing supervisor named John Parsons, whose creative notion of due diligence was to take a photograph of a mariachi singer claiming a six-figure income in front of his home in his mariachi outfit.

But that's not the worst of it. According to the Times, it turns out Parsons was snorting meth daily--and openly. "'In our world, it was tolerated,' said Sherri Zaback, who worked for Mr. Parsons and recalls seeing drug paraphernalia on his desk. 'Everybody said, 'He gets the job done.''" Yes, Parsons and WaMu did a heckuva job on us all right.

The reason this is such a dynamic "you ain't seen nothing yet" situation, though, is that the American people have not, in fact, seen anything yet in terms of the depth of the law-breaking that led to the market meltdown.

Indeed, most Americans have no idea how many criminal investigations are being quietly conducted right now--and how many blood-boiling indictments are going to detonate publicly in 2009.

This to me is literally the great untold story of the whole financial crisis--and arguably the biggest mystery. Why is it that so little reporting has been done by the national news media about these investigations outside of the sensational Madoff case? (Which, it bears noting, would still be a secret if the scammer had not turned himself in.) Why don't we know which banks and which reckless, wreckage-inducing executives are being pursued for engineering massive frauds on investors and the larger public?

The only explanation I can come up with for this reporting vacuum--an explanation that is even more perplexing and vexing than the press's failures--is that our top political leaders have been shockingly silent on the subject. The national news media, which is sadly as toothless a watchdog as Bush's Securities and Exchange Commission, typically reacts to the agendas and priorities of the Washington leaders they cover. No cues from the big politicians means no news from the big networks and papers.

One would think, given that 74% of the country now thinks Wall Street is filled with crooks, that the left and right would by now be engaging in a bidding war to bash the banks and demanding prosecutions right and left. Indeed, if ever there was a time for podium-pounding and finger-pointing, this would be it.

But to my knowledge, President George Bush, President-elect Barack Obama, Treasury Secretary Hank Paulson and the bipartisan leaders of Congress have not taken one formal action or held one dedicated press conference to communicate to the American people that the rapacious con men who jeopardized the stability of our economy and decimated the wealth of millions of middle-class Americans will be getting the jail time they have earned. Where is the bulldozing Eliot Spitzer when we really need him?

To some extent, this lack of focus on the lack of accountability is understandable in light of the exigencies of the moment. The White House and Congress' first responsibility has to be preventing the economy from totally disintegrating, limiting the fallout from the fall meltdown and getting us back in the business of creating jobs and wealth.

Moreover, it makes sense, at least on paper, for Obama to avoid grandstanding right now--it's not his style, and he is trying to position himself as a new kind of problem-solving leader.

But what Obama and the rest of Washington don't seem to realize is that the public's escalating outrage is a central part of the problem. This truly is a case of no justice, no peace--or to be more precise, no accountability, no stability.

By that I mean that the new president and Congress are going to have more and more trouble building public support for their recovery plans--which will inevitably call for the nose-holding delivery of more federal dollars to the banks that got us into this mess--if they do not simultaneously assure taxpayers that the perps are going to pay for their crimes instead of profiting from them.

But there is an even greater long-term danger here, particularly for the Democrats, who will soon control both ends of Pennsylvania Avenue. Without Bush to kick around, they will soon own not just the economy and whatever stimulus bill is passed but also the management of the bailouts. Once the criminal investigations and indictments pop next year, what kind of exposure will the TARP-covered Obama administration have? Will they be seen as soft on Wall Street crime?

That depends in large part on how the Republicans re-position themselves for the post-Madoff era, which I think will be the most fascinating political subplot to watch in 2009.

The Democrats like to think of themselves as the party of the little guy. But their recent reticence on the sub-prime crime wave, along with their aggressive push for the bad bailout deals, has given the down-and-out GOP a huge opening to begin reclaiming the middle class that Bush drove away in droves.

One of the best barometers of that will be how the Republicans take on New York Sen. Chuck Schumer, who is up for re-election in two years and is widely seen as one of Wall Street's most aggressive advocates.

By all traditional measures, Schumer should win big again, hands-down. He is one of the shrewdest pols in Washington; he effectively courted middle-class voters outside of his New York City base and his favorability ratings have remained consistently high over the past four years.

But Schumer's extensive record of doing the bidding of his banking constituents--which was once seen as a major asset, particularly in raising piles of cash as the head of the Democratic Senate Campaign Committee--has the potential to be a life-threatening liability in this climate.

With a small team of crafty opposition researchers, a small businessman from outside Buffalo or Rochester could run a devastating ad campaign painting Schumer as Bernie Madoff and company's chief protector and enabler.

I suspect that Schumer is too smart to let that happen, and that you can bank on him to engage in some Spitzer-esque fist-shaking early next year to inoculate himself before the trials start. Call it a blame default swap.

The same, I think, is true of Obama. He actually tipped his hand to some extent in one of his last pre-holiday press conferences, when he vowed to force the kind of "adult supervision" of markets Americans are demanding and to release a detailed regulatory overhaul plan as one of his first initiatives.

That leads me to Prediction No. 4: Obama’s regulatory plan, in addition to beefing up prospective enforcement and fraud deterrence, will call for a substantial increase in Bush's badly underfunded budget for investigating and prosecuting crimes already committed (a point that Obama will not be shy in highlighting).

And if the new president is really smart, he will find a creative legal tool to seize the ill-gotten bonuses that legions of Wall Streeters are reaping from their ill-gotten gains. That's one Christmas present the country would gladly accept a little late.

Dan Gerstein, a political communications consultant and commentator based in New York, is the founder and president of Gotham Ghostwriters. He formerly served as communications director to Sen. Joe Lieberman (D-Conn.) and as a senior adviser on his vice presidential and presidential campaigns. He writes a weekly column for

[Jan 02, 2009] Gold may shine again in 2009 By Martin Hutchinson,

Huge government deficits, low interest rates and rapidly growing money supply all add to the likelihood of renewed inflation - and a rising gold price. How high? Very.

Jan 02, 2009  | Telegraph  ( )

First, consider the risks of inflation. US money supply grew slowly for a while in early autumn, but in the two months to December 1 the St Louis Fed's measure of Money of Zero Maturity increased at an 11.7pc annual rate. That's a return to the trend that lasted from 1995 to 2008, when MZM grew 3.6 percentage points faster than nominal GDP.

The US is not alone. Around the world, governments have implemented large stimulus packages. If the corresponding borrowing is not to crowd out the private sector, it must be financed by money supply creation.

This monetary expansion is not supposed to be inflationary, since the governments promise to take any money away before it can push up prices.

But investors can be forgiven for scepticism. Higher inflation is at least possible once the global recession bottoms out. And gold provides good insurance against this outcome.

Demand for gold from investors increased rapidly in 2008, despite a falling price since June. The dollar value of gold demand was 45pc higher in the third quarter than the second, and 51pc above the previous year, according to the World Gold Council. Supply has failed to keep up, with mine output up only 2pc from the previous year and central bank sales down sharply.

Gold's economics are truly mysterious. The commodity demonstrated "negative price elasticity" in 2007, when a higher price produced increased demand.

Nevertheless, weak supply, strong demand and valid fears of inflation constitute a perfect mix of ingredients for building a gold rally. Any surge into gold by hedge funds and other speculators could overwhelm the market, turning the rally into a bubble.

In January, 1980 - just before the Fed led the world out of an inflationary catastrophe, the gold price peaked at $875. That is $2,430 in today's dollars. But the pools of speculative capital are much larger now than in 1980. A true gold bubble could well leave this benchmark far behind.

[Jan 2, 2009] SPX Hits 2 Month High

One last thing: Don’t buy the hype!  Comments like “Stocks are attractively priced” or “Its a new year” are frighteningly ignorant.

  1. leftback Says:

    Agree with your caveats Barry, P/Es are frighteningly high for a bear market.

    In the short-term, we have pierced the trading range intra-day, let’s see if we close above 925.
    If we zoom up towards 1000 from here would that be the Wyckoff Spring?? :-)

    A big correction is on the way, the question is when? It might be a while…
    All comments on CNBC are frighteningly ignorant.

  2. Iwasawa Says:

    the bigger the sucker’s rally.. the more significant the pain. I’m kind of surprised by the willingness of so many ‘pundits’ to ignore what’s going on in the economy.. its getting worse.. not better - and as leftback says above.. the p/e’s are laughable - this is not a bottom (imho)

[Jan 2, 2009] Retail Out and About on a Friday Morning The Big Picture#comments

"If this catches on, we may see a little euphoria in the XLF next week - enough to pop up to SPX 1000 by the inauguration??"

  1. leftback Says:
    January 2nd, 2009 at 1:48 pm

    Sounds like people are out there window shopping, Barry. Agreed about the empty storefronts, a lot of smart small business owners in NYC have seen the writing on the wall as well. SRS will have some life in it again before too long, none of those mall owners has gone BK yet.

    I just looked at bonds: Both JNK and AGG are up quite a bit off their lows, so is TBT as credit markets begin to thaw a little and money moves out of Treasurys. If this catches on, we may see a little euphoria in the XLF next week - enough to pop up to SPX 1000 by the inauguration?? This is why I will not short this market seriously until we see big-time resistance overhead or earnings season is upon us.

    I am still in the TWINE trade (the world is not ending) when it comes to resources and industrials.

  2. Winston Munn Says:

    Sorry for the redundancy, but I feel compelled to reproduce a part of my earlier comment:

    “I have never seen numbers on inventory supply of nail salons, tanning beds, home improvement stores, electronics stores…..but I can guarantee there is overcapacity of each. Anyone have an idea how many years supply of automobiles have already been produced?

    With overcapacity, the Strip Mall Shop-til-you-drop Economic Model will not soon be resurrected - cash is king; credit is tight.”

    Now back to this question: “What do you do when your industry gets appreciably smaller, other than suffer some pain and consequences?”

    When the industry represents consumption, which comprises 72% of GDP, you end up with lowered prices causing tighter profits causing falling jobs which then leads to more lowered prices….

    ….and contraction of GDP - the very spiral the Fed and Treasury are hell-bent on trying to avoid.

    Question is - are they too late?

  3. Clay Says:

    3 or 4 weeks ago I bought some refilled printer toner cartridges at a business owned by a guy who works as an engineer for Duke Energy here in Charlotte, NC. He said management had informed them to cut expenses to the bone or as much as possible as revenues had been slipping dramatically. Before I could openly speculate that revenue reductions were from their commercial customers, this engineer stated their revenues from businesses had dropped significantly.

    I have seen more commercial space for rent in numerous areas where I drive and have also heard this from people who drive in other areas in and around Charlotte. There will be more vacancies. Also, retailers are offering big discounts here too.

    I also have a friend who is a partner in a BP Amoco station-small convenience store nearby and he says his customer traffic at the gasoline pumps is down significantly compared to the first half of 2008 even though the price of regular gasoline has dropped a huge amount to around $1.55 ish per gallon right now. People are really tightening their spending belts here.

[Jan 2, 2009] Past Financial Crises Suggest Pain Far From Over

Well here we are. It's payback time for 8 years of of the most reckless spending the world has ever seen...
naked capitalism

Selected Comments

macndub said...
Reinhart and Rogoff are awesome.

I was just rereading their paper on voxeu from April: a brief history of financial crises since 1800. It's been one reason that I support a massive stimulus package. The way I see it, a devaluation of the USD and default of US debt is inevitable, so the government might as well support domestic demand in the hope of softening the burden.

Like Balin at Moria, there is no way out.

The real per-capita GDP decline is measured in PPP in the presentation, taking currency devaluation out of the picture. That's... scary.

Anonymous said...
The interesting part that is not stated in the study is that governments don't govern out of thin air, but have to respond to political forces around them.

The forces, at least prior to "regime change", are overwhelmingly biased in favor of the existing, entrenched interests.

Thus, it is extremely difficult to direct spending except to the proven, and politically expedient ones of maintaining services, or building things that may not do any good (like more bridges to nowhere).

Anonymous said...
I concur with 'macndub' the world currency defaulting is not a side note as an unknown in this writeup.

An 'L' bottoming as the US pays off debt issued on a worldwide scale could run decades while slow or no growth affects the rest of the nations.

The US stock markets rising due to liquidity being pumped into the system is outside the realm of meaningful recovery.

Anonymous said...
Sorry all. I can't see a way we can grow out of this mess, its just fallacy to think we can flog a dead horse into pulling the cart any further.

I want to hear about new plan, not just defining the corpse back to life. How can we just consume our selves out of every problem. Hell the market is betting on flys racing up the wall now days.

Increase debt, take on more and more, the universe may be infinite but we are not, are we clinging to a past that no longer serves us.

The Human race is at its apogee, we now cover the planet and impact it in ways never before in its history. Our arrogance is appalling, no wonder the best minds in social history talk of a bleak future for our race. If its the planet or us i choose the planet and we will fade from time's memory, hopefully the next intelligent species does a better job, they won't have to work to hard at it.

When you live close to the land it teaches you to live with in it and not to over whelm it or you will pay the price. Our current models ignores this simple truth. We get so wide eyed at our accomplishments and forget the simple rules to life. Don't over do it, no matter the short term consequences. We bring about the extinction of thousands of plant and animal species every year and for what.

Many would be surprised to find out how hard and fast many of mankind's civilizations have crashed and dissipated to lesser status, after a brutal period.



[Jan 2, 2009] Robert Reich's Blog Holiday Thoughts about Three Especially Vulnerable Groups

December 27, 2008 | Robert Reich's Blog

I try to be optimistic -- especially this time of year when the days are short and cold, when almost everybody things everyone else is having a better time than they are, and now that we're in the worst economic downturn in almost anyone's memory. Yet I also try to be realistic about the effects of this Mini-Depression. At least three distinct groups are especially vulnerable, each quite differently:

  1. The poor and near poor, with family incomes typically under $20,000 a year. Their connections to the labor force are tenuous at best, often involving part-time and temporary jobs. They're also the first to be let go during downturns. Not surprising, this recession is taking a toll, and about to take a larger one. Few in this group qualify for unemployment insurance, and an increasing number have exhausted the five-year maximum for temporary welfare assistance. To the extent they're getting by, they're moving in with relatives. The media have missed this story almost entirely.
  2. Middle and lower-middle class households whose breadwinners are within five years of being eligible for Social Security. Many are in danger of losing jobs and a large number are already working fewer hours. They're cutting back on all discretionary purchases.

    But their biggest problem is that both their savings and the value of their homes have shrunk dramatically, and probably won't bounce back before they planned to retire.

    Social Security will cover about 40 percent of their pre-retirement earnings. So many are now planning to work well beyond age 65. This will be a particular challenge for blue-collar workers whose earnings have depended largely on physical labor. Their bodies may not last.

  3. Middle and lower-middle class retirees. Most are dependent on income from savings, which has declined sharply. They're cutting expenses where they can, but they're running out of resources. To the extent they can turn to their children for help, they are doing so.

    That means a large and growing cohort of middle-income people between the ages of 35 and 65 have begun subsidizing their parents, even though they and their immediate families are under financial stress. Here's another untold story.

Other Americans are in distress but these three groups are particularly worrisome, and in the years ahead it seems likely they'll be in worse shape than they are today. If this is to be avoided, these three groups will need distinct public policies crafted to their particular needs. More on this to come.

In the meantime, happy holidays.

[Jan 1, 2009] Brad Setser Follow the Money » Blog Archive » China has lost its appetite for risky assets

China is making use of useless Treasuries: buying oil at rock-bottom prices.
  1. conservative.

    If you believe this is business as usual, and the world is not coming to an end, then investment opportunity exists.

    I believe in cycles. Right now we are sowing the seeds for the next boom. Cost of borrowing is going down. Cost of quality assets have gone down.

    The same income producing property next door to me , producing the same income it produced last year, is selling for %30 less. I can borrow for 1/3 lower interest yet generate the same cash flow. Business logic tells me this is a buy. Fear of the future will hold me back. Fear seems like an illogical reaction.

    Common stock in businesses that have been around for a long time with competitive advantages that have not been eroded are selling for 35% to 50% less than last year. Their cash flows may be down but not proportionately. If I had the money it would make sense to buy the business. Certainly, the opportunity to buy a fractional share in the stock market is reasonable.

    The Chinese are not the only investors in the world with capital. I predict that INVESTORS with cash will swallow hard and step up to invest in logical investments at attractive prices (does that seem like I’m going out on a limb).

    I also predict they will make money investing at these price levels.

    So if the Chinese want to invest in low return investments to preserve capital, let them.

    December 31st, 2008 at 8:33 am
  2. Be cautious of renewed optimism and a Jan, Feb, March rally. Gailbraith reminds you in his Crash of 1929 that giant events of this nature are historical and repetitive.

    December 31st, 2008 at 8:42 am


    I’m not talking about a rally or timing or optimism. I’m talking about buying assets that throw off cash at low prices.

    They can always go lower, but I consider this an excellent entry point that will make money over time.

    If I were prescient enough to expect a fall, I’d throw in some shorts. I don’t INVEST that way.

    Ben Graham, in the “Intelligent Investor”, devotes a full chapter to a discussion of investing versus speculating. It is worth reading.

    I must admit, sometimes I throw in a quick bet in the stock market, but I do it with my eyes open . I call that speculating.

    December 31st, 2008 at 10:10 am
  4. Texalope:

    I saw a recent deal with 14% coupon and 120% due at maturity, with recourse of course to all PPE. If that’s cheap cost funds, please don’t show me expensive!

    Btw, the US economy will fundamentally change after this “crisis”. Brad’s been articulating this for a while.

    December 31st, 2008 at 10:30 am
  5. China to use US Dollar reserves to build-up strategic oil reserves

    BEIJING, Dec 29 (Reuters) - China plans to use the fall in global energy demand to boost its fledgling oil reserves against future supply shocks, as it speeds up development of nuclear and wind power and cuts reliance on coal, a top energy official said.

    Among the plans, China will push ahead with building the second phase of its strategic oil reserves, having largely completed the first, Zhang said.

    The first two bases, at Zhenhai and Zhoushan, were up and running more than a year ago. Construction of the Dalian facility, the fourth base, was due for completion by year-end.

    Industry sources have told Reuters that around 7.3 million barrels of oil were injected into Huangdao in early November and more stockpiling was planned in December and January.

    The sources said more than half of November’s oil came from Saudi Arabia. This tallies with Chinese customs data showing a 70 percent year-on-year rise in imports of Saudi crude last month.

    China has completed planning of the second phase of government storage facilities that could hold up to 26.8 million cubic metres of oil, or some 170 million barrels, but has not disclosed where the facilities are or whether construction has begun.

    The size of China’s storage will still be a fraction of the U.S. Strategic Petroleum Reserve, the world’s largest emergency oil stockpile, which holds 700 million barrels of crude.

    But China is second only to the United States as a consumer of oil and its rapid stockpiling effort, begun only two years ago, has the potential to soak up a lot of surplus crude oil.

    December 31st, 2008 at 11:50 am

[Jan 1, 2009]  So Paulson Say US Lacked Tools to Battle Financial Crisis

naked capitalism

But that is utter bunk. We have pointed out before that the powers that be have ignored the Swedish model and the lessons of other banking crises as to what approaches are likely to be most effective. In fact, we noted in August that the TARP bill, which Paulson defends in the interview, was almost diametrically opposed to what an IMF study of 124 banking crises had found to be the most effective responses. An illustrative excerpt:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.5 Of course, the caveat to these findings is that a counterfactual to the crisis resolution cannot be observed and therefore it is difficult to speculate how a crisis would unfold in absence of such policies. Better institutions are, however, uniformly positively associated with faster recovery.

... ... ...

More revisionist history. Paulson was singularly uninterested in regulation, and there was NO effort to address the "too big to fail" issue. In fact, allowing (or more accurately) encouraging big firms like JP Morgan and Bank of America to acquire other big firms like Bear and Merrill only make the government an even bigger hostage of the financial system.

Selected comments

wintermute said...
King at the BoE is echoing the same excuses as Paulson. They claim they lacked effective tools to prevent the credit crisis. Total and utter LIES.

The credit crisis could easily have been prevented with simple regulatory edicts - strictly enforced. In case those idiots read this - here is a sampler:

a) No mortgages over 80% of purchase price (set by independent valuer). No vendor financing. No interest-only mortgages.

b) All credit card companies must require minimum card payment of 10% of outstanding balance per month.

c) No Tier 3 capital allowed in banks. No OBVs allowed - must roll all controlled/owned companies into one unit for capital adequacy requirements. No re-use of Tier 1 capital.

d) No naked CDS positions allowed. Must be equal to, or less than value of bonds held.

I could go on, but it is clear that regulatory institutions waste 99% of their time and money focusing on detail and bureaucracy - instead of simple controls.

December 31, 2008 2:42 AM  
bg said...
You do make it hard to give Paulson the benefit of the doubt, and god knows I was spitting mad at him more than a few times.

But I will certainly agree that his recent words ("I took the least bad approach with poor tools and it did help some") does seem to backup your view that alternative ideas were not getting to the plate.

So if I accept the "no plan, out of touch ideologue" explanation for Paulsons actions, how do I explain the legions of first tier macro economic intellectuals not in open rebelion? Krugman, Summers, Roubinni, et al?

December 31, 2008 3:23 AM  
But What do I Know? said...
Thanks again, Yves. To me, what you wrote is "news," not the self-justifying excuses that Those in Power promulgate when they grant "exclusive" interviews to the media. The MSM does a terrible job at calling people on their bullshit; that's one of the reasons I'd rather read responsible bloggers like yourself a thousand times more than this Bloomberg "story." I suppose that you might appear too negative to some by consistently parsing Paulson, but for heaven's sake you're one of a handful doing it.

Happy New Year and I look forward to reading you in 2009.

December 31, 2008 3:42 AM  
fresno dan said...
Unable to restrain myself:
"Did Paulson know how Goldman Sachs made money?"
any answer is disturbing

Honestly, what does the man actually know? It doesn't seem to be finance or economics - it seems he was just a deal maker.

December 31, 2008 5:05 AM  
ruetheday said...
There are PLENTY of tools available to policymakers to fight financial crises. What Paulson meant to say is that there are no tools available that effectively let them fight the crisis AND ensure that the princes of Wall Street are kept whole and do not lose any money.
December 31, 2008 8:12 AM  
Ken Stremsky said...
Happy new year.

Congress should have learned from the savings and loans crisis.

Congress should have required down payments on homes and fixed rate mortgages.

Allowing mortgage backed securities to be sold based on no money down mortgages was nuts.

December 31, 2008 10:16 AM  
Suzan said...
This may just be a shot in the dark, but why not impeach both Paulson and Bernanke? The impeachment proceedings alone (consider Clinton's for consensual casual sex) would be worth the expense even if they don't lead to conviction. Imagine the information that would be exposed about the Goldman, Sachs connections, etc. We've gotta find a Ken Starr of the left (Fitz?).

I think you could make an argument that enough people have had their lives threatened, money stolen (devalued, etc.) as a result of what these guys have done to reach the level of impeachable offenses.

The TARP guarantees against prosecution could be considered illegal self dealing (since they themselves came up with them) by the Supreme Court (which may even have less wingnuts on it by then), always the final arbiter on all suits it agrees to adjudicate.

The thought excites me. Anyone else?

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Groupthink : Two Party System as Polyarchy : Corruption of Regulators : Bureaucracies : Understanding Micromanagers and Control Freaks : Toxic Managers :   Harvard Mafia : Diplomatic Communication : Surviving a Bad Performance Review : Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime : PseudoScience : Who Rules America : Neoliberalism  : The Iron Law of Oligarchy : Libertarian Philosophy


War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda  : SE quotes : Language Design and Programming Quotes : Random IT-related quotesSomerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose BierceBernard Shaw : Mark Twain Quotes


Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 :  Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method  : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law


Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds  : Larry Wall  : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOSProgramming Languages History : PL/1 : Simula 67 : C : History of GCC developmentScripting Languages : Perl history   : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history

Classic books:

The Peter Principle : Parkinson Law : 1984 : The Mythical Man-MonthHow to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite

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Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor

The Last but not Least

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Last modified: September 20, 2017