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Financial Skeptic Bulletin, February 2009

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[Feb 28, 2009] Not-So-Great Depression vs. Great Recession

I like the quote "...even his greatest screw up was only mediocre at best".  So do yourself a favor: In viewing the stock market, no matter how tempting the occasional upticks, stay skeptical.”

The Big Picture

The Not-So-Great Depression moniker is a backhanded jab at the remnants of the now departed Bush administration. Its as if Barron’s is saying that the most fitting legacy for one of the nation’s least popular presidents was that even his greatest screw up was only mediocre at best.

Abelson:

“With jobs vanishing at an alarming rate, consumer confidence is dwindling apace. The latest Conference Board reading sank to 25, the poorest showing in the four decades since the survey was started. Moreover, as Goldman Sachs’ Seamus Smyth points out, the real shocker in the dismal data is consumer’s expectations, which are as close to nil as we hope and pray they’ll every get: an unprecedented 27.5, sharply below the previous low of 45.2 set back in December 1973, when the economy and the stock market were going big-time into the tank.

If nothing else, the consumer’s sour, even forlorn, sentiment makes a mockery of the notion that the good old boy will come riding to the rescue, brandishing his wand of plastic. Not a chance; the poor guy lacks both the will and, more important, the wherewithal, to go charging off on a spending binge.

As MacroMaven’s savvy Stephanie Pomboy puts it in her usual understated style: “The U.S. consumer’s legendary lust for credit died with the housing bust. As he vows to live within his means — or even (children, cover your ears) reduce his debt — all of Ben’s horses and Nancy’s men cannot get consumers to borrow and spend.”

Stephanie goes on to warn that if, as she suspects, households attempt to live the way they did before assets were confused with income, consumer spending is destined to be restrained for a long, long stretch. That means, she logically infers, that corporate profits “will be depressed for years (not just quarters) to come.” A dire prospect, she allows, that has not exactly gone unnoticed by investors, as evident in the pathetic performance of equities.

In sum, nothing in the cruel hard data or the more ephemeral mood of the citizenry persuades us that we’ve seen even the beginnings of the end of the Not-So-Great Depression. So do yourself a favor: In viewing the stock market, no matter how tempting the occasional upticks, stay skeptical.”


[Feb 28, 2009] Bill Gross, the $747 billion bond man, declares the death of equities - Daily Finance

Of course he is talking his book, but still there is something plausible about "death of equities" statement.

In Gross's view, the current economic contraction is killing the animal spirits that drive risk taking and that's contributing to the death of equity capitalism as we've come to know it.

As Gross told me, "things will never be the same. Risk taking has been destroyed and any animal spirits must come from Washington. Global growth rates -- low, low, low -- asset classes will be readjusted for that outlook. That is -- stocks will be more of a subordinated income vehicle as opposed to a 'stocks for the long run' growth vehicle."

This argument is great for bond fund managers such as Gross since it would tend to drive people out of stocks and into bonds. But his point about stocks as a subordinated income vehicle is interesting. If I understand him correctly, he views stocks as the bottom of the liquidation hierarchy -- meaning that if a firm files for bankruptcy, all the other stakeholders -- such as bondholders, lenders, and preferred stock holders -- get their money before the common shareholders see a dime.

This is why so many common shareholders are getting wiped out. And in Gross's view, growth prospects are so dim that there is no point in owning stocks since common stock investors will not benefit when there's no economic growth. Moreover, they'll be last in line for any dividends that might be available.

Meanwhile, Gross has an interesting analysis of how we got into this mess. He attributes it to too much borrowing, weak regulation and greed. He also thinks that the U.S. is going to have to come up with as much as $5 trillion to fill the capital hole in the banking system.

As Gross said, "The cause of the current situation was too much leverage leading to over consumption which was facilitated by lax regulation and good ol' fashioned greed. Human nature will never change but our institutions will. Not sure policymakers understand what needs to be done -- there still is a $4 trillion to $5 trillion capital hole that needs to be filled but politics may inhibit necessary action. Bernanke and Co. get it though and have more freedom and flexibility -- they are independent -- for now."

These are sobering thoughts from one of America's most powerful financial minds. My hunch is that over the medium- to long-run, we'll revive capitalism through venture-backed technology innovation. But I am not sure how soon that will happen. Meanwhile, what do you think of Gross's comments? Do they make you want to sell stocks?


Selected comments

Tom said...

Peter: your post gave me a sinking feeling in my gut. I was thinking bonds were dead long term as an asset class due to massive expected inflation and widespread currency debasement.
However, if debt investors can force a company into bankruptcy, the common shareholders get wiped out, and
the debtholders walk away with the company.
So in the long run, I don't know which class gets dead first....

wthattny said...

I think you've got it right. Neither are good investments right now. Even taking bets on inflation are risky due to the possibility of a long deflationary period. I suggest gold, food, and fuel.

rolando diaz said...

I'm 53 years old and a financial adviser. One thing I've learned in this life is that you never say never.

Larry said...

In order for Gross's statements to be true, "greed" has to die also. And as everyone knows, greed will never die. It'll be back, thus equities will be back. Only question is when!?

wthattny said...

Bonds are risky too. Current T-bills pay very low interest. When interest rates rise, the value of existing T-bills will fall. Bonds of all types can have negative returns.

john said...

It all started with the moral uplifting promised by "The Contract ON America". We can thank Bush/Cheyney and their cronies "Too big to fail" to insure the little guy on Social Security is "too small to succeed".
The previous administration should be indicted for crimes against the nation and dealt with accordingly.

Pension Pulse The Model That's Killing Pension Funds

"Bravo! I couldn't have said it better myself. The pension model is broken and along with it the "culture of equities" and the broken dreams of lifelong absolute returns from alternative investments "

At the heart of the pension meltdown is the investment model. The investment managers who led the Caisse into its 2008 meltdown were simply following the dominant investment theories of our time: Equity markets theoretically will provide solid average returns over the long term. Judicious stock picking can help a fund get better-than-average returns. More recently, all fund managers also came to believe that still higher returns could be found in other fields, including asset-backed securities and private investment markets.

As we've noted in this space many times over the last few years, in the view of financial economists the first part of the model -- that equities provide guaranteed returns over the long term -- is untenable.
 

Among the leading debunkers of the conventional model are U. S. consultants Lawrence Bader and Jeremy Gold. In a relatively recent paper, The Case Against Stock in Public Pension Funds, published in the Financial Analysts Journal in 2007, they warned that government pension operations are engaging in risky investment strategies. "Current funding and investment practices are costing taxpayers dearly," they wrote. By investing so heavily in equities, pension managers were putting taxpayers at risk on the assumption that long-term gains would overcome short-term meltdowns. Such equity premiums, they say, do not exist with any certainty.

As shown during the stock market crunch earlier this decade, the risks are large. The Ontario teachers plan is still being bailed out this year and next as the Ontario government pays close a $1-billion directly into the fund in part to cover past losses.

Pension funds will have to cover their equity losses, plus make up for losses from their more recent investment fads, namely, the theory developed in the U. S. that even bigger investment gains could be squeezed out of private investment deals. Equities were overvalued, they said, and the real money would now be made buying real estate in Munich, sewer systems in Brazil and private companies that had no trading value. Now that theory is also under a cloud.

So far, there are no signs that public pension funds are ready to reshape their basic approaches to pension management. The new losses are just a blip, they say, the function of a global financial crisis. You need to focus on the long term. Financial economics suggests this is the long term.


Moody's predicts [junk bonds] default rate will exceed peaks hit in Great Depression - Telegraph

"roughly 15pc of our speculative-grade issuers globally will default in 2009." That means that junk will outperform equities like it did in 2008 ;-).

Moody's said it anticipated a tidal wave of defaults was approaching.

It said that in the coming months more than 15pc of speculative-grade bonds and loans - all but the most highly-rated - would default on their debts.

This peak is even higher than the peak reached in 1933, when bank after bank throughout America was collapsing, taking hoards of other companies with them. Back then, the default rate peaked at 15.4pc; moreover these companies were former investment grade issuers regarded as more reliable credit prospects than their contemporary counterparts.

Kenneth Emery, senior vice president at Moody's said:

"The three main drivers of the forecasting model are forecasts for the high-yield bond spread and the unemployment rate, along with the current level of issuer ratings. In the fourth quarter, the high yield bond spread reached unprecedented levels; and we've got an unemployment forecast approaching 9pc this year and issuer ratings at record low levels.

"We certainly think that this credit cycle will be worse than the last two in the early 1990s and 2000s. In fact, in 2009 we expect to see the largest number of defaults since the advent of high yield bond market in the early 1980s. And the default rate for non-investment grade bonds may reach levels even higher than those registered during the Great Depression. "There are risks here because we are in unchartered territory, but the model forecast is that roughly 15pc of our speculative-grade issuers globally will default in 2009. In Europe the forecast default rate is even higher at close to 19pc."
...It predicted that company defaults will triple this year to about 300, after 101 defaulted last year on more than $280bn of debt.

If the economy deteriorates by even more than expected, the default rate could conceivably mount to around 20pc, Moody's added - meaning around one in five of all non-investment grade issuers default, something which has never happened before. The companies most at risk of default are consumer transport groups, which largely constitute airlines, media companies and car manufacturers.

In Europe, the sectors most at risk of defaulting include those providing durable and non-durable consumer goods and business services.


Bigger US budget problems to come after year one -  By Martin Hutchinson, breakingviews.com

27 Feb 2009 | Telegraph
There was a lot in the budget to like. Obama's healthcare reforms are supposedly paid for by savings in Medicare, the US health plan for the elderly, and reductions in tax allowances for those earning over $250,000. The detail evident in the proposals for medical savings suggests serious thought, and that they may be achievable. Still, the $633bn due to be saved over ten years doesn't buy all that much healthcare reform these days.

Another attractive change is the requirement for businesses that don't currently offer retirement plans to establish them automatically for employees, who can then opt out of them if they wish. These are meant to supplement the government pension system, Social Security, for middle-income earners.

But the economic and fiscal assumptions seem optimistic. The budget assumes a modest recession with growth above 4pc in 2011 and 2012. It assumes inflation below 2pc annually and interest rates peaking at 5.1pc, despite the large deficits.

The budget also projects government spending falls 10pc in 2010 - probably feasible, absent more bank bailouts - and then rises only by 2pc nominally in 2011, and by 1pc in 2012, so less than inflation.

Finally, it assumes a 67pc recovery on bailout investments. Given the performance of recipients like American International Group, that may be optimistic.

Still, the deficit would remain over $1 trillion in 2010 and is within a whisker of it in 2011. A trillion-dollar deficit for one year in a deep recession may be financeable. Three trillion-dollar deficits in succession look to be too much. Either they will crowd out private borrowers, perpetuating the recession, or they will need to be funded by money printing, producing inflation.


 

[Feb 23, 2009] 'There will be blood' (interview with Niall Ferguson) by HEATHER SCOFFIELD

When he talks about the USA I feel that his points are plausible, But this guy is really full if academic s**t as for .China, Russia and, most probably,  Canada...  They cannot continue to buy at the pace they used to. Moreover they need to sell part of their reserves to finance infrastructure and other projects that create jobs. Large amount of accumulated dollars go simply into creating national projects that maintain employment and improve infrastructure. That means that those dollars are repatriated which is swamped under newly issued debt.

February 23, 2009 |  Globe and Mail Update

... ... ...

Policy makers and forecasters who see a recovery next year are probably lying to boost public confidence, he said. And the crisis will eventually provoke political conflict, albeit not on the scale of a world war, but violent all the same.

“There will be blood.”

The Buy America penchant pushed by the U.S. Congress in passing the recent stimulus bill was only the tip of the iceberg.

Abu Dhabi buying Nova Chemicals at bargain-basement prices on Monday is a sign of things to come, with financial power quickly being transferred over to the world's creditors – namely sovereign wealth funds – and away from the world's debtors.

And much of today's mess is the fault of central bankers who targeted consumer-price inflation but purposefully turned a blind eye to asset inflation.

The Laurence A. Tisch professor of history at Harvard University, and author of The Ascent of Money, A Financial History of the World, sat down with The Globe and Mail's economics reporter, Heather Scoffield.

Heather Scoffield: Canadian leaders frequently argue that Canada is in better financial shape than elsewhere in the world, and therefore should fare better during this crisis. Do you agree?

Niall Ferguson:

...This is a crisis of globalization. Therefore, the more an economy depends on the global system, the harder it hurts. Canada is not finding the worst. Asian economies are going to be really slammed this year. But it's an unfair world. The U.S. won't be as badly affected as most countries.”

Heather Scoffield: Is the U.S. able to escape with less pain because it has more resources to throw at its problems?

Niall Ferguson: “Partly because they can throw so much at it, and they can do it at a lower cost than anybody else, because the U.S. retains the safe-haven status, which makes the world so unfair. Here is the world's biggest economy, which gave us subprime mortgages, rampant securitization, the collateralized debt obligation, Lehmann Brothers, Merrill Lynch. It is, in a sense, the fons et origo of this crisis. And yet, because it retains safe-haven status, in a global crisis, investors want to increase their exposure to the U.S. Hence, the dollar rally. Hence 10-year Treasuries down below 3 per cent yields. It's almost paradoxical that an American crisis ... reinforces the status of the United States as a safe haven.”

Heather Scoffield: Surely that safe-haven status would be revoked if China loses faith in the U.S. ability to finance its debt?

Niall Ferguson: As you know, Chimerica – the fusion of China and America – is one of my big ideas. It's really the key to how the global financial system works, and has been now for about a decade. ...

Niall Ferguson: It looks like it....The line is very clear from China. They've consistently made their position clear. They want the status quo. They do not want this thing to break down. They were kind of appalled when Geithner said the ‘m' word. And they took full advantage of Hillary Clinton's visit to smooth ruffled feathers and restate their commitment. It's a very good bilateral relation. That bilateral will is important here. The Chinese believe in Chimerica maybe even more than Americans do.

“They have nowhere else to go. They have no other strategy that they can adopt in time to cushion the blow. Their exports are contracting at a terrifying speed. They want at all costs to avoid any kind of big shift in policy. They want to keep, as far as possible, the U.S. importing Chinese goods. They want to keep currencies stable. They are still buying dollars … At least officially, Chimerica is intact. But I stress ‘officially' because there's considerable public disquiet.”

This is a crisis of globalizaiton that is destroying global trade. This poses the biggest challenge that the Chinese administration has faced since they embarked on reforms 30 years ago."

Heather Scoffield: Will globalization survive this crisis?

Niall Ferguson: It's a question that's well worth asking. Because when you look at the way trade has collapsed in the world in the last quarter of 2008 – countries like Taiwan saw their exports fall 45 per cent that is a depression-style contraction, and we're in quite early stages of the game at this point. This is before the shock has really played out politically. Before protectionist slogans have really established themselves in the public debate. Buy America is the beginning of something I think we'll see a lot more of. So I think there's a real danger that globalization could unravel.

Part of the point I've been making for years is that it's a fragile system. It broke down once before. The last time we globalized the world economy this way, pre-1914, it only took a war to cause the whole thing to come crashing down. Now we're showing that we can do it without a war. You can cause globalization to disintegrate just by inflating a housing bubble, bursting it, and watching the financial chain reaction unfold.”

Heather Scoffield: Is a violent resolution to this crisis inevitable?

Niall Ferguson:There will be blood, in the sense that a crisis of this magnitude is bound to increase political as well as economic [conflict]. It is bound to destabilize some countries. It will cause civil wars to break out, that have been dormant. It will topple governments that were moderate and bring in governments that are extreme. These things are pretty predictable. The question is whether the general destabilization, the return of, if you like, political risk, ultimately leads to something really big in the realm of geopolitics. That seems a less certain outcome. We've already talked about why China and the United States are in an embrace they don't dare end. ....

“I was more struck Putin's bluster than his potential to bite, when he spoke at Davos. But he made a really good point, which I keep coming back to. In his speech, he said crises like this will encourage governments to engage in foreign policy aggression. I don't think he was talking about himself, but he might have been. It's true, one of the things historically that we see, and also when we go back to 30s, but also to the depressions 1870s and 19980s, weak regimes will often resort to a more aggressive foreign policy, to try to bolster their position. It's legitimacy that you can gain without economic disparity – playing the nationalist card. I wouldn't be surprised to see some of that in the year ahead.

It's just that I don't see it producing anything comparable with 1914 or 1939. It's kind of hard to envisage a world war. Even when most pessimistic, I struggle to see how that would work, because the U.S., for all its difficulties in the financial world, is so overwhelmingly dominant in the military world.”

Heather Scoffield: You speak about the crisis being in its early days, but most policy makers and the International Monetary Fund are predicting a quick end to it. Where do you differ with them?

Niall Ferguson: “I do think they're wrong. I think the IMF has been consistently wrong in its projections year after year. Most projections are wrong, because they're based on models that don't really correspond to the real world. If anything good comes of crisis, I hope it will be to discredit these ridiculous models that people rely on, and a return to something more like a historical understanding about the way the world works.”

“I mean most of these models, including, I'm told, the one that policy makers here use, don't really have enough data to be illuminating … You're going to end up assuming that this recession is going to end up like other recessions, and the other recessions didn't last that long, so this one won't last so long. But of course this isn't a recession. This is something really quite different in character from anything we've experienced in the postwar era. That's why these projections give positive numbers for 2010. That's the default setting. And it just seems to me ostrich-like, to bury one's head in the sand and assume this has to end this year because, well, that's what recessions do.

“It's obvious, surely we know by now, that this is something quite different. It's a crisis of excessive debt, the deleveraging process has barely begun, the U.S. consumers are not going to suddenly bounce back and hit the shopping malls just because they get a tax cut. The savings rate is going to continue to rise. These processes have tremendous momentum that quite clearly differentiates them from anything that we've seen, including the early 80s, including 73, 74, 75. Those big crises, the ones that we have lived through, were bad. But seems certain to be deeper, and more protracted.”

Heather Scoffield: Forecasters say they can adjust their projections as things change, but households, companies and governments are basing their decisions today on what the experts tell them to expect in the future. So how should decisions be made if the forecasts are wrong?

Niall Ferguson:One possibility is that they don't believe these numbers either. They feel that it's good for morale. The truth about the crisis is that it is in large measure psychological. We're not dealing here with mathematics. We're not dealing here with human beings as calculating machines. We're dealing with real people whose emotions influence their individual decisions, and the swing from greed to fear is a very spectacular thing when it happens on this scale.

“One possibility is that policy makers are lying in order to encourage people and prevent depression from become a self-fulfilling psychological conditions. That's why it's called a depression … Maybe they don't really believe this, but they're saying it in order to cheer people up, and if they're sufficiently consistent, perhaps people will start to believe it, and then it will magically happen.”

“The other way of looking at that is to say every time a politician uses a word like ‘catastrophe' or ‘depression' to pressurize legislators into passing a stimulus package, for example, the signal goes out to the public that this is bad. And it gets worse. That's one of the interesting things that both President Bush and President Obama have done. Bush used that wonderful phrase, “this sucker's going down.” Obama talks about catastrophe at the critical moment when he wanted Congress to pass the package. It reminds me of a wonderful headline that the Onion had last year, in about October. The headline was, Bush calls for panic. I love it because it completely called the situation. There he was calling for panic ... to make people come out of denial. I've been talking a while about this being the Great Repression. It took ages, ages, for people to realize this thing had fallen apart.

“August, 2007, was when this crisis began. And if you were really watching the markets carefully, April is when it began, when the various hedge funds started to hemorrhage. The stock markets carried on until October of that year. And in many ways, consumer behaviour in the U.S. did not change until the third quarter of 2008. So there was a massive denial problem. It was like Wile E. Coyote running off a cliff, and they'd run off a cliff and they didn't look down so they didn't start falling. As soon as people realized it was bad, the behaviour switched. Now, people have to try to unscare them before this thing becomes a self-perpetuating downward spiral. I think that's why you have to say ‘growth will return in 2010' with your fingers crossed behind your back.”

Heather Scoffield: Will property ownership continue to be central to our economy's functioning?

Niall Ferguson: Property ownership is something that our societies, particularly English-speaking societies, seem to be drawn towards. The notion that the majority of people should own their own homes dated from the 30s. It didn't really become a reality until the 50s. We've sort of pushed the home ownership rate up to what seems to be its maximum, and beyond. It will clearly come down. The lesson of the subprime crisis is that you shouldn't give mortgages to people who can't afford them. Duh …

I don't think we're going to see a radical shift back to the rental society of the pre-Second World War era. That sort of exists in Germany. Germany has had none of this. German households are less indebted now than they were 20 years ago. The property ownership rate, if anything, has been completely stable. Why the English-speaking world has this fixation is kind of interesting and hard to explain. That Englishman home-is-his-castle mentality. We privilege this asset class. And in the U.S., the tax code privileges this asset class to take out mortgages and invest in property. I think that's a mistake. I'd like to see us at least achieve fiscal neutrality, so that different kinds of investments are treated the same. But even if we do that, Canada doesn't have mortgage interest relief, and the home ownership rate is the same as the U.S.”

Heather Scoffield: Abu Dhabi has just bought Nova Chemical because the company couldn't get credit. Is this the way of the future?

Niall Ferguson: “There are some fantastic investment opportunities that pretty soon are going to start attracting buyers. The returns on the super-safe, highly-liquid U.S. Treasury portfolios are next to nothing. The potential returns from buying distressed assets or from buying companies that can't roll over their debt, are double digit. So any individual institution liquid enough and not leveraged can start playing this game, and will play this game. This is going to be the beginning of a whole new investment strategy in which companies that can't roll their debt over end up being sold at bargain basement prices, or broken up and their assets sold at bargain-basement prices, in very, very large numbers. And it doesn't take a lot of imagination to see that the buyers will be sovereign wealth funds or other entities in surplus countries. The world divides in two, the debtors and the creditors. The debtors … (U.S., Europe) ... are going to have to sell of their assets. Call it the global foreclosure. They're going to be selling their assets cheaply to those who have the surpluses. This is not going to be like the Chinese buying Blackstone at the top of the market.

“It's revenge of the sovereign wealth funds. They got burned. And this time, no more Mr. Nice Guy.”

Heather Scoffield: Does the fixing of one bubble create another?

Niall Ferguson:We kind of have had a bubble in the sense that we've seen such a rally in U.S. government bonds. It's tempting to say that will burst and we'll see yields go back up. Because, you know, $2-trillion worth of debt is going to hit the market this year, maybe more. Supply is exploding just when demand is contracting. You don't need to be a Nobel laureate to see that that has to impact on the price. The difference is there is this thing called the Fed that can step in and start buying the stuff if the foreign demand fades. So it's not completely guaranteed that we'll see bonds sell off in price.

“There is still this inertia that prevents the dollar from falling off a cliff, that keeps the Treasury market from falling off a cliff. That's really important to bear in mind. I don't think we'll see a bubble distressed assets, because I think the price of these assets has started to fall. Anybody who comes into the market now is essentially paying a premium. There will be better bargains in the middle of this year, and maybe even better bargains later on. If I were in the market to buy distressed assets, I would wait, I would wait a bit longer until they're really desperate. And it might even be better to wait until they're bankrupt.”

Heather Scoffield: You've written that many financial crises are the result of excesses due to a belief that governments will bail out the financial sector. Do we need to get rid of this moral hazard through tighter regulations?

Niall Ferguson:In the Ascent of Money, I argue that you can't really have a bubble if you don't have a monetary authority that has been excessively generous. From John Law in 1719 to Alan Greenspan in the late 90s, there's always a banker, there's always a central banker making credit too readily available. The second thing is, though, that regulation may not prevent that.”

“Monetary policy evolved in a peculiar way in the 1990s towards de facto or de jure targeting of inflation, an increasingly narrow concept of inflation – core CPI. I thought it was a mistake at the time because it seemed to me crazy to ignore asset prices. Why differentiate? What's the difference between pricing a loaf and pricing a house? Why do we care about one and not the other? In fact, we should probably care more about the price of a house than the price of a loaf, certainly in developed societies. I think there was a flaw in the theory there, that essentially you could call the Jackson Hole consensus. When the central bankers got together at Jackson Hole, the view that emerged from the debate in the late 90s was, we shouldn't really pay attention to asset prices in the setting of monetary policy.”

Heather Scoffield: And more regulation?

Niall Ferguson: “European banks are far more leveraged than American banks. I don't see Europe as offering up any particularly good model in any respect. In fact, I think Europe's prospects could get a whole lot worse this year, to the extent that it could be very, very hard indeed to keep the Euro zone together. I think it will be possible because the costs of leaving will be so high.

“There will be howling anguish, all kinds of pain, conflict between Germans and the others. It's going to get very uncomfortable indeed. No, I wouldn't look to Europe for inspiration. You could, I guess, look at Spain...

“I definitely think some type of tighter regulation of banking capital adequacy is needed. Basel I and Basel II have not worked. In many ways, they're the great failures. I think Canada's somewhat straightforward, mechanical definition looks like one the rest of the world should be adopting.”

Heather Scoffield: You mentioned that the Buy America tendencies of Congress are probably only the beginning of protectionism. What do you mean by that?

Niall Ferguson: “No administration with Larry Summers in the White House is going to be a protectionist administration. Here's a man whose commitment to free trade and free capital movements nobody doubts. And I don't see the President following through to renegotiate NAFTA or the things he said in the past. But one of the things that I find troubling about the administration is the degree to which is has ceded power to Congress. It's almost like it's a parliamentary system.”

[I was in Washington last week for the passage of the stimulus package]. “I felt a strange sense of familiarity in the air. Usually Washington feels totally alien to me. It was just like being in Westminster, where power was in the legislature. And the key issue was whether the upper house and the lower house could make a deal. The president wasn't even in town. If you give Congress that kind of power – basically Congress wrote the deal – then you're half way to a British or Canadian system in which the legislature makes the decisions. And the legislature is much more likely to make protectionist decisions. After all, these are pretty much the same people who put all those anti-China bills into the works in the last session of Congress … So I'm a little nervous about how this will play out in the next one or two years … After all, this is the land of permanent election campaigning. Congressmen are saying to themselves, ‘ how am I going to campaign? I don't want to lose my job. What's my line going to be?' It's going to be very tempting to say ‘American jobs for American workers.' It's a pretty good slogan. It worked well in Britain.”

“That's out there. There's a lot of populist disgruntlement, and it's going to get bigger.”

Heather Scoffield: We've discussed many possible nasty outcomes to this crisis. Is there a way out?

Niall Ferguson: “We've discussed two reasons to non-suicidal. I'm trying to stay cheerful. One is that Chimerica is holding up. The Chinese don't seem to want to get divorced from their American spouse.”

“The other is that this isn't leading to World War Three or Four, depending on how many world wars you think there have been. There will be instability, but I don't see that instability producing something as huge as the 20th century conflicts. But it's hard to see a simple and quick macroeconomic happy ending. That I really struggle to visualize.

But the good news is only as good as this: the United States, which is Canada's biggest trading partner, is not going to suffer as badly as many other economies around the world. And that means that from Canada's point of view, it's not standing right on top of the biggest fault lines in the global system. The biggest fault lines in the global system are in Asia. They may also be in Eastern Europe. That's where things are going to be really unpredictable.”

“The two great zones of conflict in the 20th century were central and eastern Europe, and a critical part of northeast Asia – Manchuria, Korea. It makes me a little nervous that those are also places that are going to take a very heavy share of the pain. But we're looking at a Great Recession, not a Great Depression. We may be looking at a Lost Decade.

There was a time when if you said the United States was going to suffer a lost decade like Japan did in the 1990s, everybody would have said you were a mad pessimist. That begins to look like quite a good scenario. And I think it's a realistic scenario.

One of the facts is if you subtract mortgage equity withdrawal from the Bush years, the real underlying rate of growth of the U.S. economy was 1 per cent. So much of the consumption has been fuelled by mortgage equity withdrawal. So that seems like a reasonable growth rate for 10 years. … We just don't have an improvement of standard of living of the sort we're grown used to. And indeed if you have a more equitable redistribution through the tax system, which Obama is committed to, it might actually be no discernible downside for middle America and lower-class Americans. So many of the benefits of the boom went to the elites. If you have a lost decade plus redistribution, it may not be that dramatic a change for many, many people. People just have to get over the fact that their wealth wasn't worth what they thought it was in 2006. Whether it's their stock market portfolio or their housing. If we simply go back to where we were, in 2005, that's surely not the worst thing that could happen to us.”

  1. Andrew H from Canada writes: Great interview Heather. Niall Ferguson is an interesting guy.

    I do not agree with the premise that the US can get out of this mess with the dollar's value intact. It seems to me that a substantial devaluation is the obvious way to unwind the imbalance between America and Asia. Such an adjustment would both address the balance of payments problem and cause US inflation to reduce the burden of future payments on debtors.
  2. Mr. Pink from Canada writes:
    J. Michael: good comment.

    America may be economically and militarily extended, and collapsing under its own weight right now, but it is still the most powerful economic engine the world has ever known and, so, has at least the potential to turn it around.

    Interesting times and even those who do not agree with Mr. Ferguson should consider his arguments. Clearly, the landing options are now hard, harder, and hardest--let's hope it's the first one.
  3. The Natrix from Canada writes: Very good article, and unfortunately reflects the sentiment I've been feeling. And yup, as the above poster also mentioned, we really haven't changed, and we really aren't that much better then previous generations.

    Just because we have instant banking, email, debt cards, Ipods, the ability to check stock prices and mortgage interest rates instantly (the advancements we trick ourselves into thinking we are all that much better off, more productive and really creating wealth), seems to have tricked the masses that life really has become easier. As the good Professor has said, we only achieved that through easy credit and outsourcing to a huge pool of cheap labour. And look what happened when the economy was really hot... record high energy costs and rapant pollution.

    The other funny thing is, because we have had it so good for so long, previous generations that really went through strife, turmoil and hardship would be laughing at us now.

Franco TP OK Jazz from Canada writes: Prof. Ferguson is quoted as saying 'It's tempting to conclude from that ... that Canada will be less hard hit in the crisis than the United States. But that is unfortunately wrong. Because this is a very unfair crisis. The epicentre is the United States, but the rest of the world, and particularly America's trading partners, will get hit harder than the U.S.” Unfortunately, this forecast is likely to be wrong. For three reasons: (1) The skills of historians, the greatest included, and their ability to interpret the past stop at today's doorstep. Dura lex sed lex. The predictions of historians tend to be weak compared to the robustness of their diagnoses. The Chinamerica arrangement thesis, in particular, may not have such a central and enduring shelf life. (2) Confident ten, fifty- or hundred-year predictions of GDP, exchange and inflation rates, energy consumption, greenhouse gases, and similar quantities should not be believed. Natural, biomedical, technological, and geopolitical developments occur that inevitably steer the cursor of the 'now' in unsuspected directions. (3) Bayesian priors. Few informed analysts (besides the modellers that Pro. Ferguson is right to castigate) would believe that Canada will be hit harder, based not only on the relative strength of its financial sector to this point, but on its vast natural resources endowment, from the water needed for food production to the food products themselves, to minerals, energy, fertilizers and forests. The U.S. and the rest of the world will continue to import much of the basic resources needed to sustain a decent living, even if they were to buy less imported cars, luxury items, TVs and other electronics. Korea, Singapore, Hong Kong and Taiwan will be hit harder. But Canada? If you were a betting person, which country would you elect to play in these turbulent times?

  1. beta max from Canada writes: 'The U.S. and the rest of the world will continue to import much of the basic resources needed to sustain a decent living'

    In vastly reduced amounts, at vastly reduced prices. Commodity-based economies do not fare well in prolonged recessions.
  2. Kipling Hedley from Nanaimo, Canada writes: As Gerald Celente says, Tim Geithner and Larry Summers are strikeout artists. Why would anyone bring them into a World Series situation where you need a home run, and expect anything different? Wylie Coyote is finally looking down, that's for sure.
  1. boris moris from Vancouver, Canada writes: If I read Niall Ferguson correctly, and my portfolio is loaded with the equities of trade dependent companies and banks..which it's thankfully not, then I should sell asap. He's basically saying we're being told a recovery is imminent and that this is great big fat lie. He says this bold faced lying is a measure being taken with good intentions but a far more plausible reason for these fabrications is to enable insiders to unload their positions before they are worthless.
    Institutional investors are in a tough bind though. Hmmm...good thing I don't have a pension plan that is tied up in equities either.

    My advice is to buy first rate art and collectibles including quality collector cars.

[Feb 26, 2009] "The Financial Crisis and the Systemic Failure of Academic Economics“

Economic professors as a variation of prostitutes serving the banksers?

Paradoxically self-reinforcing feedback effects within the profession may have led to the dominance of a paradigm that has no solid methodological basis and whose empirical performance is, to say the least, modest. Defining away the most prevalent economic problems of modern economies and failing to communicate the limitations and assumptions of its popular models, the economics profession bears some responsibility for the current crisis. It has failed in its duty to society to provide as much insight as possible into the workings of the economy and in providing warnings about the tools it created. It has also been reluctant to emphasize the limitations of its analysis. We believe that the failure to even envisage the current problems of the worldwide financial system and the inability of standard macro and finance models to provide any insight into ongoing events make a strong case for a major reorientation in these areas and a reconsideration of their basic premises.”

[Feb 26, 2009] The Two Documents Everyone Should Read to Better Understand the Crisis William Black

Huffington Post

As a white-collar criminologist and former financial regulator much of my research studies what causes financial markets to become profoundly dysfunctional. The FBI has been warning of an "epidemic" of mortgage fraud since September 2004. It also reports that lenders initiated 80% of these frauds. When the person that controls a seemingly legitimate business or government agency uses it as a "weapon" to defraud we categorize it as a "control fraud" ("The Organization as 'Weapon' in White Collar Crime." Wheeler & Rothman 1982; The Best Way to Rob a Bank is to Own One. Black 2005). Financial control frauds' "weapon of choice" is accounting. Control frauds cause greater financial losses than all other forms of property crime -- combined. Control fraud epidemics can arise when financial deregulation and desupervision and perverse compensation systems create a "criminogenic environment" (Big Money Crime. Calavita, Pontell & Tillman 1997.)

The FBI correctly identified the epidemic of mortgage control fraud at such an early point that the financial crisis could have been averted had the Bush administration acted with even minimal competence. To understand the crisis we have to focus on how the mortgage fraud epidemic produced widespread accounting fraud.

[Feb 26, 2009] Is the Treasury Planning on a Near Term Recovery in Bank Stocks

naked capitalism

...the scary view comes from Ed Harrison:

Obviously, Geithner, Bernanke, et al. believe ‘irrational despondence’ is the source of what ails us and that propping up asset prices will be the cure.

Witness remarks made by Ben Bernanke just recently before Congress:
Federal Reserve Chairman Ben Bernanke said Wednesday recent sharp declines in stock prices mostly reflected investor attitudes about risk and had become detached from real U.S. economic fundamentals.

The risk appetite of investors changes over time and right now the standard measures of the risk premium that investors are charging to hold stocks are at very high levels relative to anything we have seen in recent decades,” Mr. Bernanke said in semi-annual testimony to Congress.

The stock values reflect not so much the fundamentals, the long-term profitability of the economy, but they also reflect investor attitudes about risk and uncertainty which right now are at very high levels,” he told lawmakers during questions.

U.S. stocks have fallen to 12-year lows this month, with the benchmark S&P 500 down about 15% and the Dow Jones industrial average off about 16% since the start of 2009.
This goes to the mindset here. What Ben Bernanke does not say but clearly suggests is that asset prices are being depressed artificially by ‘irrational despondence.’ Stepping in to offer a bid to these assets will lift them — at which point the despondence will go away and all will be fine with the world.

This view is misguided because many asset prices are still above their long-term trend. This is certainly the case with house prices, where renting is still significantly cheaper than purchasing in many locales.
Yves again. Looking at "recent" norms with stock prices is also misleading. Martin Wolf, who had no axe to grind, pointed out that equities were overvalued in March 2007. Indeed, a significant deviation from long-term trends started in late 1996 (remember Greenspan's "irrational exuberance" remark?) and the excess of that decade was enough to shift long term averages. When I was a young person on Wall Street, market PEs of 16 were peak multiples. They came to be seen as normal.

What is amazing is the degree to which Bernanke has been unable to process what has happened over the last year and a half. It isn't simply that he is trying to restore status quo ante; he seems to see the only possible operative paradigm as the status quo ante. Worse, he has a romanticized view of it too.

We had a massive stock market bubble, followed by an even bigger asset orgy, with housing at the epicenter, but plenty of other types got dragged along with it. Having asset appreciation fueled by debt is NOT how a healthy economy operates. It is going to take some time for the excesses to work themselves through. Carmine Reinhart and Kenneth Rogoff's study of major postwar financial crises have found stock prices take 3 1/2 years to bottom.

But Ben believes the trend from here has to be up, and seems unable to consider that rather than the risk appetite being irrationally low now, it may have been irrationally complacent earlier.
d4winds said...
One leaked observation about US military planning during the Bush administration, in paraphrase, went as follows: In previous admins. everyone came prepared to debate at meetings and drank the Kool-aide afterward; in this one, you had to drink it before the meeting.

Different admin., same mindset, but now w.r.t. the economy.
February 26, 2009 4:34 AM
Swedish Lex said...
I have not seen the details of the "new capital in 6 months or your are dead" proposal, but I was (again) utterly confused. Another step in the wrong direction.

There is no up-side for the Administration in setting a fictonal deadline that the markets, the political opposition, etc. immediately will use as a weapon. Why is the Administration painting itself into a corner?

Available capital now knows how long they will have to wait to get a better deal. By then, the prey will be dead, the fresh meat that was left will be rotten and prices will thus be at vulture levels.

Now, THAT, is wealth destruction.

[Feb 25, 2009] Japan Exports Fall By 46% in January, Producing Record Trade Deficit

... ... ...

The fact that Japan is now running trade deficits also means they will not be accumulating foreign exchange reserves, specifically buying Treasuries (Japan could still buy Treasuries to lower the value of its currency, but the terrible economic news has already put the yen on a downward path).

Selected Comment

ndk said...
I expect any newfound yen weakness arising from economic crisis to face a strong headwind as Japanese households repatriate savings which were invested overseas. These holdings are heavily concentrated in formerly high-yielding currencies, putting the crosses under even worse pressure. Still today the Tokyo metro and rail lines are littered with advertisements for home FX trading, though I've seen nary a one for domestic equities or bonds.

Even if the yen does weaken somewhat due to these newfound deficits, or it fails to strengthen further, the extraordinary weakness of other currencies such as the KRW and CNY will continue to threaten Japanese exports, as they compete in many categories.

While Japanese policy has opted for a weak yen to stimulate exports, with an aging population having significant overseas holdings, Sakakibara's comments regarding yen strength being beneficial to Japan may also gain currency in policymaking.

I'm very comfortable projecting the decline in Japanese exports and GDP well into the future, but persistent yen weakness is much less obvious to me.
Anonymous said...
One of the questions that comes to mind about foreign currencies is the implication of the trillions of dollars being magically created in the past few months and to come.

What choices to countries (excluding US) have?

They can do nothing.

They can print money as fast or faster than the US to keep up.

They can consort with other countries, with which they trade regularly, to develop trade agreements with financial settlements that go around the current Reserve Currency cross settlement.

They can consort with other countries or blocks of countries to force a new world monetary system.

We are seeing movement in all the possibilities that I mention. I expect definitive movement on the last on by the end of the year or sooner depending on how tightly Wall Street holds on to the financial excesses of derivatives and how strongly the rest of the world reacts to continued US financial immorality.

As to how trade will sort itself out if there isn't total protectionism.....well I think the big if revolves around consumption-of-crap levels. Have we indeed mortally wounded conspicuous consumption. While I hope so I am not deluded to believe it will ever die entirely. There are too many people that are followers....I digress
Outside of food and basic infrastructure trade levels what will be made, who will make it and who will buy it. I think that before this is over that there will be enough of a hit to the marketing definitions of "NEED" that whole new ways at looking at consumables will be born.

Change provides opportunity for growth.
David said...
It seems to me that the US is starting to look like one of the best economies. If the retrenching in US consumer spending is here to stay, most of that pain will fall overseas to the countries that export to us. Not all of the pain of course. Retail shops are closing at an amazing pace. I don't think the media has really covered this story enough since the numbers probably are not out yet. I drive around Chicago and am amazed at the pace. Every day there is a new shop closed. There has been so much change in just the last month. I assume it must be the same in most big US cities. I do wonder where these retail people are going to get employed next.
artichoke said...
Furthermore China at the government level will be spending their USD, probably in a hurry before the USD depreciates. China was just on a shopping trip in Europe buying hi-tech products from several countries there (excluding France whom they are mad at.)
artichoke said...
Bonesetter Brown,

If nobody else buys the T-bills, the Fed should buy them and is already buying them.

In the long run it's inflationary. But we need inflation anyway, to reduce debt burdens in real terms.
Anonymous said...
I think China's "buying spree" is very much exaggerated at this point. We're talking less than $25 billion in asset purchases, $25 billion in loans in exchange for future oil deliveries, and a few billion for European products.

If we take the optimistic view that China will eventually start spending those USD... then we have to also adopt the pessimistic view that China doesn't see a bottom in asset prices, yet.

[Feb 25, 2009] Bernanke: 2010 Will be Year of Recovery

2009-02-24 | CalculatedRisk

From Fed Chairman Ben Bernanke: Semiannual Monetary Policy Report to the Congress

In their economic projections for the January FOMC meeting, monetary policy makers substantially marked down their forecasts for real GDP this year relative to the forecasts they had prepared in October. The central tendency of their most recent projections for real GDP implies a decline of 1/2 percent to 1-1/4 percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half. The central tendency for the unemployment rate in the fourth quarter of 2009 was marked up to a range of 8-1/2 percent to 8-3/4 percent. Federal Reserve policymakers continued to expect moderate expansion next year, with a central tendency of 2-1/2 percent to 3-1/4 percent growth in real GDP and a decline in the unemployment rate by the end of 2010 to a central tendency of 8 percent to 8-1/4 percent. FOMC participants marked down their projections for overall inflation in 2009 to a central tendency of 1/4 percent to 1 percent, reflecting expected weakness in commodity prices and the disinflationary effects of significant economic slack. The projections for core inflation also were marked down, to a central tendency bracketing 1 percent. Both overall and core inflation are expected to remain low over the next two years.

This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside. One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected. Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing. To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets. If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.
emphasis added

[Feb 23, 2009] The Slide Into Addiction to Economic Pessimism by Hugo Lindgren

Feb 1, 2009 | New York Magazine

My wife busted me again the other day. I had slipped away from her and the kids and into the fantasy world of the web. But not the kind of fantasy you’re probably thinking of. This was pessimism porn. A friend had turned me on to a futurist named Gerald Celente, who anticipated the Asian financial crisis and other calamities. Now, Celente says, the U.S. is heading for a middle-class tax revolt, food riots, and a Central Park engulfed by shantytowns.

This is cruder stuff than I usually go for. Abstruse financial analysis provides a more satisfying jolt of fright, dread, and incomprehension. One god-awful prediction that dances through my head at three in the morning is the “coming dollar debasement trade,” which will happen when the Chinese and the rest of the world give up, en masse, on our currency as a reserve. The leading nightmare peddlers see it as nothing less than the end of civilized America.

The blog Calculated Risk is always a reliable turn-on. The guy who runs it combs the financial media for “cliff-diving” rates of this and that. One data point he often cites is the A2P2 spread, or the difference “between high- and low-quality 30-day nonfinancial commercial paper.” Turns out it “gapped” dangerously last fall.

Worrying about the A2P2 spread is like having a dirty secret. I spend many fruitful minutes playing out scenarios: What do I do when my corner deli gets looted? What bridge do I take out of town? There’s something very exciting about it all.

As in real porn, there’s also a thrill in surreptitiously connecting with fellow users, like the guy standing at the periphery of the kid’s birthday party, glassy-eyed from another crushing week at the office. The subject of gold is a good icebreaker. If you’ve chosen your mark properly, you’ll soon be swapping advice on techniques for securing your own gold bars.

Like real porn, the economic variety gives you the illusion of control, and similarly it only leaves you hungry for more. But econo-porn also feeds a powerful sense of intellectual vanity. You walk the streets feeling superior to all these heedless knaves who have no clue what’s coming down the pike. By making yourself miserable about the frightful hell that awaits us, you feel better. Pessimism can be bliss too.

[Feb 24, 2009] US Remains World’s Leading Manufacturer By Barry Ritholtz

February 23rd, 2009

“The United States remains by far the world’s leading manufacturer by value of goods produced. It hit a record $1.6 trillion in 2007 - nearly double the $811 billion of 1987. For every $1 of value produced in China factories, the United States generates $2.50.”

Interesting Associated Press article about US manufacturing prowess. Far from being the disaster that its so often thought of, the United States remains a global superpower in manufacturing and industrial design.

How is that possible, given that so much stuff comes from China? Its mostly the easy-to-make, low margin stuff. The higher end, much more profitable stuff is made in the USA.

Indeed, the stat about the US being the world’s leading manufacturer looks not to total unit volume, but to value. If we looked at it by profitability, it would be even more lopsided.

AP:

“So what is made in the U.S.A. these days?

The United States sold more than $200 billion worth of aircraft, missiles and space-related equipment in 2007, and $80 billion worth of autos and auto parts. Deere, best known for its bright green and yellow tractors, sold $16.5 billion worth of farming equipment last year, much of it to the rest of the world.

Then there are energy products like gas turbines for power plants made by General Electric, computer chips from Intel and fighter jets from Lockheed Martin. Household names like GE, General Motors, International Business Machines, Boeing and Hewlett-Packard are among the largest manufacturers by revenue.

Several trends have emerged over the decades:

The United States makes things that other countries cannot. Today, “Made in U.S.A.” is more likely to be stamped on heavy equipment or the circuits that go inside other products than the televisions, toys, clothes and other items found on store shelves.

U.S. companies have shifted toward high-end manufacturing as the production of low-value goods has moved overseas. This has resulted in lower prices for shoppers and higher profits for companies…

Thirty years ago, U.S. producers made 80 percent of what the country consumed, according to the Manufacturers Alliance/MAPI, an industry trade group. Now it is about 65 percent.”

Fascinating stuff . . .

Source:
Is anything made in the U.S.A. anymore? You’d be surprised
Stephen Manning
Associated Press, February 20, 2009
http://www.iht.com/articles/2009/02/20/business/wbmake.php

[Feb 24, 2009] Dividends Falling Means S&P 500 Is Still Expensive (Update5) By Michael Tsang

Feb. 23 (Bloomberg) -- The fastest reduction in U.S. dividends since 1955 is depriving investors of the only thing that gave stocks an advantage over government bonds in the last century.

U.S. equities returned 6 percent a year on average since 1900, inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG show. Take away dividends and the annual gain drops to 1.7 percent, compared with 2.1 percent for long-term Treasury bonds, according to the data.

A total of 288 companies cut or suspended payouts last quarter, the most since Standard & Poor’s records began 54 years ago, when Dwight D. Eisenhower was president. While the S&P 500 is trading at the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent.

“It’s a greater fool theory if we always buy stocks based on earnings and we never get a penny out of it, hoping for someone to buy that stock at a higher price,” said James Swanson, chief investment strategist at MFS Investment Management in Boston, which oversees $134 billion. “Dividends have been a cushion in bad times. If they go to zero it’s a disaster.”

Twenty-six companies in the S&P 500 saved more than $21 billion by cutting or suspending outlays this year, more than all the reductions from 2003 to 2007, when the index returned 83 percent. On a per-share basis, S&P 500 companies may trim payouts 13 percent this year, the biggest drop since 1942, S&P data show.

[Feb 24, 2009] naked capitalism Now It's Official Stress Test Results Pre-Determined

Timo said...
USA is going to collapse big time. The taxation level should already be Swedenlike or more in order to stop going deeper into debt, mainly thanks to SS and Medicare future liabilities, growing every single year 2000-3000 billion dollars on top of that 60000.

That would mean doubling income tax NOW and VAT of about 30 percent on everything you buy...for starters. Sweden would be then actually considered tax haven by Americans!

Is that going to happen in the USA? Hell no, they will prefer keeping their precious "tax cuts" and go down with the ship.
February 22, 2009 10:57 PM
Anonymous said...
Total window dressing, nothing more than we'd expect from the Bush adminstration (may it rest in everlasting hellfire).
Anonymous said...
Noted from Wiki.....

In 1997, together with then-Federal Reserve chairman Alan Greenspan, Rubin strongly opposed the regulation of derivatives, when such regulation was proposed by then-head of the Commodity Futures Trading Commission (CFTC), Brooksley Born. Overexposure to credit derivatives of mortgage-backed securities was a key reason for the failure of US financial institutions Bear Stearns, Lehman Brothers, Merrill Lynch, American International Group, and Washington Mutual in 2008.

According to the New York Times, “In November 1999, senior regulators—including Mr. Greenspan and Mr. Rubin—recommended that Congress permanently strip the CFTC of regulatory authority over derivatives.”[9] This advice was accepted and derivatives were kept clear of regulation by the CFTC.

January 9, 2009 Citigroup announced his resignation [Rubin], after having been criticized for his performance. He received more than $126 million in cash and stock during his eight years at Citigroup.

MarcoPolo said...

This is so far off the wall. I don’t know if it’s worthy of your comments.

Consider however, that Obama, through his minions Geithner & Summers, knows that nationalization is the only possible answer, but that there are either political obstacles and/or physical limitations which make that impossible now.

And that also nationalizing a Citi and not BA, which might be possible, would likely produce a run someplace else. Never mind the probable catastrophe in derivatives and the problems at the trading desks. So, the thinking may be that they need a holiday. And the stress testing is nothing more than a feasibility study. A sample population.

[Feb 23, 2009] Economist's View Shaky Social Contracts During Downturn

As a social scientist Robert Skidelski is most interesting as Keyes biographer.  His point about rising social tension in tough economic situation is banal. And his reference to "social contact" that existed in China and Russia is funny (as one reader commented :  "hehehe. like easy credit wasn't an "implied social contract."). A scenario, where the people are revolting, is certainly romantic, but it is not very realistic. Even rebellions require leadership.  His statement "At the current moment, economic well-being is shrinking. Correspondingly, civil rights should expand." is not supported by history. That's the author's preference (or bias, if you wish). Comments are more interesting then his opus ;-)
Shaky social contracts during downturn, by Robert Skidelsky, Project Syndicate:

"Enrich yourselves,” China’s Deng Xiaoping told his fellow countrymen when he started dismantling Mao Zedong’s failed socialist model. In fact, elites everywhere have always lived by this injunction, and ordinary people have not minded very much, provided that the elites fulfill their part of the bargain: protect the country against its enemies and improve living conditions.

It is this implied social contract that is now endangered by economic collapse. Of course, the terms of the contract vary with place and time. In 19th century Europe, the rich were expected to be frugal. Conspicuous consumption was eschewed. The rich were supposed to save much of their income, as saving was both a fund for investment and a moral virtue. And, in the days before the welfare state, the rich were also expected to be philanthropists.

In the opportunity culture of the United States, by contrast, conspicuous consumption was more tolerated. High spending was a mark of success: what Americans demanded of their rich was conspicuous enterprise.

Societies have also differed in how wealthy they allow their elite to become, and in their tolerance of the means by which wealth is acquired and used. ...

... ... ...

The more corrupt the system of capitalism, the more vulnerable it is to attack.

The general problem is that all of today’s versions of capitalism are more or less corrupt. “Enrich yourselves” is the clarion call of our era; and in that moral blind spot lies a great danger. ...

In estimating political risk today, analysts must pay particular attention to the character of the political system. Does it allow for an orderly transition? Is it competitive enough to prevent discredited leaders from clinging to power? Analysts also must pay attention to the nature of the implied social contract. Broadly speaking, the weakest contracts are those that allow wealth and power to be concentrated in the same few hands, while the strongest are built on significant dispersal of both.

... ... ...

Igor Yurgens, one of Russia’s most creative political analysts, has been quick to draw the moral: “the social contract consisted of limiting civil rights in exchange for economic wellbeing.

At the current moment, economic well-being is shrinking. Correspondingly, civil rights should expand. It’s just simple logic.” The rulers in Moscow and Beijing would do well to heed this warning.

Selected comments

James Kroeger says...

The problem with the wealthy is not that they are wealthy, but only that they are stupid. Because there is scarcity, there will always be rich people. It is a good thing that there are rich people. But the rest of society, those who are not rich, have the right to insist that rich people be Smart Selfish, instead of Stupid Selfish.

Stupid Selfish is what the Republican Party peddles. They encourage rich people to believe that they can act as a class to advance their collective self-interest, but they are wrong. The best we can hope for is that the rich learn how to be Smart Selfish, which means learning that rich people can only optimize their REAL WEALTH if every member of society is productively employed.

Posted by: James Kroeger | Link to comment | February 21, 2009 at 05:11 PM

hapa says...

hehehe. like easy credit wasn't an "implied social contract."

Bruce Wilder says...

"In 19th century Europe, the rich were expected to be frugal. Conspicuous consumption was eschewed. The rich were supposed to save much of their income, as saving was both a fund for investment and a moral virtue. And, in the days before the welfare state, the rich were also expected to be philanthropists."

This, of course, would be be the 19th century Europe of Skildelsky's fevered imagination, as opposed to the 19th century Europe of titled nobility, failed revolution and potato famine. Are there no prisons? Are there no workhouses?

A scenario, where the people are revolting, is certainly romantic, but it is not very realistic. Even rebellions require leadership.

The real struggle is among and across elites, between those, who see the economy as a zero-sum game, and who seek "low labor cost" and to "lift the fiscal burden of entitlement spending" and so on, and those among the elite, who see power and wealth as a positive sum game, in which a society is enhanced by a meritocracy, by broad investments in education and the empowerment of the many.

I don't know much about current conditions in Russia or China, but I know that, in the U.S., there is a crying need for revolution, against a selfish and destructive elite, whose imperial projects abroad and antisocial redistribution of income and wealth upward are ruining the country. A corrupt Media is being used skillfully to make populist resentment a reactionary force, even amidst scurrilous public looting on a vast scale.

The reforms needed in the U.S., to reverse the decline in education, to establish a functioning and financially sound health care system, and rein in a runaway military-industrial complex are daunting enough, and may very well fail, in the face of the pro-plutocrat Media propaganda saturating the public discourse.

Bruce Wilder says...

The broader lessons of history -- 19th and 20th century -- is that economic decline both motivates change, and scares and frightens people into embracing populist, authoritarian appeals. Revolutions sometimes succeed magnificently; sometimes fail miserably; and, sometimes, continue, with mixed results, for a long time.

Deflation and depression have often been opportunities for wealthy elites to break unions and dispossess the petite bourgeoisie. The New Deal in the U.S. Great Depression was exceptional. Let's pray for American exceptionalism.

Doc at the Radar Station says...

"Enrich yourselves,” China’s Deng Xiaoping told his fellow countrymen when he started dismantling Mao Zedong’s failed socialist model. In fact, elites everywhere have always lived by this injunction, and ordinary people have not minded very much, provided that the elites fulfill their part of the bargain: protect the country against its enemies and improve living conditions.
....

Failure to bring home the bacon will meet with dissaproval no matter what the ideology of the politician(s). Ordinary every day people are not going to pay the attention that is required to prevent oligarchies and elites from corrupting the government to some extent, no matter what the system... unless things go bad. Then they will pay extraordinary attention and that is when we get needed changes. I would posit that things going swimmingly well, or seeming to go swimmingly well lures the populace into a malignant and anesthetic complacency. Power shifts disproportionately to the elites as a result and when things eventually go south you have more of a tectonic shift. It is best to let everyday people affect policy in an incremental way to defuse the tension than to allow it to build up to avalanche dimensions.

Lafayette says...

Confusing Communism and Socialism

Article: "Enrich yourselves,” China’s Deng Xiaoping told his fellow countrymen when he started dismantling Mao Zedong’s failed socialist model.

OK, I'll buy that bit about China's economic failure.

But, why cast aspersions at the "socialist model"? That's like the painter blaming his paints or paint brush because he hasn't an ounce of artistic talent.

Once again, some dimwit is confusing Communism and Socialism.

Most Communist regimes fail because of Central Planning (which was/is impractical), not because their model is Socialist. Socialist models, when combined with Regulated Capitalism, work well enough. Many European nation-states serve as present examples.

And, what about the American version of Unbridled Capitalism? Anybody think, today, that it is a Glowing Success Story?

So much for "Project Syndicate" objectivity and certainly for that of this article's author.

Post Scriptum

The consternation arises from the pedigree of this article's author. Skidelsky is no fool -- see Wiki and his web site. How could he have confused Autocratic Communism with Democratic Socialism?

Lafayette says...

The BoobTube

BW: The reforms needed in the U.S., to reverse the decline in education, to establish a functioning and financially sound health care system, and rein in a runaway military-industrial complex are daunting enough, and may very well fail, in the face of the pro-plutocrat Media propaganda saturating the public discourse.

I keep wondering about what Americans see on the BoobTube. Aside from allegations of warped journalism, I am convinced of the harm BigMedia TV, abetted by least-common-denominator advertising, has done for the American Language.

There are hundreds of ethnic languages that are disappearing constantly. These are the languages employed by small ethnicities around the globe. We have a few in the US, namely, Indian.

There are even some languages that have no written structure. The native tongue of Eskimos, I believe, is one. I am wondering if the American English, because of television, is not another that is gradually diminishing to gibberish.

This is not the same point that BW is making above. It is beside his point, that is, that of a Warped Media. My point is auxiliary – I really think I get better coverage of American news and even the American society from European journalistic inputs. It is in depth and unsugared (with political incorrectness). Why?

Because they see America through a very different prism. European journalists are just as curious as their American counterparts, but far more naive. They ask questions that American journalists take for granted. Particularly the English reporting teams, who have a knack for investigative journalism that excels way beyond the rest of the pack.

The BoobTube? Throw the damn thing out the window. It’s useless as an objective informational device.

OK, so keep it. It's not bad for watching movies.

Real Person from the Real World says...

I'm with James Kroeger, a labor shortage might be just the thing. Right now, *employers* get pretty picky: I have seen companies reject people that are "too qualified" as well as people that are "not qualified enough." My current foreign born employer didn't look at my "qualifications" as such, he looked at the raw material and in fact, he took advantage of my naivety, to screw me on salary. I learned what I had to on the job just fine, as he knew I would. If I were a lot younger, I could parlay what I know into a great paying job. As it is, I now face age discrimination, right at a time, when I need a decent income most.
- Many of us, including myself, rant about visa people, but there is a lesson there: many have very inflated resumes, but they cram up on what they need to know, the job req, the title of the person who will interview them, and make it work.
- HR weeds people out, that they claim will be unhappy because of the salary, and this includes more practical workers who would accept lower but livable salaries.
- Sometimes, I think employment is really, a personality game primarily.... if you have the right friends, or the "look" of those in the hiring clique, including age, weight, clothes, education, cultural interests, and even way of talking. The wild card is that you get can hired regardless of previous experience or education because you met someone in a position to do something, and clicked. I have even seen people with no college education, who picked the right area of tech, and got into great jobs with the potential to move up, and add education, or whatever is necessary, along the way, while college educated people failed.
Why not try labor shortage? It would also eliminate the need for unions.

Michael Turner says...

I'm more worried about the opposite, actually. What if the more authoritarian societies will be able to spread the social safety net faster, nationalize banks sooner, and inaugurate appropriately scaled stimulus programs, than wrangling democracies can? Wherever this happens, it earns greater legitimacy for authoritarian approaches to government.

We have at least one disturbing precedent: Pinochet in the early 80s (temporarily) junking Chicago School policies and pulling together a major New Deal-style work creation program beyond even what FDR managed, while ordering bank nationalizations that even Allende hadn't been able to pull off.

You won't get any traction on understanding Deng Xiaoping's thinking with any two-word bumpersticker rendition of his economic program. The question is: WHY did he say "enrich yourselves"?

Deng Xiaping's concern was always to yoke free enterprise and the profit motive to the project of building "productive forces" for China as a nation -- for socialism. Black cat, white cat -- as long as it catches mice! Whatever socialism is supposed to be, it's NOT supposed to be universal penury. And he knew his Marxism: Marx said capitalism was (almost certainly) a necessary stage, because socialism, to have any real benefits, would need productive forces already established.

China is recently responding to the economic crisis with massive stimulus spending, and inaugurating a program of universal health coverage. It's never been ideologically blinkered about laissez faire capitalism being some ideal -- the Communist Party knows exactly what it's dealing with, in boom-bust Capitalism, and has always said so in party doctrine. The only question for them is: while the bronco is bucking, can they stay on top? That is their goal. And if they succeed, in the process showing themselves to be better managers in rescuing their own economy than we are in our democracies, what will that say about democracy itself?

Even Keynes admitted that dictatorial powers would make his prescriptions easier to apply. What if we get a whole string of demonstrations of this fact? It could send the wrong message. I'd rather that the take-away for citizens in democracies be: "Keynesian policies are better", not "authoritarian governments are better." But who knows? What I'm worried about might seem stretched right now, but think of how another two years of decline might change people's thinking, and for the worse.

[Feb 22, 2009] Object Lesson: Consumer Frugality in Japan

"This is one of the most interesting posts in Naked Capitalism for the last week. It suggest that frugality has its own dynamics. and it is a double edge sword: "what happens to our credit and bond markets when Asia starts to use its savings to keep itself together instead of giving it to us?"

In case you managed to miss it, Japan has taken a huge fall in its relative economic standing by more or less standing still for almost a generation. The comparative fall is 30%. And even though visitors to Japan do not see the superficial signs of distress (infrastructure is well maintained, people are neatly dressed, restaurants, bars, and tea houses look busy), the consumer has retrenched to a degree that (now) seems unimaginable to the US.

...a second reason is the extreme instability of employment among the young. Many are so-called "freeters", or basically long-term temps, doing low level work for employers, the first to be fired, and little hope of advancement even if they do wind up staying with the same company a long time. This is not only materially difficult, but psychologically hard, since Japan places great standing on group membership.

The examples from this New York Times story are revealing:

...To better compete, companies slashed jobs and wages, replacing much of their work force with temporary workers who had no job security and fewer benefits. Nontraditional workers now make up more than a third of Japan’s labor force.

Younger people are feeling the brunt of that shift. Some 48 percent of workers age 24 or younger are temps. These workers, who came of age during a tough job market, tend to shun conspicuous consumption.

They tend to be uninterested in cars; a survey last year by the business daily Nikkei found that only 25 percent of Japanese men in their 20s wanted a car, down from 48 percent in 2000, contributing to the slump in sales.

Young Japanese women even seem to be losing their once- insatiable thirst for foreign fashion. Louis Vuitton, for example, reported a 10 percent drop in its sales in Japan in 2008.

“I’m not interested in big spending,” says Risa Masaki, 20, a college student in Tokyo and a neighbor of the Takigasakis. “I just want a humble life.”...

Perhaps I am wrong, but my impression is Americans understand frugality borne of real or near poverty but are less able to identify with middle class desperation. But studies have also found that happiness is correlated strongly with relative rather than absolute economic standing, that is, someone would be happier earning $100,000 in a community where the average income is $75,000 than they would earning $150,000 in a community where the average income is $200,000. Since Japan has very little income disparity, the fact that the belt-tightening is widespread no doubt makes it somewhat easier to bear. I do not know how well America would bear up if we had a long period of Japanese style austerity with the big differences we have between the bottom, middle, and top echelons.
Selected Comments
Anonymous said...
I think one of the reasons cars are no longer as prized by youth (in some countries anyway) is that they have lost some of their allure as status symbols. That development in turn might be due to rising environmental concerns. Alternatively the environment might simply be a convenient excuse for economically insecure youths who do not want a car loan as an albatross around their necks.

Anyway, a Japan-style lost decade would probably mean a continued golden age for the net. Cheap entertainment and potential substitute for physically collecting things. Opium for the masses to quote a certain economic theorist.

 
Anonymous said...
'Many are so-called "freeters", or basically long-term temps, doing low level work for employers, the first to be fired, and little hope of advancement even if they do wind up staying with the same company a long time."'

Sounds like the US fields of

1. Computer science.
2. Engineering
3. Physical Sciences- Chemistry/biology

America today is a world of contract temps (ala 3M, IBM, Oracle), temp visas and job insecurity.

You finance people are finally going to get a taste of the real world. You've been sucking the blood out of the rest of us for years.

I'm baffled by why Yves thinks Japan should be immune to US labor productivity evolution.

IF said...
To a Kraut these lessens sound all too familiar: Yum - cabbage and potatoes! And on Sundays some pork as well. Just kidding. I also remember the laundry trick. But recently my sister didn't even want a new subcompact car as a present! She bicycles. (Do you believe these Germans are the people who will save Ireland from eating their babies by donating their own?)

Now Americans might not refuse a free ride. But they are adopting well otherwise. All these people that get foreclosed on, seem to disappear without a trace. Nobody knows where they went. And rents are going down at the same time in CA. (Body snatchers out there?) Do Americans really have families in the heartland that will take care of them? Or are they more like the Japanese: everyone for themselves. Maybe they are finding religion and are getting help by Jesus? I would never know.

Anonymous said...
I grew up in California in a frugal middle class household. It was not the end of the universe to be among the last of my cohorts to have a color television or dishwasher.

To be honest most of discretionary consumption contributes fairly little to overall happiness - one adjusts to whatever level, within reason.

alex black said...
How will modern America fare with its new, reduced standard of living? Hmmmm...

Thomas Carlyle once wrote that happiness is what we have divided by what we expect - and if his math served him well, adding the the numerator wasn't nearly as effective as learning to reduce the denominator.

Henry David Thoreau wrote that he embarked on his "experiment in simple living" on Walden Pond, reducing life to its barest necessities, so he would be sure that he didn't end up missing out on what was most essential in life.

Fast forward to 21st century America, when a few years ago, a new fad of "simplicity" started popping up - mainly propelled by a huge glossy monthly magazine titled, "Simplicity", which costs about $8 per issue, and is as thick as a Melville novel because it's full of thousands of slick ads for new products to buy buy buy to help you create your new "lifestyle of simplicity"

I'd weep at the Tragedy, but I'm too busy laughing at the Comedy.

This will be a very strange transition.

bg said...
" in the US, since we have employment at will, and employment relationships have been becoming shorter and less stable over the last 20+ years."

While the above is true, it had not affected the non-manufacturing sector employees sense of fear of running out of money. The shorter tenures have been used more by employees to optimize their situation than it has been used by employers to keep efficiency up.

That is starting to change. In my cohort real fear is being experienced for the first time. My father was a depression baby and WW2 soldier, his attitudes about life were meaningfully more insecure to anything we have seen since.

Jojo said...
Perhaps some good to come out of this worldwide crisis will be less babies born.

After all, as a parent, do you want to roll the dice that your 3, 4, 5, 6 or more children will be able to find gainful employment and remain employed for the remaining 40-70 years of their lives? Or even that YOU will be able to remain employed and support your children until they are on their own?

OTOH, less population means less spending, which goes against all that is held holy in many economies today. Also less people spending means less people working which leads to less people contributing to Social Security, which raises questions of future funding.

The old saying is "Dammed if you do and dammed if you don't" or maybe "Between a rock and the hard place".

February 22, 2009 1:03 AM
alex black said...
One more anecdote from the frontlines of America's psychological adjustment to the seismic downshift in wealth. I have a friend who is a psychotherapist. Most of his new clients are people who are having extreme emotional difficulty coping with the fact that their property value has fallen, after years of rising. Not so much economic anxieties, but more of clinical depression-levels of loss of self-esteem, hopelessness, loss of meaning.....

Bad things happen when people are exposed to hundreds of thousands of ads from birth (TV, radio, print, etc), all professionally designed to convince them that their self-worth DEPENDS on buying what the advertisers are selling. Even when the money is flowing and the shopping bags are full, something still doesn't feel right. And once the money STOPS flowing, for many the psychic implosion is immense.

Wall Street 1929 was symbolized by busted brokers leaping from office window ledges. Main Street 2009 might be symbolized by busted shoppers leaping from the 7th level of the atrium at the mall.

February 22, 2009 1:24 AM
Anonymous said...
So... America will resemble Venezuela during the 1986-1999 oil depression. 60% of the middle class wiped out. Even in 1995, hunger through out society, the rich still partying in Miami, and the final election of a dictator to "fix stuff"?

great,

ntm

February 22, 2009 2:23 AM
jm said...
Although there may be less "income disparity" in Japan in terms of corporate salaries, there are huge disparities in total income and purchasing power.

Japan Inc. has been remarkably successful at promoting among the US intellectual classes the meme that Japan's economy is on the ropes, such that anyone who speaks out about their mercantilistic practices will be seen as attacking a poor nation struggling to survive, and risking estrangement of a vital US ally. Eamonn Fingleton has written usefully, if with perhaps somewhat excessive fervor, on this subject.

Note how the Times' relates information such as the following in a way that implies it represents serious economic malaise:

Nontraditional workers now make up more than a third of Japan’s labor force.

Younger people are feeling the brunt of that shift. Some 48 percent of workers age 24 or younger are temps. ...

As the fraction of Japan's labor force that enjoyed true large-corporation "lifetime employment" was never more than about 20%, the Times' statement that non-traditional workers are more than a third of the workforce informs us only of the utter uselessness of most main-stream-media reporting about Japan.

Recent papers here and here, and this Wikipedia article give much more useful portrayals of Japan's employment market.

[Feb 22, 2009] Soros Says Financial Crisis Marks End of a Free-Market Model By Walid el-Gabry

Feb. 21 (Bloomberg) -- Billionaire investor George Soros said the current economic crisis has its roots in the financial deregulation of the 1980s and marks the end of a free-market model that has since dominated capitalist countries.

Liberalization of the financial industry begun by the Reagan administration has led to a series of breakdowns forcing government intervention, Soros told economists and bankers last night at a private dinner at Columbia University in New York. The global recession, triggered by the collapse of the U.S. housing market, has “damaged the financial system itself,” he said.

Regulators are in part to blame because they “abrogated” their responsibilities, Soros, 78, said. The philosophy of “market-fundamentalism” was now under question as financial markets have proved to be inefficient and affected by biases rather than driven by all the available information, he said.

“We’re in a crisis I think that’s really the most serious since the 1930s and is different from all the other crises we have experienced in our lifetime,” Soros said.

Soros, founder of New York-based hedge-fund firm Soros Fund Management LLC, said last month at the World Economic Forum in Davos, Switzerland, that the Obama administration’s plan to buy toxic assets from U.S. banks won’t be enough to get financial institutions to start lending again.

A more effective approach for restarting the economy would be to inject capital directly into the banks and cut minimum capital requirements, Soros, whose firm oversees $21 billion, has said.

Soros’s Quantum Endowment Fund returned 8 percent last year. That compared with an average loss of 18 percent by hedge funds, according to data compiled by Hedge Fund Research Inc. of Chicago.

To contact the reporter on this story: Walid el-Gabry in New York at welgabry@bloomberg.net

[Feb 22, 2009] Volcker Speech- Economy May Suffer for a `Long Time’

Calculated Risk

Volcker Says U.S. Economy May Suffer for a `Long Time’ February 20 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker speaks in New York about the impact of the financial crisis on the U.S. economy.

Selected comments

datadave writes:

Volcker? Alas, you guys didn't live through his anti-inflationary era. Unemployment was much higher then than now. And Reagan got elected as a result of Volcker's policies which led to even worse consequences...like what we have now: Global destruction of both the environment and average people's finances. The roots for all that is evil now came from Reagan's miasma of anti-progressive reactionary bilge. Like Reagan's belief that we serfs should trust all Bankers as they are Rich and they are Good.

Sorry, Obama (who I voted for) picked two extremely elitist polar economists to lead his team: Summers and Volcker who practice 'disaster capitalism' that liquidates people's incomes to pad oligarch's bottom lines ala Russia in the '90s (Summers was a major supporter of that disaster.)

Instead of people like Krugman, Dean, Reich, or "Dr. Doom" who know so much more than full-of-himself Larry Summers.)

Volcker might be helping the gold bugs though on the short term. thx, Paul.
datadave | 02.22.09 - 10:57 am | #

dryfly writes:

Demographics is not on our side. Could be worse; we could be Japan.
anonymous | 02.22.09 - 12:08 am | #

I'd argue it is worse than that.

The reason is that who cares about the demographics per se... it isn't just the 0-18 and 65-up who are 'just eaters'... there is a HUGE sectors of people in between who do what exactly? Besides collect a paycheck for occupying a cubie each day?

Where my wife works they just laid off massively - something like 25-30% of the company work force... almost all were mid-manager white collar or support... almost all between the ages of 30-45. In the middle of their most productive years.

She looked over the 'carnage' and came to the realization... it won't affect output much at all... most were just 'salaries' & not that critical to the actual day-to-day operation. The white collar equivalent of 'legacy cost'.


The production floor hardly got touched (maybe a 5% reduction) - same thing w/ engineering (nobody let go - hiring freeze)... But finance, marketing, IT, accounting, gen mgmt - all chopped to the ground.

But it is stuff like that that raises hell w/ entitlement funding. Their FICA goes zero too & now they draw UE pulling down 'gen fund' even faster.

And yet the company still chugs along making stuff - at least for now.

There is a ton of dead weight out there all over the place and it isn't all just the kids or the old foggies. We're gonna understand that real well in the months & years to come.

dryfly | 02.22.09 - 12:24 am | #

[Feb 21, 2009] Bond Trading Highest Since ‘07

"The stock exchange is the biggest con game the world has ever seen."
CalculatedRisk

From Bloomberg: Bond Trading Highest Since ‘07 as Credit Freeze Thaws

Corporate bond trading in the U.S. is rising to the highest level in two years, adding to evidence that credit markets are thawing even with stocks off to their worst start since the 1920s.

An average $17.1 billion of corporate bonds traded daily this month, following $17.7 billion in January, according te Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.
Spread Corporate and Treasury Click on table for larger image in new window.

There has been some improvement (decline in spread) in recent weeks, but the spreads are still very high, even for higher rated paper, but especially for lower rated paper with a spreads still above the high level of the early '80s recession.

A2P2 Spread There has also been improvement in the A2P2 spread. This has declined to 1.09. This is far lower than the record (for this cycle) of 5.86 after Thanksgiving, but still too high.

This is the spread between high and low quality 30 day nonfinancial commercial paper. Look at the graph - there was significant concern when the A2P2 spread spiked in 2007 and 2008 (the three little peaks). Now the spread is back to the highest level of those peaks!

 

TED Spread It is also worth mentioning that the TED spread is below 1.0. This is the difference between the interbank rate for three month loans and the three month Treasury. The peak was 4.63 on Oct 10th and a normal spread
Comments

scone writes:

Don't have the stomach for corporate bonds. Even the munis scare me now. It's TIPS and cash, for the moment. I wonder how much cash is quietly accumulating on the sidelines, worldwide?
scone | 02.20.09 - 1:17 pm | #

Bob Dobbs writes:

" Interesting Times writes:
B-bye 1997...

Hello 1987...
Interesting Times | 02.20.09 - 1:22 pm | # "

Brings back memories. In '87 I was dating a 40-something millionaire who'd been an officer of the NYSE at one point. She stayed up all night watching news coverage of the crash and recovery and told me, "The stock exchange is the biggest con game the world has ever seen."

I never bought much stock after that.
Bob Dobbs | Homepage | 02.20.09 - 1:27 pm | #

PonziMonetizaCoruptiCapitalism writes:
could the increase in bond trading be because the derivatives market's are about to go tu?
PonziMonetizaCoruptiCapitalism | 02.20.09 - 1:31 pm | #

That's Ballgame Comrades writes:
Ken Lewis is finished. Toast. Adios.
That's Ballgame Comrades | 02.20.09 - 1:46 pm | #

Cut Bait writes:

The FIRE industry cannibalized itself and ate the rest of the world as dessert.

The dichotomy of America's history is outstanding in the rich irony of the situation.

I am glad the meltdown has picked up speed leading to nationalization. The future will only have glimmers of hope when the twisted wreckage of our financial system is bulldozed away and a simple, humble, functional structure is erected.

Thread music tribute.

http://www.youtube.com/watch?v=T...h? v=T2NEU6Xf7lM

Cut Bait | 02.20.09 - 1:46 pm | #

[Feb 21, 2009] Silver, Gold, and the Hunt Brothers

2/21/200 | CalculatedRisk 

From the LA Times: Gold fever sweeps suburbia

Gold is hot. The precious metal soared $25.70 an ounce Friday to $1,001.80, topping the $1,000 mark for the first time in nearly a year. South African Krugerrands, American Eagles and other gold coins are in demand as people seek safe investment havens in uncertain times.

That has people digging through their drawers and jewelry boxes looking for watchbands, cuff links, chains and bracelets that can be sold to jewelers, pawnshops and other brokers to be melted down to feed the growing demand for gold coins.

The party Geivet attended at the Aliso Viejo home of Mary-Margaret Fincher is a twist on the old suburban Tupperware party. Here, however, it's the guests who do the selling.
...
There were earrings from ex-boyfriends, ring settings with missing stones and chain bracelets from sorority sisters. One woman brought in her husband's wedding ring -- from a previous marriage.
I don't follow gold, but back in the late '70s I was long the silver market. I closed my positions when housewives started selling the family silver - and eventually shorted the market. Of course that market was being manipulated by the Hunt brothers, but this story reminded of early 1980.

Note: not intended as advice. Besides I don't follow gold. This was just a short trip down amnesia lane.

 

[Feb 20, 2009] Fed's Lockhart sees "catalysts for the start of modest recovery"

2/19/2009 | CalculatedRisk

Excerpts from a speech by Altanta Fed President Dennis (edit) Lockhart today:

[T]he economic outlook is not indefinitely bad. Most forecasts, my own included, see catalysts for the start of modest recovery in the second half of the year.
I think almost everyone agrees with the "not indefinitely bad" comment. But I'm interested in what Lockhart sees as "catalysts for recovery":
With production falling—and expected to decline significantly more this quarter—I expect some reduction of excess business inventories, putting producers in a position to expand output as spending returns.
Right now it appears inventory levels are too high. In the Philly Fed economic outlook report today, they asked a special question about inventory levels:
In special questions this month, firms were asked about their current inventory situation. Nearly 44 percent of the firms indicated that their inventories were too high and were expected to decrease during the first quarter; 67 percent said their customers' inventory plans had also decreased.
So Lockhart might be correct, but it is too early to tell if producers will reduce inventory enough in the first half of 2009 to expand output in the second half of the year.
There are signs lower mortgage interest rates are helping housing markets on the margin. The January pending sales number was up, and there has been a spurt in refinancing activity. If historically low mortgage rates can be sustained over the coming months, I expect more buyers will be drawn into the market.
Actually the most recent pending home sales number was for December and the reason it showed an increase was because of more activity in areas with significant foreclosures.
Several factors should lift consumer spending as the year progresses. These factors include the dramatic fall in energy prices, greater stability in the housing market, and improving consumer confidence.
This is very possible, but I don't see evidence of this yet.
I should mention that last week the U.S. Census Bureau reported an unexpected increase in retail sales during January. I would like to see further confirmation of the underlying strength hinted at in this report, but on its face, the pickup in consumer spending is encouraging.
This is just one month of data and could be related to gift cards, so I wouldn't read much into that small increase.
Also contributing to the upturn seen in the consensus outlook are the large and targeted fiscal, credit, and monetary policies of the government and the Federal Reserve ... The intent of these aggressive and unprecedented policy actions is to support spending and fix the dysfunction in credit markets that has so severely constrained the economy’s natural forces of growth.

Indeed, we have seen modest, but hopeful, signs that financial markets are improving. A key element in the improved economic environment expected in the latter half of the year is that financial institutions will find more stable footing and begin to provide greater support to business expansion and consumer spending.

I think we can start looking for some rays of sunshine, but I don't see anything yet.

 

[Feb 20, 2009] Markets and more

Calculated Risk

And for all those who think this is all doom and gloom, Paul Kasriel wrote today: SIVs Got Us into Trouble – SIVs to the Rescue?

[W]e believe that the nadir of this recession is occurring now. Moreover, we believe that the combination of the $1 trillion TALF program and the $787 billion fiscal stimulus program, assuming it is financed by the banking system and the Fed, will have a salutary effect on aggregate real activity, perhaps inducing an economic recovery by the fourth quarter of this year.
By "nadir", Kasriel doesn't mean the lowest point for GDP, but that he believes the worst percentage decline in GDP is happening this quarter - and he is forecasting a 6.4% annualized decline in real GDP for Q1.

Why the Failure to Understand the Global Financial System?

Some readers may take issue with the headline, but bear me out.

Within ten days of 1987 stock market crash, President Reagan established what was popularly called the Brady Commission to investigate the causes of the meltdown and recommend remedies. A little more than two months after it was created, the Commission submitted its report.

The 1987 crash was trivial in complexity compared to our current mess. Stocks trade on exchanges, so transaction sized, prices, and execution time are a matter of public record. Even though foreign markets swooned in sympathy with the US downdraft, the crisis was a domestic event.

Contrast the 1987 panic with our credit meltdown. The 1987 crash was a single country event, in transparent markets (equities and equity futures). This crisis revolves around multiple over the counter markets (asset backed securities, including securitized auto, student, residential and commercial real estate loans, CDOs, CLOs, CDS) that were originated and sold around the world. The authorities have an weak to non-existent picture of trading volumes and prices. In addition. they also do not have a good feel for the terms of the instruments themselves (these were privately negotiated agreements; unlike registered securities, the offering documents are not a matter of public record). And the lack of an understanding of the range and mix of types of deals impedes developing sound policy. For instance: it is widely known that many residential mortgage-backed securities contain restrictions on modifying mortgages. Admittedly, some do not prohibit them, but some bar them completely, others limit them to a certain percentage of the pool. But since these deals were all sold OTC with no document registry, no one knows what the distribution among these three types is.

I have complained for some time that it is inexcusable for the authorities to be fumbling in the dark as they are without trying to light a candle. One could argue that in the first two acute phases of the crisis (August-September 2007 and November-December 2007), the authorities. could tell themselves that their remedies would work, this would pass relatively quickly. like the Asian crisis (while the affected countries suffered a long aftermath, the international market disruption resolved itself much faster). But by the Bear failure, with other investment banks known to be in precarious shape, it was clear this crisis was not going to resolve itself quickly. That was when the need to get a better grasp on what was going on was undeniable.

Before readers say it would take too long and be too hard, consider: if you had a mysterious disease, would you rather have your doctor treat by analogy to common ailments or do the needed testing to come up with a diagnosis?

Even with a full court press starting in March 2008, it probably would have taken 6 months to get a better picture. It would be impossible to get a full picture in that time, but if one set investigation priorities well, one could have a great deal of insight on the key issues (most things in life are 80/20, meaning 80% of the value comes from the top 20%; there is no reason why an effort like this should be any different). And before you say regulators were overtaxed and lacked sufficient personnel, the Brady Commission was headed on a day-to-day basis by a Harvard Business School finance professor and staffed largely by junior-mid career people from the private sector with relevant analytical and industry knowledge (they were seconded from their firms; it was considered an honor and a career boost to participate).

A Financial Times comment recognized the same underlying problem, but suggests going about it in a different way. Otmar Issing and Jan Krahnen suggest putting in place mechanisms to capture information that would help give a better overview of the financial system, as opposed to just individual institutions. I am not convinced that the data gathering would create a "risk map" as they contend, but it would provide an enormously valuable database and should greatly reduce the number of regulatory blind spots (at least those due to lack of data).

From the Financial Times:
 

Consider the insights gained during this crisis. First, supervision has to focus on containing systemic risk rather than on avoiding individual bank defaults. Second, early warning signals need to be backed up by reliable information on all financial markets, including derivatives. Both aspects have been neglected in the past and continue to be neglected today.

Setting up a solid information base capturing global financial exposures is imperative. There is a long list of exposures that are not transparent today, for example the cross-border links between large, complex financial institutions (LCFIs) and the whereabouts of credit default swaps, collateralised debt obligations and other asset-backed securities. Putting together a global “risk map” displaying financial links among LCFIs as well as the most important risk drivers, such as asset price changes and yield spread dynamics, would enable authorities to carry out financial system stress tests.

The basis for the risk map would be a global database. We have proposed that standards be defined by a task force of experienced international agencies, such as BIS, the European Central Bank, the Organisation for Economic Co-operation and Development and the International Monetary Fund, allowing the data to be aggregated by region or by product. Data privacy conditions and capacity limits mean data collection must be defined on a discrete – for example, quarterly – basis. The risk map project could be chaired by the IMF. Data sharing could be on an aggregated level to preserve data privacy and to maintain a level playing field for international competition. Furthermore, data analysis would focus on an early warning methodology and a general assessment of systemic risk, which in turn could feed directly into the minimum capital requirement of international banks. Such a hard-wiring of systemic risk analysis to capital standards would allow supervisors to carry out counter-cyclical policies.

The control of systemic risk could be further enhanced by the use of a global credit register, which would essentially extend the risk map to exposures of banks with regard to large corporations. Existing credit registers are basically still national. This is an anachronism at a time when companies borrow and banks lend on a global scale.

Returning to our initial questions: have central banks and supervisors taken appropriate action to establish a reliable data foundation for systemic risk assessment? The answer is, unfortunately, no. Although 18 months have elapsed since the outbreak of the financial crisis, there is still no co-ordinated initiative.

What explains the reluctance of governments to get involved in a data generation exercise? The most likely explanation draws on the competitive situation in international financial markets, with governments aiming at preserving the competitive advantage of national banking industries.

Referring to the first question in the introduction, the answer is negative as well. We are still not prepared to avoid a disastrous financial crisis like the one that started 18 months ago.

However, in the interest of improved macro-prudential super vision, one can see at least what needs to be done. As the huge losses caused by the financial crisis forcefully show, macro-financial stability is a public good that has to be actively managed. The risk map is one element in such an endeavour, and a vital element for that matter.
 

23 Comments
Anonymous lucifer said...
Because facing reality, thinking objectively and adapting is hard (especially if you have a bad case of hubris). Pushing old ideas, concepts, beliefs and models is so much easier.

February 19, 2009 9:55 PM

Anonymous Anonymous said...
Because it is hard - in fact, I fear impossible - to switch from massive systemic fraud and corruption when it compromises, paralyzes, and contaminates everything it touches.

- StewPDX

February 19, 2009 10:00 PM
 

Blogger Steve said...
Excellent post.

Let's remember what _hasn't_ happened that would increase transparency. Congress has done nothing to regulate CDS or to place OTC derivatives under CFTC (we're now 11 months after Bear). Obama could issue an emergency order to this purpose -- good luck with that. Hedge funds could be required to disclose more than their short positions. Hasn't happened, probably won't. Some of those folks are probably holding back data as a bargaining chip to get government backstops.

So instead we have the Fed doing the best it can, on marshy legal ground, just the way the contribution-sucking politicians like it. The Fed can make any agreement it wants with its European counterparts on a clearing house for CDS--but nothing will happen (nothing so far HAS happened) without the agreement of ISDA and the market participants.

February 19, 2009 10:25 PM
 

Blogger Michael Lumley said...
I'm not wholly convinced that large aggregations of market data would even be helpful from a policy perspective. The most important policy decisions are being made at a level where political - not economic - considerations are most important.

February 19, 2009 10:42 PM

Anonymous Charles said...
What Issing and al. do not realize is that the universe of "modern" financial product is far too complex to be captured in a quarterly reporting. A big part of the complexity lays in the optional positions. By "optional position&quoses in a loan, the loss-experience dependant change of asset management responsability in CDO's,etc... I remember once hearing a very good Head Quant of a respected "LCFI" saying that it found impossible to price accurately all the contigent clauses embedded in a "plain" CDO documentation.

Consequently, there is NO WAY to have any meaninful global reporting before the universe of permitted financial instruments is drastically simplified.

I would leave vanilla loans and deposit for banks, and exchange traded forex, equity, bonds and derivative for anyone else. Funnily, could have a place in such a chastitized financial world, as contracts traded in an exchange based on underlying bonds traded on the same exchange...

February 19, 2009 10:45 PM
 

Anonymous artichoke said...
The banks are likely to want to trade: we open our books and let you put our counterparty exposures into your database, and you(the government) take responsibility for the losses at some level.

That is unacceptable. We have to seize these guys by the necks, use regulatory authority to extract the information without asking their permission, then use the data to manage a restructuring of the worldwide industry. But that still leaves the question: why?

If the government manages the restructuring at this level, the temptation will remain to have the taxpayers "participate".

Actually I don't see why the data is necessary. If the banks cannot show they are solvent, use Mankiw's new prescription: wipe out the shareholders, put the bondholders in as the new shareholders, and let them figure it all out.

February 19, 2009 10:55 PM

Anonymous doc holiday said...
I used to have a post from some old derivatives publication which had a reference to Moody's or S&P; this was circa 2002 or so. There were derivatives exploding all over the world and the rating agencies basically admitted that they didn't understand the structuring of these new products, but it would be a mistake to not capture some of the market action and increase rating capacities. I'll see if I can find that, but the bottom line obviously has been, in retrospect, that the rating agencies and government regulators were totally unaware of what was going on and they used out-dated risk modeling and out-dated policies which were then linked to the political agenda of The Bush Ownership Society, which relied on non-regulation and non-accountability. That was and still is, The Perfect Storm!

Thank you very much ...

February 19, 2009 11:08 PM

Anonymous Tony said...
You'll understand the system as much as you want to understand it.

The long and short of it is that for 10 years people got greedy, the greed wasn't restrained, and this resulted in massive bad investments and the United States and Europe are now massively over indebted.

There are only two ways out of insolvency: loan restructuring or default.

If the government itself is insolvent, then the government must go to its creditors for loan restructuring. The US and Europe could go to China, Japan, and all the other foreign *sovereign* holders of US and European sovereign debt. This group is small enough to be an oligopoly.

The US and Europe could sign an agreement where the sovereign creditor oligopoly will guarantee continued to loans to US/EU provided that US/EU guarantee restructuring their economies to export what the sovereign creditor oligopoly want to consume. Sort of like a Chapter 11. This would lower the risk on US and European bonds. The US and European governments could then take that money and put it into restructuring of debt in the private sector.

February 19, 2009 11:10 PM

Anonymous artichoke said...
China is providing help on the financial front to the US. In return the US is helping China in terms of foreign policy: to regain Taiwan and perhaps, according to rumors I have heard in the past day or two, in other ways.

Others are being left out in the cold, but it seems that a US-China collaboration is in the works.

February 19, 2009 11:20 PM

Anonymous doc holiday said...
Anyone remember this gem from Citi?

At September 30, 2006 and December 31, 2005, the Company's maximum potential
amount of future payments under these guarantees was approximately $1.1 trillion
and $709 billion, respectively. For this purpose, the maximum potential amount
of future payments is considered to be the notional amounts of letters of
credit, guarantees, written credit default swaps, written total return swaps,
indemnifications, and recourse provisions of loans sold with recourse, and the
fair values of foreign exchange options and other written put options, warrants,
caps and floors.

February 19, 2009 11:30 PM

Anonymous doc holiday said...
I'm finding some great old hits as I look for something; anyone remember this (The Perfect Storm)

Chairman Ben S. Bernanke
Before the Independent Community Bankers of America's Annual Convention and Techworld, Honolulu, Hawaii
(via satellite)
March 6, 2007
GSE Portfolios, Systemic Risk, and Affordable Housing

FYI: "A straightforward means of anchoring the GSE portfolios to a clear public mission would be to require Fannie and Freddie to focus their portfolios almost exclusively on holdings of mortgages or mortgage-backed securities that support affordable housing. The evolution of mortgage markets since the GSEs were created strongly suggests that a concentration on affordable-housing products would provide the greatest public benefit. Markets for highly rated assets--including most residential mortgages and the pools of MBS backed by such mortgages--have become extremely deep and liquid, with more than $25 trillion in outstanding instruments. These markets are international in scope, and market participants include thousands of banking organizations, insurance companies, pooled investment vehicles, institutional investors and, increasingly, foreign governmental authorities. Given the size and depth of the secondary market for most residential mortgages, the GSEs’ purchase and retention of highly rated mortgages and of their own MBS are unlikely to do much to enhance liquidity in the secondary markets for these assets or to promote affordable housing. On the other hand, the vast size of the market for highly rated assets greatly increases the potential for rapid growth of GSE portfolios and, consequently, systemic risk."

>> Why is Ben still around? He crashed the friggn economy and then dug a deeper hole with Paulson and now what, how deep can this go before someone like Obama say, screw you? These Go To Eleven $ Trillion

February 19, 2009 11:39 PM

Blogger Advant Guard said...
No mention of how Basel 2 turned the rating agencies into for profit regulators of the financial system. Derivatives are just a symptom of an approach to risk management that explicitly ignored issues such as counter-party risk. The rules allowed you to net derivatives with different counter-parties and poof, the risk vanishes; until one of the counter-parties (AIG, for example) can't meet it's obligations.

February 19, 2009 11:50 PM

Anonymous Anonymous said...
In my opinion, it is because the fed and the bankers believe there is an unlimited amount of debt they can "force" on the lower and middle class. It is all about negative real earnings growth for MOST people, more and more debt on the lower and middle class, and making sure the debt gets repaid even if the fed has to monetize it while making sure price inflation and wage inflation do NOT occur.

February 20, 2009 12:24 AM

Anonymous Anonymous said...
May I suggest a coverup as the reason?

Vinny Goldberg

February 20, 2009 12:54 AM

Anonymous Anonymous said...
If anyone think there is oversight of TARP funds, well, it is the best oversight a bunch of 20 something former campaign staffers can do:

"The Congressional Oversight Panel, the body named by Congress to oversee the $700 billion bailout, consists of five strong-minded members who agree about the enormity of their task, and little else.

The short-staffed panel is drawing heavily on the Harvard University law students and colleagues of its chairwoman, law professor Elizabeth Warren, as it churns out reports at a break-neck pace. Most of the staffers are 20-something aides from the Obama campaign, though an executive director and two banking lawyers were hired recently."

http://online.wsj.com/article/SB123509144351728451.html

February 20, 2009 1:02 AM

Anonymous Anonymous said...
hahaha, they understand it Yves. They really get it. But you have to understand, the whole point of government is to protect corporations and banks.

The vast majority of people just provide cheap labor. Obama and co are pretty smart people but they protect the interests of the elite first.

Everyone knows there was massive fraud and greed going on, but no one is going to do a thing. A few fish here and there will get fried but otherwise same old, same old.

February 20, 2009 1:11 AM

Blogger M.G. said...
They do not to understand because those are the ones who screwed it up....The day that banks will disclose balance sheets and open their books it will be a nightmare and maybe too late. It is a market of lemons where information holders can and are allowed to cheat. But it is getting out of hands...

February 20, 2009 1:13 AM

Anonymous Simpson said...
I'm with Michael. I don't really think aggregated data would be particular useful or valuable.

This is not plain vanilla equities with open and transparent pricing.

This is structure finance.

With all due respect, it would take 500 sophisticated expert analysts a year just to figure out Citi's current exposure. By the time they finished, their analysis would be useless as it would be completely out of date

February 20, 2009 1:27 AM

Anonymous Anonymous said...
Wouldn't participation in the investigation of this meltdown, also be way for juniors to differentiate & divorce themselves the failed status quo? Sounds like a great education and resume addition in an industry that will be exceptionally leery of youthful disregard of risk & consequence.

February 20, 2009 1:48 AM

Blogger Mencius Moldbug said...
I learned one thing from this event: in a stable free-market financial system, the market interest rate on loans of any maturity is that point at which there are the same number of private actors who want to lend at that maturity and rate, as borrow at it.

Ie: "borrowing short and lending long" is not a free-market activity.

And if you don't have a stable free-market financial system (which hopefully means you have a stable non-free-market financial system, not an unstable non-free-market financial system, and sure as hell not a black, smoking hole in the ground), you sure as heck need to manage the heck out of it.

Because either the thing flies on its own, or it doesn't. If it doesn't, you need to fly it.

Ie: if you build a fragile liquidity structure out of systematic maturity mismatching, the structure will collapse unless it is protected by loan guarantees. Loan guarantees do not issue themselves.

If your maturity pyramid is underprotected, we get what just happened. If it is overprotected, you get bad lending - eg, the S&Ls. Where do you draw the line? With good management. And so on.

The problem is: everyone is assuming that USG can get its act together, patch the open artery, and get back to business as usual with the same basic financial system, but comprehensive, effective and modern regulation.

If there is any evidence that this assumption is realistic, much less true, it has escaped my attention...

February 20, 2009 2:45 AM

Anonymous Swedish Lex said...
Yves,
This is the crucial point, and the one that will matter in the long run.

How do we build a system/society that is capable to analyse, understand and self-correct en route, without first having to steer off the road, crash and then start over, go full throttle ("OH, what a lovely bubble economy"), and then crash again, eventually. There are parallels with global warming etc.

This is what my next pice of research will cover

February 20, 2009 2:49 AM

Anonymous Anonymous said...
Bit like rock and roll rehab, clean up and start over, you gotta love the drug = (re-discover childhood).

skippy

February 20, 2009 3:37 AM

Blogger Mitchell said...
How's the LaRouche movement doing in the US? Last night I found a pile of leaflets by his Australian affiliate at the train station. Frankly, his call to write off the whole financial system that we have, and replace it with a new accounting based on physical productivity, almost sounded plausible - and certainly sounded plausible enough to attract the support of people who are losing their jobs and trying to understand finance for the first time.

It's getting to the point that being in favor of capitalism now is like being in favor of socialism after the Berlin Wall came down.

February 20, 2009 4:03 AM

Some readers may take issue with the headline, but bear me out.

Within ten days of 1987 stock market crash, President Reagan established what was popularly called the Brady Commission to investigate the causes of the meltdown and recommend remedies. A little more than two months after it was created, the Commission submitted its report.

The 1987 crash was trivial in complexity compared to our current mess. Stocks trade on exchanges, so transaction sized, prices, and execution time are a matter of public record. Even though foreign markets swooned in sympathy with the US downdraft, the crisis was a domestic event.

Contrast the 1987 panic with our credit meltdown. The 1987 crash was a single country event, in transparent markets (equities and equity futures). This crisis revolves around multiple over the counter markets (asset backed securities, including securitized auto, student, residential and commercial real estate loans, CDOs, CLOs, CDS) that were originated and sp a good feel for the terms of the instruments themselves (these were privately negotiated agreements; unlike registered securities, the offering documents are not a matter of public record). And the lack of an understanding of the range and mix of types of deals impedes developing sound policy. For instance: it is widely known that many residential mortgage-backed securities contain restrictions on modifying mortgages. Admittedly, some do not prohibit them, but some bar them completely, others limit them to gistry, no one knows what the distribution among these three types is.

I have complained for some time that it is inexcusable for the authorities to be fumbling in the dark as they are without trying to light a candle. One could argue that in the first two acute phases of the crisis (August-September 2007 and November-December 2007), the authorities. could tell themselves that their remedies would work, this would pass relatively quickly. like the Asian crisis (while the affected countries suffered a long aftermath, the international market disruption resolved itself much faster). But by the Bear failure, with other investment banks known to be in precarious shape, it was clear this crisis was not going to resolve itself quickly. That was when the need to get a better grasp on what was going on was undeniable.

Before readers say it would take too long and be too hard, consider: if you had a mysterious disease, would you rather have your doctor treat by analogy to common ailments or do the needed testing to come up with a diagnosis?

Even with a full court press starting in March 2008, it probably would have taken 6 months to get a better picture. It would be impossible to get a full picture in that time, but if one set investigation priorities well, one could have a great deal of insight on the key issues (most things in life are 80/20, meaning 80% of the value comes from the top 20%; there is no reason why an effort like this should be any different). And before you say regulators were overtaxed and lacked sufficient personnel, the Brady Commission was headed on a day-to-day basis by a Harvard Business School finance professor and staffed largely by junior-mid career people from the private sector with relevant analytical and industry knowledge (they were seconded from their firms; it was considered an honor and a career boost to participate).

A Financial Times comment recognized the same underlying problem, but suggests going about it in a different way. Otmar Issing and Jan Krahnen suggest putting in place mechanisms to capture information that would help give a better overview of the financial system, as opposed to just individual institutions. I am not convinced that the data gathering would create a "risk map" as they contend, but it would provide an enormously valuable database and should greatly reduce the number of regulatory blind spots (at least those due to lack of data).

From the Financial Times:
Consider the insights gained during this crisis. First, supervision has to focus on containing systemic risk rather than on avoiding individual bank defaults. Second, early warning signals need to be backed up by reliable information on all financial markets, including derivatives. Both aspects have been neglected in the past and continue to be neglected today.

Setting up a solid information base capturing global financial exposures is imperative. There is a long list of exposures that are not transparent today, for example the cross-border links between large, complex financial institutions (LCFIs) and the whereabouts of credit default swaps, collateralised debt obligations and other asset-backed securities. Putting together a global “risk map” displaying financial links among LCFIs as well as the most important risk drivers, such as asset price changes and yield spread dynamics, would enable authorities to carry out financial system stress tests.

The basis for the risk map would be a global database. We have proposed that standards be defined by a task force of experienced international agencies, such as BIS, the European Central Bank, the Organisation for Economic Co-operation and Development and the International Monetary Fund, allowing the data to be aggregated by region or by product. Data privacy conditions and capacity limits mean data collection must be defined on a discrete – for example, quarterly – basis. The risk map project could be chaired by the IMF. Data sharing could be on an aggregated level to preserve data privacy and to maintain a level playing field for international competition. Furthermore, data analysis would focus on an early warning methodology and a general assessment of systemic risk, which in turn could feed directly into the minimum capital requirement of international banks. Such a hard-wiring of systemic risk analysis to capital standards would allow supervisors to carry out counter-cyclical policies.

The control of systemic risk could be further enhanced by the use of a global credit register, which would essentially extend the risk map to exposures of banks with regard to large corporations. Existing credit registers are basically still national. This is an anachronism at a time when companies borrow and banks lend on a global scale.

Returning to our initial questions: have central banks and supervisors taken appropriate action to establish a reliable data foundation for systemic risk assessment? The answer is, unfortunately, no. Although 18 months have elapsed since the outbreak of the financial crisis, there is still no co-ordinated initiative.

What explains the reluctance of governments to get involved in a data generation exercise? The most likely explanation draws on the competitive situation in international financial markets, with governments aiming at preserving the competitive advantage of national banking industries.

Referring to the first question in the introduction, the answer is negative as well. We are still not prepared to avoid a disastrous financial crisis like the one that started 18 months ago.

However, in the interest of improved macro-prudential super vision, one can see at least what needs to be done. As the huge losses caused by the financial crisis forcefully show, macro-financial stability is a public good that has to be actively managed. The risk map is one element in such an endeavour, and a vital element for that matter.

[Feb 19, 2009] Experts, Crashes, Media, Skepticism By Barry Ritholtz

Was not Reaganomics/"Bush ownership society" the greatest experiment in groupthink ever ?
February 19th, 2009 | The Big Picture

There is a surprisingly interesting article at Money Magazine on why so many so-called experts utterly missed the market crash, credit crisis, and housing collapse.

Its an interview with Philip Tetlock who is (with no small amount of irony), an expert on experts. He is a professor of organizational behavior at the University of California-Berkeley’s Haas Business School, and has been studying experts for 25 years.

“But you shouldn’t simply write all gurus off. Tetlock’s research found that one kind of expert turns out consistently more accurate forecasts than others. Understanding what makes them better can help you make more reliable predictions in your own life. Tetlock explained it all to Money’s former managing editor, Eric Schurenberg, in a recent interview. . . .

What makes some forecasters better than others?

The most important factor was not how much education or experience the experts had but how they thought. You know the famous line that [philosopher] Isaiah Berlin borrowed from a Greek poet, “The fox knows many things, but the hedgehog knows one big thing”? The better forecasters were like Berlin’s foxes: self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes and were rather modest about their predictive ability. The less successful forecasters were like hedgehogs: They tended to have one big, beautiful idea that they loved to stretch, sometimes to the breaking point. They tended to be articulate and very persuasive as to why their idea explained everything. The media often love hedgehogs.

How do you know whether a talking head is a fox or a hedgehog?

Count how often they press the brakes on trains of thought. Foxes often qualify their arguments with “however” and “perhaps,” while hedgehogs build up momentum with “moreover” and “all the more so.” Foxes are not as entertaining as hedgehogs. But enduring a little tedium is worth it if you want realistic odds on possible futures.

Fascinating stuff.

My own thesis as to their problematic prognostications places a healthy amount of blame on the conspiracy of optimism.

And on a related note, Dean Baker and I are interviewed in Editor & Publisher magazine on what Journalists can do when interviewing these experts: What to ask, how to dig beneath the data, how to not get rolled by the spinmeisters:

Wish list for reporters covering this and future financial crises

Be more skeptical of sources. “You have to play lawyer, ask what is this person’s motivation for saying what they’re saying.” The best reporting on the automobile industry’s true financial predicament was at an upstart Detroit Web site that supplies unvarnished automotive reviews and editorials about the industry, The Truth About Cars. “They understood the business and its challenges; they were railing for several years against the unsustainable nature of the capital structure of the Big 3,” he says.

Question data, constantly. Last March, for example, The Wall Street Journal ran a story saying the vast inventory of foreclosed homes was starting to bring people back into the housing market, and cited figures from the National Association of Realtors showing a jump in sales in February of 2.9% from the month before. But he points out that in every year home sales are lowest in January, so changes from January to February are measuring seasonal differences, not actual improvements in house sales. The tendency to overemphasize the most recent data point in a monthly series is called the “recency” effect. “It is a foolish way to ignore the trend and give greater emphasis to today,” he notes.

Give good context. The struggle to control the narrative of how the housing crisis and ensuing financial meltdown occurred is in full swing, exemplified by Karl Rove’s op-ed in the Wall Street Journal in January that fingered Fannie Mae and Freddie Mac as among “the principal culprits of the housing crisis.” But he and others point out that the two government-sponsored enterprises, though they became too large and overleveraged, had nothing to do with the explosion of high-risk lending that took place between 2002 and 2007.

Both articles are thought provoking and worth exploring . . .

Sources:
Why the experts missed the crash
Eric Schurenberg
Money Magazine, February 18, 2009: 4:10 PM ET
http://money.cnn.com/2009/02/17/pf/experts_Tetlock.moneymag/index.htm

Expert Tips on Covering the Financial Crisis
Barbara Bedway
Editor & Publisher, February 18, 2009 12:01 AM ET
http://www.editorandpublisher.com/eandp/news/article_display.jsp?vnu_content_id=1003942139

Comments

  1. tryflyfishing Says:

    My father -a journalist- told me to start with “Why is this bastard lying to me?” It would help if journalists started this way today.
     

  2. Transor Z Says:

    How to spot a fox:

    1. They probably aren’t on TV, and if they are

    2. The glib a-hole talking head interviewer is impatient and dismissive because the fox is taking too long/not following the standard TV interview formulas/not charismatic/too thoughtful and nuanced for the glib a-hole to understand. IMO most TV personalities are “hedgehogs” that attack foxes. “The medium is the message.”

    There’s actually a term for this phenomenon: Sociology of Knowledge. See http://en.wikipedia.org/wiki/Sociology_of_knowledge

    It’s a study of how society prioritizes which “experts” to listen to and arrives at consensus reality.
     

  3. ottovbvs Says:

    Most “experts” missed the signs because they had a vested interest in missing them. Now of course all the “experts” including the ones here are swinging too far in the other direction.

    Yes we’ve got a rough year, profits will be in the tank, a big bank or two could get nationalized, unemployment will go to around 9%, negative growth probably for this and the next two or three quarters, but reports of the death of the US economy are being somewhat overstated.

    Basically we’re faced with a couple of year when the US economy is going to be operating below optimum (not overheated) capacity. I accepted that long ago and adjusted accordingly.

    All this running around forecasting jumps in protectionism, massive deflation, massive inflation (I’ve heard both predictions here) etc etc is somewhat overwrought.

    This is the attitude of people like Doug Kass and Uncle Warren and it’s mine.
     

  4. danm Says:

    The less successful forecasters were like hedgehogs: They tended to have one big, beautiful idea that they loved to stretch, sometimes to the breaking point. They tended to be articulate and very persuasive as to why their idea explained everything. The media often love hedgehogs.
    —–
    It’s much easier to be articulate when explaining a single big idea than when trying to explain the effects of multiple non-linear ideas.

    I’ve often been told that to convince the masses you’ve got to stick to MAX three ideas. With the multitude of signs popping up to warn us but the expert rehashing the same 2 or 3 positive ones, it’s no wonder most did not see this coming!

    Dori said it best: “Just keep swimming, just keep swimming, just keep swimming…”
     

  5. dead hobo Says:

    Being a little more serious now, I have learned that most people have something valuable to say. They can be famous, infamous, ordinary, or hermits. All are also capable of saying things of monumental stupidity. The secret is being able to listen, and do it on more than one level.

    The listener has to privately ask himself “What is this person really saying?” A lot of messages will be coming out simultaneously. The challenge is to put all of them together into one story, then decide if you are learning something new or wasting some time. To listen well, you have to draw on outside information to see how what you hearing fits in? Also, you have to be smart enough to know there are unknowns and unknowables, and either work within those limitations or file what you heard away for future reference in another context elsewhere.

    Let’s not even start on “are you talking to an expert, or just someone who is anointed or popular”. Or maybe just a psychopath who wants something from you and you were unlucky enough to maintain eye contact for too long.
     

  6. Steve Barry Says:

    The experts missed the crash, because since the early 80s, we were all on the same train of optimism…led there by Reagan at first, then Greenspan ran with it by fixing the system using monetary policy. If you weren’t a optimist, you were looked down on and more importantly, missed the big party or even worse, made very poor. I was in the lead car of the optimism train…then the Internet bubble crashed. I was shocked and made it my life’s work never to be fooled like that again. I became the ultimate realist…unfortunately right now that makes me an uber-bear. Most experts though were still drinking the even more powerful kool-aid in 2006-7 and thus of course could not see the track was out and the train derailed.
     

  7. H Salmon Says:

    I learned critical thinking in an early career (one Barry shares). Then moved to Corporate America and found it completely discouraged. Those who engaged in it were feared/forced out as “hedgehogs” (we had another word) tried to spin whatever the leader wanted as great strategy. No surprise to me that so many companies are struggling - managing for short-term #s, executive bonuses, office politicians, and a revolving door as those executives leveraged short term success to jump ship for better opportunities just spells eventual disaster.

    It’s now hard for me to invest in equities as I am always suspicious. Makes we want to only invest in companies that I control.

    I am hoping that we are entering a new age of more critical analysis, but we certainly are not in Washington. Bloomberg had a great interview with Michael Porter where he nailed it - Washington just completely lacks any strategic thinking. Anyway, it is wonderful to have sites like TBP where you can hear from true thinkers and entertain different views.

[Feb 18, 2009] Economist's View A Decade of Despair

http://www.bls.gov/webapps/legacy/cesbtab4.htm

January 9, 2009

Real Average Hourly Earnings, 1964-2008

December *

1964 (7.96)

1965 (8.12)
1966 (8.13)
1967 (8.30)
1968 (8.43)
1969 (8.44) Nixon

1970 (8.47)
1971 (8.74)
1972 (9.07) High
1973 (8.85)
1974 (8.55) Ford

1975 (8.44)
1976 (8.63)
1977 (8.68) Carter
1978 (8.65)
1979 (8.23)

1980 (7.94)
1981 (7.84) Reagan
1982 (7.92)
1983 (7.97)
1984 (7.95)

1985 (7.91)
1986 (7.97)
1987 (7.86)
1988 (7.80)
1989 (7.74) Bush

1990 (7.57)
1991 (7.57)
1992 (7.53) Low
1993 (7.54) Clinton
1994 (7.54)

1995 (7.57)
1996 (7.59)
1997 (7.79)
1998 (7.95)
1999 (8.02)

2000 (8.08)
2001 (8.24) Bush
2002 (8.29)
2003 (8.29)
2004 (8.21)

2005 (8.18)
2006 (8.33)
2007 (8.27)
2008 (8.66)

* Production and nonsupervisory workers on private nonfarm payrolls; seasonally adjusted, 1982 dollars.

 

[Feb 18, 2009] Martin Wolf- Rethinking the Lessons of Japan's Debt Unwind

"it is impossible to rule out a lost decade for the world economy." Where is the demand to come from? From over-indebted western consumers? Hardly. From emerging country consumers? Unlikely

Ah, today the Financial Times reminds me of the way it was back in early 2007, when it was clearly heads and shoulders above any US paper....

Back to Wolf:
....recognising losses and recapitalising the financial system are vital, even if, as Mr Koo argues, the unwillingness to borrow was even more important. The Japanese lived with zombie banks for nearly a decade. The explanation was a political stand-off: public hostility to bankers rendered it impossible to inject government money on a large scale, and the power of bankers made it impossible to nationalise insolvent institutions.
Yves again. Doesn't this sound familiar? ... Back to Wolf:
The bad news is that the debate over fiscal policy in the US seems even more neanderthal than in Japan: it cannot be stressed too strongly that in a balance-sheet deflation, with zero official interest rates, fiscal policy is all we have. The big danger is that an attempt will be made to close the fiscal deficit prematurely, with dire results. Again, the US administration’s proposals for a public/private partnership , to purchase toxic assets, look hopeless. Even if it can be made to work operationally, the prices are likely to be too low to encourage banks to sell or to represent a big taxpayer subsidy to buyers, sellers, or both. Far more important, it is unlikely that modestly raising prices of a range of bad assets will recapitalise damaged institutions. In the end, reality will come out. But that may follow a lengthy pretence.
Yves here, It's great to see his dismissal of the the private-public partnership tripe so succinctly, but is anyone in the US paying attention? I see too may people who should know better endorsing the idea. Back to the piece:
Yet what is happening inside the US is far from the worst news. That is the global reach of the crisis...we confront a balance-sheet deflation that, albeit far shallower than that in Japan in the 1990s, has a far wider reach. It is, for this reason, fanciful to imagine a swift and strong return to global growth. Where is the demand to come from? From over-indebted western consumers? Hardly. From emerging country consumers? Unlikely. From fiscal expansion? Up to a point. But this still looks too weak and too unbalanced, with much coming from the US. China is helping, but the eurozone and Japan seem paralysed, while most emerging economies cannot now risk aggressive action.

Last year marked the end of a hopeful era. Today, it is impossible to rule out a lost decade for the world economy.

[Feb 17, 2009] Financial Crisis Toxic Plans for Toxic Assets

Slow bleeding might represent a danger not only for stocks but for high yield and corporate bonds:  "we have a horrible problem of too much borrowing, too much debt, and too much consumption. "

It looks like "yet another child of the" previous year and a half's interventions: "optimistic and indecisive" at a time "focus and ferocity" are needed. Instead of crafting a surer solution, it timidly chose "three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress."

...banking analyst Meredith Whitney told Bloomberg (on February 4) that "Investors should not even consider owning banks at this point on an equity basis." Looking forward, she also doubts that Citigroup will exist in its current form, large numbers of Wall Street layoffs will continue, and eventually "we'll go back to an older and smaller bank system, where local banks lend off what they have in deposits."

...Investor Jim Rogers never holds back, and, on February 11, was true to form on Bloomberg: Interviewed on Geithner's plan he said:

"Mr. Geithner has been bombing for 15 years. (He) caused the problem. He was head of the New York Fed that was supposed to be supervising banks. (Instead), all last year he came up with TARP. He came up with all these absurd bailouts. Geithner's has never known what he's doing. He doesn't know what he's doing now, and pretty soon everyone will know it, including Mr. Obama."

Asked how to fix the problem, he referenced Washington's advice to Japan in the 1990s.

"You let (bad banks) go bankrupt. You clean out the system. You wipe out insolvent ones and let (good banks) take over.  America is making the same mistake (as Japan), and the politicians are making it worse. You want to know why they're making it worse? They want to support their friends on Wall Street."

"The idea of the government buying up bad assets is not going to work." Either the price will be too high (at taxpayer expense) or it will be too low....it's not going to work. It's never worked....Pouring in new money will only weaken the whole system. Go back in history and see what worked. Countries that took their pain (solved their crisis). It was horrible going through it, but they came out of it and became rapidly growing. Countries that did it our way never came out of it until a long, long time later, if ever."

"What Geithner should have said was we have a horrible problem of too much borrowing, too much debt, and too much consumption. You know what we are going to do - we're going to borrow more, go deeper in debt, and consume more....These guys don't know what they're doing (and it's why) I'm shorting" the market.

George Soros framed it [the problem] this way:

"The hard choice facing the Obama administration is between partially nationalizing the banks, or leaving them in private hands but nationalizing their toxic assets."

Michael Hudson's Way "to Save the Economy from Wall Street". In his view: "The only real solution to today's debt overhang is a debt writedown," and let debtors (the banks and others) take the pain, not the public. "Until this occurs, debt service will crowd out spending on goods and services and there will be no recovery. Debt deflation will drag the economy down while assets are transferred further into the hands of the wealthiest 10 percent of the population (in the financial sector)" while the rest of us get poorer.

Wall Street wants another way, and that's the problem. It wants costs socialized and profits privatized. It believes "free markets are 'free' of public regulation against predatory lending; 'free' of taxing the wealthy (and) shift(ing) the burden onto labor; 'free' for the financial sector to (plunder) the 'real' economy like parasitic ivy around a tree to extract the surplus." This makes a travesty of freedom, but they get away with it because presidents like Obama let them, and, according to one observer, trillion dollar giveaways are like buses. They'll be another one along shortly.

[Feb 17, 2009] Quotes on the danger of banking

Some Quotes from People Who Understood the Problem (taken from an article by Matthias Chang on “The Shadow Lenders”)

Napoleon Bonaparte: “When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”

Niccolo Machiavelli: “For the great majority of mankind are satisfied with appearances as though they were realities, and are often more influenced by the things that seem than by those that are.”

President James Madison: “History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control of governments by controlling money and its issuance.”

President Abraham Lincoln: “The money power preys upon the nation in times of peace and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy.”

President James A Garfield: “Whoever controls the volume of money in any country is absolute master of all industry and commerce.”

The Rt. Hon. Reginald McKenna – Chancellor of the Exchequer: “ I am afraid that the ordinary citizen will not like to be told that the banks can, and do, create money. The amount of money in existence varies only with the action of the banks in increasing and decreasing deposits and bank purchases. Every loan, overdraft, or bank purchase creates a deposit and every repayment of a loan, overdraft or bank sale destroys a deposit. And they who control the credit of a nation direct the policy of governments, and hold in the hollow of their hands the destiny of the people.”

Sir Josiah Stamp – Bank of England: “Banking was conceived in inequity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the costs of your own salary, let them continue to create deposits.”

President Woodrow Wilson: “ A great Industrial nation is controlled by its system of credit. Our system of credit is concentrated in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world – no longer a government of free opinion, no longer a government by conviction and vote of majority, but a government by the opinion and duress of small groups of dominant men…I am a most unhappy man. I have unwittingly ruined my country (Wilson regrets after the Fed took over).”

Supreme Court Justice Felix Frankfurter: “ The real rulers in Washington are invisible and exercise power from behind the scenes.”

Louis T. McFadden, Chairman of Banking & Currency Committee, in 1932: “The truth is the Federal Reserve Board has usurped the Government of the United States. It controls everything here and it controls all our foreign relations. It makes and breaks government at will …”

McFadden, in 1933: “Roosevelt has brought with him from Wall Street James P. Warburg, son of Paul M. Warburg, Organizer and first Chairman of the Board of the Federal Reserve System…”

McFadden, in 1950: “This same Warburg had the audacity and arrogance to proclaim before the U.S. Senate: ‘We shall have World Government whether or not we like it. The only question is whether World Government will be achieved by Conquest or Consent'.”

Senator Barry Goldwater: “Most Americans have no real understanding of the operation of the international money-lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States.”

Henry Ford: “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

Benjamin H. Friedman, Letter to Dr. David Goldstein dated October 10, 1954: “The history of the world for the past several centuries and current events at home and abroad confirm the existence of such a conspiracy (to destroy Christianity and obtain global power). The world-wide net-work of diabolical conspirators implements this plot against the Christian faith while Christians appear to be sound asleep. The Christian clergy appear to be more ignorant or more indifferent about this conspiracy than other Christians … It seems so sad.”

[Feb 16, 2009] Bankers need to rely on something more than a seething mass of greed - Telegraph

Why should ordinary bankers be paid many times what the best brain surgeons earn?  May be that was an  insurance paid to make certain that those greedy jerks will never become brain surgeons ?
Anyway, the "market" for people has always been a fuzzy concept. Economists often think of labmanage. Indeed, it is striking how different the rates of pay have been between different banks for ostensibly doing the same job.

Peter the Rock

"Nice" views Roger but I am afraid you have probably misread the situation.

For those readers who wish to know the truth about central banking and the elite private families that control it, a short history can be found here:

http://www.marketoracle.co.uk/Article8909.html

I you wish to let the masses know what's really going on, why not write a precis of this fine summary of how it came about that 1% of the population own and control 70% of the nation's wealth?

Some quotes taken from an article by Matthias Chang on "The Shadow Lenders" :

Senator Barry Goldwater: "Most Americans have no real understanding of the operation of the international money-lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States."

Sir Josiah Stamp, Bank of England: "Banking was conceived in inequity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the costs of your own salary, let them continue to create deposits."

Henry Ford: "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

Well...the revolution may be on it's way. Forget the banker's pay, all central banks and the whole rotten system must be nationalised NOW and operate transparently thereafter under firm domocratic government control...world-wide ..if we are to stand any chance of stabilising our current debacle.

The key banksters who have now lost control, must be swiftly brought to justice before they cause WW3.

William

Here are some simple rules that I suggest be applied to all companies and organisations:

- No employee of any company (public or private) to receive total compensation (including pay, bonusses, pensions etc) greater than 100 time that of lowest paid employee (including contract staff, eg cleaners, caterers).

- Compensation committees to be representative of the workforce. So if 90% of the workforce are paid the minimum wage, then 90% of the coompensation committee are selected from these employees.

- Compensation agreements to be approved by shareholders at AGM with all votes published.

Anthony

"Let he who is without sin cast the first stone"

When we look back in 50 years time (with the Greater Depression hopefully over by then), historians will identify not only the bankers as the cause of these troubles, but also the hired ranks of economists, accountants, lawyers etc, 99% of whom prostituted themselves to the banks by acting as apologists for flawed models.

Even now, the likes of Bootle and co say NOTHING about the true causes of this crisis. Is your silence on these matters due to ignorance or (worse) reluctance to point to the 1 ton gorilla in the room? I am referring of course to the fractional reserve banking system and the global use of fiat money. You surely cannot be unaware of the establishment of the privately owned Federal Reserve bank in 1913, or the fact that all fiat currencies that ever existed have all failed? The crisis is unplaying exactly as Von Mises and the 'Austrian' economists said it would. Roger - you may be less guilty that the bankers you denigrate in this article, but you are far from blameless yourself.

Whiplash

In the past Labour has been quite ready to levy "windfall taxes" on profits earned under unusual circumstances favouring small sections of the economy .

Why not levy a windfall tax on these individuals ?

Is it that our rubber-stamp "parliament" is so in thrall to the E.U.S.S.R. that it can not decide for itself ?

Is it that these individuals would have their "human rights" infringed ?

These people have infringed the rights of millions and to see the blighters walk away grinning is too much for the feeble brain to bear .

Roll on a gold-based currency in which these people really would be selling apples on the Mile End road .


Yours Whiplash
 

 

[Feb 16, 2009] Geithner and Summers Consolidating Power (Auto Bailout Edition)

Tremendous arrogance as well as ghosts of the past of Summers might prevent him from functioning well in his new post
And the risk of lack of knowledge is real. Summers is close-minded. That trait was part of his undoing as Harvard president. From the Financial Times, "Out of His League":
“He himself is not widely educated,” said Judith Ryan, a professor of German literature. I met Ryan, a 63-year-old Australian who speaks with a mid-Atlantic drawl, in her office near Harvard Square. On her walls were pictures of Rilke and Kafka, watching as Ryan ate a late, rushed lunch of yoghurt and Starbucks coffee. She attended the faculty meeting in University Hall on February 7 and was one of the academics who stepped up to the microphone to criticise Summers.

“He is a brilliant economist but not really very curious about how other disciplines function and what is at stake today in those disciplines,” she said. Ryan regularly sat in on tenure meetings with Summers. “He really tends to translate things into economic models and he would start to talk about his impressions of the field. Our visitors were astonished. He would ask the meaning of words that I thought were part of most people’s vocabulary.” “Syntax” was one example, she said....

Ryan also expressed misgivings shared by some of the other professors I spoke to about the pro-science direction Summers was taking the university. “He had a very present-day notion of the aims of education,” she said with a shrug. “He didn’t see the point of studying ancient Greece.”

I have long believed that one of the most valuable traits for people in general, and leaders in particular, is to understand the limits of their knowledge, and to seek out sources and individuals who can help fill those gaps. Summers (and perhaps Geithner, if the Summers imprinting has taken) is of the reverse inclination: he thinks that what he knows has universal relevance. Scary.

Comments

artichoke said...
Training in Economics can do that to someone. It did it to me, to be honest. After doing my doctoral work in financial economics, actually at some point during that process, I came to see most things in life as applications of game theory.

What can I say, the theory works. It is a superior tool. (It doesn't make one understand old German, but it has pretty broad application.)

That doesn't mean I agree with their approach to the bailout. It would be hard to agree with their approach anyway, since as yet they have not announced one. But so far they have not made blunders, something Krugman pointed out.

I respect Summers anyway. Geithner presumably was appointed because he is weak.

socimagination said...
I've always been stunned by the certitude that comes with economics training.
I don't doubt the importance of rational actor models, as they do provide a great deal of understanding about the complexities of human behavior given a finite set of data about the social world.

However, I can't help but think that the lessons of LTCM and this financial crisis are being unheeded. People arent't that rational! Sometimes, they buy houses/mortgages they cannot afford because they are pursing the "American Dream" or some other internalized cultural form. Although there's nothing wrong with greedy bankers, it seems to stun and anger millions of Americans that they were reckless and pursued short-term goals over sustainable ones. Has Bonfire of the Vanities really slipped off the shelf that much?

There's something to be said of a liberal arts education, one that is meant to teach doubt and skepticism, and not rely on a singular discipline for the answers to everything. It certainly doesn't exist in the dynamic and constantly shifting social world.

artichoke said...
@socimagination: I don't see a necessary inconsistency between economic theory and what happened with LTCM, or in this crisis.

LTCM was trying a convergence trade that had worked before in the past but didn't work this time.

Excessive leverage, then and now, is quite consistent with the compensation structure for traders: if you win you're rich, if you lose you are at worst fired.

People who got liar loans with teaser rates live in a house they could never have dreamed of getting for a while, then at worst they have to leave and get a bad FICO score, heck they're probably tired of borrowing anyway.

It's economic rationality indeed. Individual utility-maximizing behavior can produce a second-best outcome or worse for the society.

One can find the same theme in much literature, although it is not usually identified as such. The economists are the ones who bring it to the fore.

Of course this works easiest in retrospect! It's harder to predict the results before they happen. But many, including of course Roubini, and I too, saw that a big crash was possible

cj7 said...
Yves,

Your simple phrase:

"I have long believed that one of the most valuable traits for people in general, and leaders in particular, is to understand the limits of their knowledge"

strikingly points to what is wrong in the world today. Good leaders can always tell when they are dealing with someone who exceeds their own knowledge on a particular subject, and this is indeed a very valuable trait. The problem with Western society today is that people are generally promoted exactly to their level of incompetence, which Geithner for some reason overshot by several levels.
The problem with this commonality is that we now see many people in positions of power throughout the corporate and political world that fail to see their own limitations and thus make decisions based on some combination of ignorance, arrogance, or a need to satisfy others.
Humility throughout the course of human civilization has been considered one of the greatest virtues, yet sadly modern day Wall St. and Washington have construed this noble characteristic as a weakness.

Cash Mundy said...
From Asia Times, back in November:

"For a quarter of a century, the inbred products of the Ivy League puppy mills have known nothing but a rising trend in asset prices. About the origin of this trend, they were incurious. The Reagan administration had encountered a stock market in 1981 trading 50% below its the long-term trend. Reagan restored the equity market to trend by cutting taxes, suppressing inflation and easing some regulations. The private equity sharps were fleas traveling on Reagan's dog. They simply rode the trend with the maximum of leverage. ....

That explains how a Washington political operative like Rahm Emanuel, now Obama's chief of staff, who studied ballet rather than balance sheets, could earn a reported $16.2 million in two-and-a-half years at Wasserstein Perella, the mergers and acquisitions boutique. At the height of the bubble, Bruce Wasserstein's firm sold out to Germany's Dresdner Bank for the fairy-tale sum of $1.6 billion. Even the crumbs from Wasserstein's loaf could make a Chicago politician rich.

Without leverage, the clever folk around Barack Obama are fleas without a dog. None of them invented anything, introduced an important new product, opened a new market, or did anything that reached into the lives of ordinary people. They wore expensive cufflinks, read balance sheets, exercised regularly, sat on philanthropic boards, and assumed that their flea's ride on the Reagan dog would last forever."
Inbred puppies and one-trick ponies. Apparently Summers is an aging yuppie, a breed which always struck me as being well-trained to serve theier corporate masters to the limits of their limited abilities and generally incurious and uneducated about anything not directly remunerative. "Syntax". Really.

SocialismSucks said...
"but this time dont you think you are making an ad hominem attack?"

No way. Yves is seeing things clearly: The jig is up. The American people hired Obama ultimately because of a lack of good options, and the reality of Obama does not equal the notion of Obama.

This is a fiasco. A stunning no confidence vote from the markets is dead ahead. Watch Summers and Geithner exit this administration within the year.

Reagan/Volcker were able to save the economy only after extreme pain and much permanent loss. Obama can't even duplicate that feat because of his central planning economic ideology. This is not 1933 where the savior gets elected and at least has plenty of cash to put to work. USA Inc is broke to an extent that Roosevelt never dreamed of. We are staring at a full stop Iceland-style gear grinding freeze up of this economy.

Steve said...
With Summers, it's not `cognitive regulatory capture' -- he's a player who was a managing director at DE Shaw until he accepted the crown and scepter from Jimmy Carter Obama.

Summers was dead wrong about credit derivatives, Glass-Steagall, institutional leverage, and the `great moderation'. I'm still waiting for someone to point me to a single important academic paper authored by him.

Nomenklatura said...
Isn't the more important point here that Obama is trying to distance himself from our economic problems by delegating them to experts because he's totally out of his depth?

Larry Summers' arguably inadequate respect for ancient Greek, and what some Arts professor at Harvard may think about it seem to me to be awesomely trivial next to this. It's Obama's cluelessness that is really going to cost us, as this plays out.

Anonymous said...
"I'm still waiting for someone to point me to a single important academic paper authored by him."

Summers wrote a decent paper on the link between gold and interest rates.

http://ideas.repec.org/a/ucp/jpolec/v96y1988i3p528-50.html

AlanM said...
I'm leaning a bit contrarian (odd, or not, that the spellchecker wants me to change that word) to most here. Seems I read somewhere that Obama started getting CIA briefings exceptionally early in the campaign. He's bound to have been obsessed with the financial crisis for the past six months at the very least.

Just as Yves and many of the commenters here know a great deal more about all this than I do, so I suspect do Obama and his team have access to much information that we don't.

This crisis has great international ramifications. When I read that the Japanese PM has an approval rating of less than 10%, and that western European banks' exposure to eastern Europe exceeds US banks' to subprime, I wonder if dawdling might not suit the moment.

Just as domestic politics dictate that Obama might have no choice but to wait for great pressure to build before temporarily nationalizing big US banks, there might be a need to allow pressure to build before restructuring key global economic arrangements.

And I do believe we cannot avoid the latter. Chimerica has major issues.

Might Japan and Korea go for an updated Greater East Asian Co-Prosperity Sphere? Will oil from the Middle East be priced in a basket weighted that way? If the euro collapses, who might throw their cards in with Gazprom? (Please sit down and stop waving your hands, Mr. Berlusconi.)

We're in very deep waters. I would be much more concerned if the new administration had come out with a complete save-the-world plan in its first month.

If the G30 meet produces nothing but platitudes and smiles all around, then we've really got to jump on these people.

That said, regulatory reform and the auto industry should be addressed in substance before the G30.

Roger Bigod said...
The examination of Summers' previous management performance is legitimate and useful. To take some reasonable examples, Carter, Reagan, Clinton and Bush II had been governors, and the way they handled the Presidency conformed to their known styles of "leadership" (if that is the word). Or as the ancient Greeks put it, character is fate.

And no, game theory isn't economics, any more than differential equations is engineering. And Nash was not an "economist". Engineers don't try to claim that Isaac Newton was an engineer or con a private firm into setting up a Nobel Prize in engineering.

February 16, 2009 4:50 AM
foghorn said...
What in the world do those guys know about the auto industry? Obama is supposed to be very smart, and he certainly ran a smart campaign. I'm quite alarmed about hi goto guys on economics, but I guess the real measure of Obama's savvy will be how he handles them when they don't deliver- and nothing in their pasts indicates they will.

[Feb 15, 2009] FT Alphaville » Blog Archive » Equities and bonds, two views

Overall, Smithers remains bearish about the outlook for equities for 2009, mainly because demand for shares by companies is falling and their supply rising as both financial and non-financial companies change from buying shares to issuing them.

In fixed income, meanwhile, government bonds are expensive, and are likely to remain so for a while as the world economy continues to weaken.

However, the short-term outlook for corporate bonds seems quite good, notes Smithers. With the exception of the recent slump, the spreads on US corporate bonds are at record levels and have been narrowing since the beginning of 2009. However, this narrowing of spreads has been accompanied by a fall in corporate bond prices, due to the fact that government bond yields have risen by more than spreads have narrowed.

Consider the three main factors determining their yields, he says:

  1. Government bond yields, which we expect to be flat short-term and to rise in the medium-term,
  2. The default risks, including default experience, variations in default expectations,
  3. The variations in the return to investors for buying relatively illiquid assets.

In the shorter term, the return on corporate bonds should be good, in Smither’s view, “unless the downgrading of bonds, default experience and the default premia have an offsetting negative impact”. While it’s true that US companies are more highly leveraged than is still generally appreciated, the relatively low level of interest rates mitigates this risk.

____________
Faber, meanwhile, predicted in a recent client newsletter at the end of January that the stock market’s immediate response to US stimulus measures would be to rally further for several reasons - not least the hope that, in some cases, there will be a modest improvement in the relentlessly bleak economic and financial news. By “modest improvement”, though, he means news will merely be less horribly negative than it is now – and when that happens, “eternally bullish fund managers” will undoubtedly take it as a sign of a recovery in the second half of 2009.

There are two other indicators suggesting a positive view may be justified, even if only for the moment, says Faber. First, that the market remains physically oversold:

The appalling economic news has encouraged traders to stay short – for example, as recently as mid-January, the 5-day average of put-call ratios on equities was only a little below the extremes of last November – but the equity indices had not given up much further ground.

Second, he says, that there has only been one case since 1900 where the DJIA has fallen by significantly more than 50% during a bear phase.

This was in 1930-32, when it fell by 86%. But the point here is that the preceding 1929 Crash embraced a fall of 48%, and was then followed by a significant rally of about 50%.

In the current bear [to end-January], the DJIA has fallen by 48%. At the very least, a bear squeeze should be in the making.

Faber also quotes Joachim Fels, Morgan Stanley’s chief global fixed income economist, noting that the liquidity cycle has turned up. According to Fels:As GDP downgrades abound and investors’ gloom thickens, our metrics indicate that a new global liquidity cycle is in the making. While still in its infancy, this new liquidity cycle will likely help support asset markets, end the recession later this year and prevent lasting deflation. As always, it is difficult to predict which asset classes will benefit most from the build-up of excess liquidity. However, our strategists favour credit and EM equities in 2009.
 

Fels adds:

“Focus on global excess liquidity… Our favourite metric for tracking the liquidity cycle remains the evolution of excess liquidity, which we define as the ratio of money supply M1 to nominal GDP (aka the ‘Marshallian K’). M1 is a narrow monetary aggregate comprising currency in circulation and overnight bank deposits held by non-banks. It is used for transactions in the real economy – when buying goods and services – and in the financial sphere – buying stocks, bonds or other financial assets.

Of course, as Fels notes, “it is difficult to predict which asset classes will benefit most from the build-up of excess liquidity”.

But that certainly doesn’t stop the veteran pundits from trying - and even, sometimes, succeeding.

Comments

  1. Bob_in_Massachusetts Feb 13 13:40
    I like beer

    "...the market remains physically oversold..."

    hmmm, physically oversold? I find Faber refreshing and insightful, but that sounds a lot like something the morons on cable TV would come up with.

    I'm waiting for the S&P500 to get above the 100 DMA, which should happen within the next month. It may possibly hit 900 again. Then it seems obvious there will be another leg down.

    And Microsoft? Yeah, that store idea is awesome. I know dozens of people enraptured with the aura of Microsoft... are they serious?

 

[Feb 16, 2009] US banks under pressure from forensic hit-teams Business guardian.co.uk

"The problem is not toxic assets," said Krugman. "The problem is that financial institutions have lost a lot of money and many of the big ones, if they are not actually insolvent, are very close."

Aware of the mounting frustration and impatience, banking chiefs are trying to be humble. The head of Bank of America, Ken Lewis, opted for an eight-hour train journey from his North Carolina headquarters to appear before Congress on Wednesday, anxious to avoid using his corporate jet.

But as Lewis and seven other bank bosses arrived on Capitol Hill, they ran the gauntlet of protesters from Jesse Jackson's Rainbow-Push coalition, who were railing against the treasury's seemingly unfettered support for Wall Street.

Morgan Stanley's boss, John Mack, had a taste of public anger when campaigners descended on his mansion in Rye, a wealthy enclave in New York's commuter belt. Waving placards, the early-morning demonstrators accused him of being a "loan shark". "You've got to hold these chief executives personally responsible," said Bruce Marks, chief executive of the Neighbourhood Assistance Corporation of America, which organised the protest.

The conventional wisdom has been that the failure of top banks would provoke a catastrophic chain of events similar to the fallout from Lehman Brothers' collapse: a stockmarket crash, a panicked withdrawal of funds and a reverberation in liabilities around intertwined institutions in the US and abroad that could send the financial system into meltdown.

By trying to cleanse banks' balance sheets, the US government has been hoping to restore top financial firms to health. But in order to sell toxic assets such as mortgage-related securities, banks would first have to record their true value. Many are still held on balance sheets at vastly inflated prices.

A source at one Wall Street firm said Geithner's plan would either involve buying assets at over-egged values or would force banks to take billions of dollars in life-threatening write-downs: "The real question is are these treasury guys really serious about forcing the commercial banks to mark down their portfolios?"

By ordering so-called stress tests of each firm, the treasury intends to determine the extent of hidden losses. Geithner has yet to say what he will do with institutions that fail their tests – but a form of nationalisation, followed by dismemberment and resale, is one option.

Douglas Elliott, a banking expert at the Brookings Institution in Washington, said this would be risky: "If the reason for stepping in is because these banks are in a deep black hole, that black hole would become explicitly the taxpayers' black hole."

Nationalisation would wipe out shareholders – and Elliott said that as soon as one firm was taken out, others would suffer a crisis of confidence: "As soon as you do this to the weakest banks, the next weakest banks' stock will start to fall heavily. People will think 'maybe it's just a week or two before the government does this to us'." Analysts at Goldman Sachs have estimated banks could lose $2.1tn on delinquent mortgages, credit cards and loans before the crisis ends. Confidence is at rock bottom.

"The problem is that none of us – no Americans – trust you any more," the Democratic congressman Michael Capuano told Wall Street bosses this week, declaring that he would not be depositing a cent in any of the top eight banks. "I don't want my money put into CDOs, credit default swaps and humongous bonuses."

[Feb 15, 2009] The Growing Chorus for Nationalization

Feb 14, 2009 | Calculated Risk
Bill Moyers interviews Simon Johnson (ht Nemo)
Former chief economist of the International Monetary Fund (IMF), MIT Sloan School of Management professor and senior fellow at the Peterson Institute for International Economics, Simon Johnson examines President Obama's plan for economic recovery.
And Joe Nocera writes in the NY Times: A Stress Test for the Latest Bailout Plan (ht MrM)

Matthew Richardson and Nouriel Roubini write the WaPo: Nationalize the Banks! We're all Swedes Now

First -- and this is by far the toughest step -- determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it should determine which are solvent and which aren't in one fell swoop, to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.

Second, immediately nationalize insolvent institutions. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off.

Third, once an institution is taken over, separate its assets into good ones and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer.

The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even.

Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.

The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms would also be instituted to reduce the chances of costly future crises.

And they conclude: We're all Swedes now!

S&P500 Q4 Earnings Collapse The Big Picture

I suppose we have heard the end of the mantra “But stocks are a buy now based on projected earnings”..if indeed the S and P 500 p/e will be 58 3 quarters from now as speculated…

Comments

  1. danm Says:

    Of all the sad words of tongue or pen, the saddest of these,”It can hardly get worse”…..
    ———
    Today’s equity valuations are based on 3% yields.

    Most of the growth in market returns of the last 2 decades were due to inflation. Everyone will say that inflation was dead. They might be right in the consumption side. But the inflation of the 70s and 80s truly got reflected in securities in the last 2 decades. Rates went from 18.5% to 2.5%. This drop in yields made your multiple go from 5 to 40! Basically, this drop in rates with the multiple going up was the lagging inflation of the 70s and 80s.

    This multiple effect is finished. Now if you want the market to go up, you need earnings to growth, more inflation or complete idiots. And if inflation rears its ugly nose, equities will do the same as they did in the 70s.

  2.  The Curmudgeon Says:

    As a simple mathematical proposition, the earnings on the overall stock markets (not just S & P) must grow at about the same rate as the overall economy (whose growth rate is also intimately tied to the population growth rate). If it appears that they aren’t growing at about the same rate, then something else is going on, like for instance, GE transforming itself from an industrial conglomerate to a highly leveraged investment bank, as we now know is how they so consistently “outgrew” their peers.

    The recent several years of continual double-digit growth in S&P earnings when the economy was barely moving should have rung bells amongst financial/economic minds. It could not last. Somebody was monkeying with something. In this case, it appears it was monetary mischief more than anything.

  3. Todd Says:

    Not monetary mischief, more like credit creation mischief, the fed only plays try and catch up with the needed cash to support the credit sloshing around. The big players were gaming the system, and now they have been caught.

  4. johnbougearel Says:

    Thank you Barry,

    This is particularly worrisome, scary is a better word. According to the chart, trailing four quarter earnings will be around where they were in 1990. The dow bottomed at roughly 2400 in 1990 and the SP500 at roughly 300. That would still be a ttm p/e of 20 for the SP500.

  5.  JohnnyVee Says:

    johnbougearel “The dow bottomed at roughly 2400 in 1990 and the SP500 at roughly 300. ”

    Iit may be closer to 1985 than 1990…s/p 180. Are equities dead? Me thinks so.

  6. BG Says:

    collapse in earnings,
    the massive buildup of debt (which ultimately has to be financed by somebody besides the Fed),
    collapsing real estate,
    continuing prop up of the US financial system for years,
    Social Security,
    Medicare,
    increase in the social programs,
    Interest rates being set by the results of Treasury auctions instead of being manipulated by the Federal Reserve,
    financing the Federal debt on an annual basis,
    fading/retiring Baby-Boomers,
    no retail participation in securities markets,
    low availability of good-paying jobs in the US,
    no trust in anything or anybody in the financial industry.

    The Wall of Worry has never been steeper. It will take decades to work our way out of this. (Let’s face it. A lot of us will already be dead when it happens.)

    Clean up your life and hunker down. You are on your own.

  7.  How the Common Man Sees It Says:

    @The Curmudgeon Says: February 14th, 2009 at 11:14 am

    As a simple mathematical proposition, the earnings on the overall stock markets (not just S & P) must grow at about the same rate as the overall economy (whose growth rate is also intimately tied to the population growth rate). If it appears that they aren’t growing at about the same rate, then something else is going on, like for instance, GE transforming itself from an industrial conglomerate to a highly leveraged investment bank, as we now know is how they so consistently “outgrew” their peers.

    I can see that for the market in general but I thought it was the job of companies to create value, innovate and produce productivity enhancements that they could then sell to the general public. Doing that is supposed to make them grow at a faster rate than the economy and that is why we invest in them

  8. RW Says:

    Single digit PE’s in what is essentially a ZIRP environment would really surprise me a lot; shocking in fact. In 1980 bear when bond interest rates were something north of 17%, sure, stocks had to yield more in order to compete and single-digit multiples were common …but now? If we get there I’d rather not be here (if you get my meaning).

  9. Mr.Sparkle Says:

    @John Clarke - single-digit multiples are by no means a guarantee. Look at the last bubble: when the market bottomed, PEs were still well above levels considered to be “value” territory. (I’ll immediately state that I do *not* believe this is a repeat of 2001 for lots of reasons.)

    Take a look at Shiller’s data from his website - yes, there are several periods of market correction during which PE dropped to that level but it isn’t a necessary element for recovery. Multiples seem to correct more to a recent average, rather than relative to a historic average. And recent (meaning maybe last 10-15 years) have seen multiples higher than the entire series.

    I don’t disagree with your premise and expectation of more pain ahead, just warning that assigning a “fair” multiple is as arbitrary as bulls wanting to claim the market is cheap by valuations or the Fed model or whatever fits their bias. The period of 1974 - 1982 was pretty nasty and it doesn’t take a great leap to see a return to the conditions of that era.

[Feb 15, 2009] Will Eastern Europe Trigger a Financial Meltdown

It's funny, that along with some interesting observation (Baltic countries and Ukraine are a toast, that's for sure), the level of hate with which this British economic expert hates Europe is really ridiculous...

 naked capitalism

As Ambrose Evans-Pritchard remarks in the Telegraph:

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut....

... ... ...

Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system....

The sums needed are beyond the limits of the IMF, w...We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.

Comments

Anonymous said...
In Poland, 60pc of mortgages are in Swiss francs.

That's insane. Polish jokes aside, how can so many people fail to grasp the concept of currency risk?

Cnothing4 said...
Yves,

Quick question - I'm only a novice on these matters, but something has been bothering me for a while about why we're haven't gone down the Swede route here in the states (aside from the reasons being talked about). Back when AIG was nationalized I remember there being a lot of discussion about the amount of collateral damage that would be dealt on the banks across the channel should one or more of the major US banks fail/go under government ownership. What are the chances that the nationalization trigger hasn't been pulled here because of the chance that it would adversely affect the remaining London, Swiss, and German banks given the pain they are already in and the fact that the EU doesn't have an adequate means of handling the potential for handling that much damage?

Anonymous said...
In the crisis of 2001 in Turkey total household debt to banks was less than 5 billion USD. Now it is around 100 billion. Despite tricks of debt consolidations and shifting the burden to another family member more than 2 million people have already defaulted.

One of my friends who happens to be a savy trader made a trip to Poland and he was simply shocked by the amonut of indebtedness. He warned his Polish friends about the downside risks in capitalistic systems.

And guess who financed all this utter lunacy?

Minh said...
Polish home owner are hoping for a crash of Swiss frank. How likely is that before the zloty crash ? It's really insane now, race to the bottom.

I remember when the USSR collapse, Vietnamese govmint paid back the debt of Russian weapons sale during the Vietnam war in rubble, which was something like 1/10 of the value in term of gold when the credit was made.

Cnothing4 said...
Artichoke,

I don't know if I'm within a mile of the target, but the current talking point explaining why we haven't gone farther with public ownership than we already have - political willpower - doesn't make any sense to me.

The current administration suffers a lot more the longer this crisis goes on for. Taking an unpopular move now that ultimately restores our banking sector and with it the US economy before the next election should more than make up for the immediate hit in public opinion. And, if it actually works, the Democrats can use it to counter the a lot of the current moderate and right-wing positions on government influence over the private sector(which the public still largely agrees with, hence the popular opposition to the latest stimulus package).

The only reason why they haven't already gone ahead and attempted a larger nationalization, under any name you want to call it, that actually makes sense is if they expect it to do more immediate harm than everyone else in the popular press/blog-sphere is currently talking about. They have the votes to get something like that through congress, it's very unlikely that the public wouldn't support them, there's a very good chance that it would ultimately be successful,... the list goes on. Hence, there has to be something that I'm missing on this.

February 15, 2009 3:10 AM
artichoke said...
Well ... I don't think Barack Obama went in three years from Illinois State Senator to President of the United States without a lot of help from powerful friends. Perhaps those powerful friends don't want the banks to be left to wither on the vine.

Chicago politicians know who their friends are. As do non-Chicago politicians by the way.

poszi said...
Why Poles took mortgages in Swiss francs? It's simple: lower interest rates, hence lower monthly payment ("howmuchamonth" is not just an American phenomenon).

To nitpick Polish zloty has not halved against the franc but lost a third of the value (franc rose from 2 PLN to 3 PLN). The people who took Swiss franc mortgages are lucky that the CHF Libor crashed and the monthly payment barely increased. They are severely underwater now but they think it is temporary and still can afford the payment. In fact, the delinquency rates are still very low but it may be early to tell. Rising of the unemployment or further rising of the franc may change the picture.

Poles who took mortgages are heavily indebted but huge majority is debt-free. Moreover, the banks are not so heavily leveraged. The housing bubble insanity was severe but short and not so many people were put into enormous indebtedness. It is going to be difficult but maybe not as bad as the article suggests.

aw70 said...
@Lune

I agree with what you are saying - the European problem really is split into three different categories. The Eurozone will try to stay afloat, the non-Euro EU members are worse off, but have a chance... and some of the non-EU countries of the former East (such as the Ukraine) are very probably, well, completely screwed (there is not point in embellishing this).

As to what Ambrose Evans is saying: this is partly true, but also partly drivel. AEP is one of the breed of anglo-american "economic experts" who hates the EU with a passion, and who revels in the possibility of the EU failing. And who takes every possible opportunity to poke at that institution. I cannot understand why he is so keen on that - maybe he thinks that Britain will get something positive out of a failure of the EU? Nor do I understand why anyone outside Britain actually listens to this guy. Especially since he is very good at ignoring the fact that the British economy is just as screwed, and that's without actually having done anything useful with the missing money (such as re-building Eastern Europe after the fall of Communism).

Anonymous said...
I said 'warring' once and someone took issue with it. It's not the working class of the world I worry about it's their governments or maybe banks that can control their governments (you don't have to look far for an example).

Every time factional reserve banking reaches its limits warring ensues. Something to do with liquidating the overstock to create demand. Overstock could be defined in a couple different ways, debt being one of them.

History is a good guide.

rkka said...
Indeed, all the West's best, most enthusiastic political projects are well and truly screwed. The Baltics and Ukraine were profusely praised in the pages of The Economist, and held up as examples for benighted Russians to follow, and now look at them, bankrupt.

Russia is in trouble too, there is no question. However, please sketch out a course of action the Russian government could have begun ~1999 that would have prepared Russia better for the collapse of the global financial system in less than a decade than the one Mr. Putin has chosen.

Clearly the vast sums the Russian government carefully taxed away from the Oligarchs after Mr. Putin broke their power was invested better than the over-leveraged Oligarchs would have done if they were left in their hands.

[Feb 15, 2009] North Carolina Attorney General Asks Bank of America to Describe and Justify Bonuses

Anonymous said...
Let's get back to bonuses. It is ridiculous to pay them now.

Suppose a guy is making $100,000 for a analyst job that would pay $60,000 elsewhere. (These might be more like GS / MS numbers, I don't know what the pay scales are in BAC). Then on top of it he gets $80,000 bonus, for a total comp. of $180K. It is pointed out that much of his annual comp. is bonus, it's an expected part of compensation, and he did a good job after all.

Baloney. Sure he did a good job. His bonus is a combination of individual performance and firm performance. Firm performance is beyond disastrous. And he's still making more than he would have made working for a normal company. He should be glad he still has a job.

These numbers aren't made up. They are conservative for top-tier former IBs. Someone who knows BAC or similar pay scales is invited to supply numbers.

Anonymous said...
I worked on the sell-side for six years and on the buy-side for five years. The sense of ENTITLEMENT on the sell-side borders on insane. Sell-siders, you'd be outta biz if you didn't have the govvy ride in and save the day. How can ANYONE on the sell-side complain about possibly not getting a bonus? What did your FIRM do to earn it? You're lucky you still have a job.

And yes, many of my friends are still on the sell-side. And it pisses me off that THE TAXPAYERS are paying their bonuses.

JOKE + BONUS = JONUS

"Cheetos and jonuses for all my boys."

Anonymous said...
Anon 9:59 said; “Let's not fall for demogougery. People are losing their jobs and fortunes. I met a man yesterday who had been with Circuit City for 14 years. Ken Lewis didn't cause that. Millions of US did. Yes, I use the royal WE.”

Yes, of course we are all complicit, and it is small beer. But some pigs are more equal than others. Ken Lewis is an arrogant elite slime and himself small beer compared to Bernanke, Paulson, Rubin, Summers, Clinton, Bush, et al who intentionally created this financial coup.

The wealthy elite eliminating the middle class IS a morality play. Interest is slavery.

Wake up and smell the aggregate generational corruption.

Yves Smith said...
15 years ago, a buddy who still worked on Wall Street commented that it was full of mediocre, overpaid people. I think a few are genuinely talented, but the excess pay is pervasive.

However, the problem with BofA ex Merrill is that it is a commercial bank, and a cost-conscious one at that. The rank and file is not terribly well paid, and unlike Merrill, did take a big pay reduction on average last year. So Cooper appears to have cast his net a bit too wide in going after BofA. His real objective would seem to be Merrill, and only a small cohort of employees at the stand-alone BofA.

SBW said...
Yves,

I think the question should be -- where would BoA be without TARP funds? (That's not a rhetorical question from my point of view, I really don't know the answer.)

But whether the BoA employees are terribly paid or not is immaterial. I worked my ass off (and was quite the bargain, I might add) and still got laid off from my non-financial employer for one reason -- revenues plummeted, and management decided to cut people to costs. And for that particular industry, costs had to be cut, because the government has shown it cares little for anything else besides finance, with US automakers being the glaring exception.

The ostensible reason for TARP -- and thank you for your coverage on it -- was to spur lending. If TARP monies are being used for anything else, regardless of how hardworking or underpaid the staff is, that is most certainly the public's business.

Anonymous said...
"I think a few are genuinely talented, but the excess pay is pervasive."


That's because they won't hire anyone without an Ivy league degree. And of course they put a cap on the number they hand out.

Enforced scarcity does wonders for compensation.

Bush and other's have shown it's a degree you buy, not earn. The great thing about this financial collapse is that most(not all) of the impostors swaggering around the halls of power will be outed and flogged.

[Feb 15, 2009] "We Are Threatened by a Veritable Disaster"

Swedish Lex said...
With commentaries like Leijonhufvud's the debate is finally advancing towards its inevitable conclusion. So much of the ink over the past year has been spent to keep peoples' heads firmly in the sand.

Leijonhufvud's comment that the Swedish bank bailout worked in part because of the simultaneous massive devaluation of the currency that gave the country's export-driven economy a life saving boost, is crucial. Furthermore, the high global growth rate during the second half of the 90s (think Ericsson) helped to catapult Sweden out of its slump.

Thus, the Swedish bank bailout, although cleverly devised and well managed, was only half of the success story.

This time, however, the crisis is virtually global and hence there is no corner of the economy, really, that can act as locomotive to be found. Fiscal stimulus or not.

As the bitter reality that "There is much to fear beyond fear itself" begins to take hold, countries will increasingly be tempted to go down the path of protectionism that will only aggravate the downward spiral. We are already watching the beginning of this process. The WTO can only provide ex post support, hence why the political process around the G20 is so important and why the trading partners of the U.S. reacted so quickly and in such a coordinated fashion when the "buy American first" provisions appeared in earlier versions of the stimulus package.

The Swedish currency has again lost significantly in value vis-à-vis the euro and the dollar. This is part of Sweden's tacit societal understanding to let the currency lose in value to support exports. However, we can not have a race to the bottom for all currencies.

Without a growth-locomotive in sight, we will have to re-build the economy brick by brick. First, however, we should stop the TARP-ing (i.e. throwing future generations' good money after ours' bad) and take the necessary steps to delever the economy in a controlled way. State control over large parts of the economy during a transition will become virtually impossible to avoid.

A gloomy start to the week end. Sorry.
 

February 14, 2009 3:56 AM
Swedish Lex said...
Another thought:

Many believe, and I do agree, that the current crisis with excessive leverage in the system is the result of decades of adding layer on layer of debt. It was that global debt-driven process that in fact contributed to pulling Sweden out of its crisis in the 90s (see my previous comment).

Thus, the excellent Reinhart & Rogoff papers that compare different countries' handling of their banking crises have to be analysed bearing that in mind. The conclusions in their papers are therefore somewhat mitigated, in my view, as regards the capacity of the economy to heal following a financial crisis.

This crisis will not be resolved by applying more debt somewhere else in the economy or somewhere else in the world, unlike most (all?) crises analysed by Reinhart & Rogoff.

[Feb 14, 2009] Fair Value for S&P = 440 By Barry Ritholtz

February 13th, 2009 | The Big Picture

Interesting article in the WSJ this AM about earnings collapse.

The flip side of earnings is valuation — and that is the main problem here:

There are hints lately that the economy’s collapse isn’t quite as precipitous as it once was, which suggests the worst may be over for corporate profits, too. That doesn’t mean they are anywhere close to normal.

Since World War II, earnings have grown at about 6% a year, slightly trailing economic growth. But earnings have fallen well off trend during the current recession.

“As-reported” earnings per share — which, unlike “operating” EPS, conform to accounting standards — of companies in the S&P 500 are on pace to total just $28.75 for the past four quarters, according to Standard & Poor’s. That is roughly 61% below where they would be had they maintained a 6% growth rate in recent years, estimates Vitaliy Katsenelson, head of research at Investment Management Associates in Denver.

Slap a 15 multiple on that, and you end up with a very ugly S&P 500 number . . .

Source:
Profits’ Return to Normalcy Seems Far Off

Comments

  1. Byno Says:

    Has a secular bear market ever ended with PE multiples above 10? If not, why is 15 the appropriate number? I realize earnings will probably improve, even as the market is in decline, such that trailing 12 month earnings will be better than trough as the market is bottoming, but still…

    What if the fair value of the S&P at the moment is actually more like 250? Not saying it will go that low, but at the same time, the Nikkei ultimately lost 85% peak to trough, and given that they’ve been in their own depression for twenty years now, forgive me for thinking there might ultimately be some ugly parallels.
     

  2.  Mr.Sparkle Says:

    This is interesting from a rational perspective but I think overlooks the psychology part of it.

    Back in the tech-bubble implosion, as reported PE levels rocketed up to the 30’s, all the way to the mid-40’s. And that was before the actual bottom. When the bottom finally arrived, the PE level had retreated back to the low 30’s on an as-reported basis.

    If you look at the EPS at the time, it appears that earnings finally ticked upward and brought the PE level downward before a mass of bottom fishers and “value” investors came into the market. After the bottom, PE continued to fall right up until late 2007. Undoubtedly there were some “value” investors that got suckered by these low PEs and continued to fuel the boom.

    I think it is more interesting to see the current EPS forecast from S&P and compare it to the years of 2001-2003. That might explain a bit better why the market has stubbornly clung to this level.

    Just my 2 cents.
     

  3. Robertm73 Says:

    Look at the March Options for SP500 to be at 500. 108K open contracts. Very scary stuff.

    http://doomisnigh.blogspot.com/2009/02/sp-440.html

  4. farmera1 Says:

    “Since World War II, earnings have grown at about 6% a year, slightly trailing economic growth. But earnings have fallen well off trend during the current recession.”

    Hum, we’ve had 6% plus economic growth since WWII, I would doubt it. The 6% plus number seems high to me.

    Using 10 Yr. moving average of real earnings and applying a 15 multiple to it is about as meaningful as…well its hard to come up with anything that would be less meaningful. Ranks right up there with houses never decrease in price.Sure I’ll buy stocks based on that little gem. Sounds like a sales tool to get people to buy stocks to me. Got to come up with some reason for people to buy stocks er houses or whatever.

  5.  Mannwich Says:

    Too many people in denial looking for the quick fix again. It’s not going to happen this time.

  6. Broken Says:

    @llandson:

    Trailing 10 years is too long and does not properly reflect current conditions. I feel more comfortable with the average of last peak earnings ($85) and projected trough earning (~$29) with a PE multiplier of 12.

    This gives S&P = ~ 680.

[Feb 13, 2009] Failure to Rise, by Paul Krugman, Commentary, NY Times

In view of repug position the idea "Never short America" is open to review.  Fish rots from the head. Therefore S&P500 =500 might well be in the cards despite stimulus...  I like the quote form this Cato Institute guy “destroying my daughters’ future. It is like sitting there watching my house ransacked by a gang of thugs...”.   Most people probably have different from him composition of the "gang of thugs"...

But it’s now clear that the party’s commitment to deep voodoo ... is as strong as ever. In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration’s tax cuts is more Bush-style tax cuts.

And the rhetorical response of conservatives to the stimulus plan — which will ... cost substantially less than either the Bush administration’s $2 trillion in tax cuts or the $1 trillion and counting spent in Iraq — has bordered on the deranged.

It’s “generational theft,” said Senator John McCain, just a few days after voting for tax cuts that would, over the next decade, have cost about four times as much.

It’s “destroying my daughters’ future. It is like sitting there watching my house ransacked by a gang of thugs,” said Arnold Kling of the Cato Institute.

Comments

BJ Feng says...

No one else notices the BS in this article? You're telling me that an extra $400 billion and we'd be saved? This is laughable. It's time for the left to stop pretending that the spending is to help the economy, but rather to be truthful and admit that the crisis is just an excuse to pass pet projects that are so wasteful and foolish that they would stand no chance of passage in normal times. A real stimulus would upgrade the energy grid, start building new clean nuclear power plants, and build structural assets that will continue to provide gains for decades to come. This "stimulus" is a hodgepodge of absolute crap.

We might as well face reality. THE BUBBLE CANNOT BE REINFLATED! This is the real issue and the bottom line. We need time to restructure and consolidate the economy, firms that depended upon the bubble have to go out of business, the workers have to lose their jobs so that they can be freed up for non-bubble work. This downturn WILL take its course no matter what, but we have to make sure we don't foolishly throw our money away in the meantime.

We face a difficult future even without the crisis. The boomers are about to retire, we cannot waste money now because we will need it, and soon. How is Medicare and SS going to be funded when the boomers all retire? We will need to run deficits like this when the time comes, if we waste this money on garbage, then the boomers will get screwed.

[Feb 12, 2009] New York Times: US Going Down the Japan Path By Not Taking Out Dud Banks

Ten years of falling stock might be helpful for pushing busheviks into dustbin of history where they belong...  How US people can stand those idiots and crooks ?  But S&P500 at 600 now looks pretty plausible possibility.
Your humble blogger has said that rationalizing and recapitalizing the banking system is essential for recovery. Economists like Ben Bernanke attribute Japan's failure to dig itself out of its hole to not being aggressive enough in terms of fiscal and monetary stimulus,. Yet Japan did a great deal on both fronts. The biggest difference between Japan's program and that of countries that exited financial crises faster (Sweden, Norway, Chile) was that they tackled their banking mess early on, taking over and resolving insolvent banks.

Indeed, the Japanese recognize their mistake, and gave an uncharacteristically direct warning to the US last year. As we noted in "Japan Says US Financial Crisis Worse Than Its Bust, Urges Government to Recapitalize Banks":

The comments in the Financial Times by Yoshimi Watanabe, Japan’s financial services minister, are extraordinary. He ventured to give the US advice on its credit crunch based on Japan's experience during its post-bubble-years banking crisis. And it's not pretty.

Why are these remarks so unusual? Consider:

Most countries (save the US pushing liberalized capital markets) don't give other countries advice on how to run their financial services sector. That alone is pretty unheard of (however, the IMF dictated the terms of rescue programs in the Asian crisis of 1997, but those were third world countries suffering capital flight. Of course, their situation, with excessive borrowings, wobbly banks, and unsustainable current account deficits, bears no resemblance to ours)

The Japanese are particularly loath to stick their noses in other countries' affairs (that gives others license to comment on their practices). Note that even the often-belligerent Chinese sound off in response to US pressure, not in a vacuum

This statement came from the head of Japan's top financial regulator. If the powers that be had wanted to soft-pedal the message, they would have used a lower-ranking bureaucrat or a retired official

The Japanese comment is effectively a statement that significant actors in the US financial sector are bankrupt and will need to be recapitalized. Again, that is a shocking diagnosis to make in a public forum. Wantanabe says that the US banking system will need to get new equity from the government. The delay in recapitalizing Japanese banks (it was hard to win over the public) is considered within Japan the biggest reason for the length of their economic crisis

The Japanese are as nicely as they possibly can telling the US that we are in a terrible mess and we need to get on top of it ASAP. This is a blunt warning. I am sure the significance of the Japanese attempt at tough love will be lost.

The New York Times article today is playing up the parallels to Japan as "cautionary tales." This is still short of "Warning! Japan woes ahead!" but is still much more pointed statement of the dangers than its previous positioning ("lessons to be learned from Japan").

From the New York Times:

The Japanese have been here before. They endured a “lost decade” of economic stagnation in the 1990s as their banks labored under crippling debt, and successive governments wasted trillions of yen on half-measures.

Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.

By then, Tokyo’s main Nikkei stock index had lost almost three-quarters of its value. The country’s public debt had grown to exceed its gross domestic product, and deflation stalked the land. In the end, real estate prices fell for 15 consecutive years....

“I thought America had studied Japan’s failures,” said Hirofumi Gomi, a top official at Japan’s Financial Services Agency during the crisis. “Why is it making the same mistakes?”

Many American critics of the plan unveiled Tuesday by Treasury Secretary Timothy F. Geithner said the plan lacked details. Experts on Japan found it timid — especially given the size of the banking crisis the administration faces.

“I think they know how big it is, but they don’t want to say how big it is. It’s so big they can’t acknowledge it,” said John H. Makin, an economist at the American Enterprise Institute, referring to administration officials. “The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks.”

Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying — ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.

One reason Japan’s leaders were so ineffectual for so long was their fear of stoking public outrage. With each act of the bailout, anger grew, making politicians more reluctant to force real reform, which only delayed the day of reckoning and increased the ultimate price tag. Japanese taxpayers are estimated to have recouped less than half what it cost the government to bail out the banks.

A further lesson from Japan is that the bank rescue will determine the fate of the wider economy....

Many in Japan thought that low interest rates and economic stimulus measures would help banks recover on their own. In late 1997, however, a string of bank failures set off a crippling credit crisis.

Prodded into action, the government injected 1.8 trillion yen into Japan’s main banks. But the injections — too small, poorly planned and based on little understanding of the extent of the banking sector’s woes — failed to stem the growing crisis.

Fearing more bad news if banks were forced to disclose their real losses, Japan’s leaders allowed banks to keep loans to “zombie” companies on their balance sheets.

Japan, instead, experimented with a series of funds, in part privately financed, to relieve banks of their bad assets.

The funds brought limited results at best, says Takeo Hoshi, economics professor at the University of California, San Diego. For one thing, the funds were too small to make an impact. The depository for bad loans had no orderly way to sell them off. And the purchases that did take place failed to recapitalize banks because the bad assets were priced so low.

So far, the Obama administration’s plan avoids the hardest decisions, like nationalizing banks, wiping out shareholders or allowing banks to collapse under the weight of their own bad debts. In the end, Japan had to do all those things.


It is amazing how the politcization of decisions is driving the US down the same road the Japanese took, despite the considerable differences in the two societies. While Obama strives to strike a new tone, true leadership (as in getting the public to do things that are difficult but in their best interest) went out of fashion in the US a long time ago.

Comments

A Sad Panda said...
If I remember correctly, the 1997 relapse in Japan was triggered by the gov't tightening the loose fiscal strings as the economic outlook was improving and the budget deficit was looming.

With no real structural reform in sight, I imagine we'll be following in their footsteps a few years down the road. The administration will see signs of recovery, jump the gun, and realize they didn't fix anything in the first place when everything comes crashing down again.

Anonymous said...
Yves - there's an irony in your comment "...true leadership (as in getting the public to do things that are difficult but in their best interest) went out of fashion in the US a long time ago."

That's the attitude the powers that be took last fall with TARP I. The plutocrats/kleptocrats knew better than just about everyone else and used "leadership" as an excuse to rip off taxpayers in favor of wealthy bankster types in order to "save the world."

Judging by his economic team Obama is not very different in this matter.

There are several things that better than nothing, including things you have suggested, but the Paulson/GS/Geithner approach is not one of them.

Careful what you wish for.

vlade said...
"amazing how the politcization of decisions is driving".
Unfortunately, economics (as in not the economy, but the high-level economic decisions) is an extension of politics by other means. Yet more unfortunately, it doesn't seem to get through most of the economic packs that all economic decisions will be judged first and foremost by their politics implications and biases of the group currently in power and its supporting power base(s).
Anonymous said...
"Japanese banks weren't holding a bunch of CDO and CDS positions as that stuff had not yet come of age.
If they worried that taking down the bad banks would cost a lot of jobs they didn't have to worry that pulling on the wrong string would unravel the global financial system."

You know the financial lobbyists are losing an argument when they talk about collapse of the financial system. They love the parade of horribles technique, and never provide any factual support for it. Lying liars.

Anonymous said...
We all know what to do with bad banks. And that's the problem, a lot of very powerful people and the wealth of status quo are connected.

It is not about banking mechanics, but politics.

Same thing as in Japan.

Our problem: we can't afford doing what the Japanese did, they have gigantic budget surplus when they started the slip and slide.


Imagine US has 200% sovereign debt in it's book with the size of trade deficit. We'll go bankrupt in 5 years, nevermind "lost decade"

vlade said...
Japanese banks were holding a whole bunch of shares in Japanese companies, which came down in value by about 80% since (using NIKKEI as a proxy, with high of 39,000 to today's 8000).
Selling those shares in open market (well, if ever such a thing really existed in Japan) would drive them down a lot - especially if everyone was selling at the same time.
Anonymous said...
"It is amazing how the politcization of decisions is driving the US down the same road the Japanese took..."

It's because we're both human. Proven time and again in real life and in academic study, taking a loss today is more painful than at some point in the future. Has to do with abstract thinking. No surprises here.

[Feb 12, 2009] Quote of the Day- On Markets

A friend I used to work with who buys distressed debt/CDOs emails me this:

I don’t remember when you had this on your site, but it caught my eye. I printed it and hung on my computer screen. I read it once a day. It restores in me faith that my perseverance, honesty and respectful treatment of all I come in contact with in business is the only way to do this thing called life.

I totally forgot about that, and thanks to Google, I was able to find the original version of that:

It is the markets’ job [eventually] to reallocate money from the ignorant to the intelligent, from the lazy to the hard working and studious; from the naive to the educated, and from the speculator to the investor.

  1. brianm Says:

    I think you have to add “eventually” to that statement - then it becomes perfect.

    I sat on the sidelines for years and watched with frustration and anger as the real estate bubble raged, and the ignorant, lazy, naive, speculators were rewarded - year after painful year - all for watching Kramer and Kudlow, parroting the NAR talking points, and generally mindlessly following the herd. I pontificated regularly to anyone who would listen - but most people laughed, shrugged it off, called me a “conspiracy theorist” or “too cheap to buy real estate.” Wow, I sound like Peter Schiff - lol.

  2. leftback Says:

    @brianm: “the waiting is the hardest part…” Right on.

    Barry, speaking of “reallocatinh money from the ignorant to the intelligent”, Kedrosky has some details of the past and present positions of the Harvard endowment. Not only were these guys complete tools last year, it looks as though they went to the dartboard and played “Blind ETF Darts” to come up with their 2009 portfolio.

    http://paul.kedrosky.com/archives/2009/02/12/a_closer_look_a_1.html

    It is really amazing to me that people get paid to invest as badly as these guys obviously did last year. I don’t even have an MBA and I beat these guys by about 25 percentage points.

    (Ah, maybe it’s BECAUSE I don’t have an MBA…)

Anyway the point is that you can be “right” during those periods, but you are also human. It is just so hard to control your emotions, stick to your convictions, and wait. Especially when the whole world seems to have gone mad. I used to have to search the web to find a single mainstream commentator who dared call real estate a “bubble.” It was taboo. Now they say it openly during Congressional hearings. My how things change . . People’s capacity for self delusion and self-censorship is virtually limitless. If I learned anything during this last bubble - it’s that.

And this is what makes investing *hard* More than being smart or savvy or hard-working, it’s also the capacity to master your emotions in the face of adversity. That, to me, is the hardest work of all.

[Feb 12, 2009] Some Thoughts On N-word Implications by Tyler Durden

2009-02-09 | zerohedge.blogspot.com

By the way, that's Nationalization... Just wanted to get that out of the way. So what is so terrifying about nationalization that only the Duo of Doom (Roubini and Taleb) dares to expound on it profusely on prime time CNBC (and engender more boycotts of the otherwise harmless TV station)? Fundamentally, any recapitalization of banks by the government involves stripping or diluting certain asset classes of their value. Nationalization is merely an exercise of common stock dilution taken further, to the point where not just existing common, but preferred, hybrid and potentially junior and senior levels of debt are impaired and even extinguished. If you have never stared at a bank's balance sheet long, think of it as starting with the most unsecured capitalization layer which is always the company's common stock, which is last to receive any recoveries in a liquidation, and going all the way up to the most "riskfree" layer, secured debt, which is first in line in liquidation proceedings.

In 2008 the government really screwed the pooch when it recapitalized banks that failed or were on the verge of failure. Starting with the first failed entity, the GSEs (Freddie and Fannie), instead of wiping out the common stock in an entity that should have been governmentally controlled anyway, and potentially also impairing the thin layer of subordinated debt between the common stock and the senior debt, the government pulled a magic number out of its hat, saying that only 79.9% of the common stock was worthless, that the balance was healthy, and that the debt above the common was worth every penny. Now while the reasons for this are arguable, in my opinion the primary cause for this approach was to not spook foreign sovereign and private investors (who own a lot of GSE senior and sub debt) into thinking that not only this investment, but others, (potentially even Treasuries!) may also be on the edge. The lack of a more decisive security impairment higher in the capital structure is why the GSEs are constantly begging for more capital as the initial recapitalization was woefully inadequate.

After the GSEs conservatorship became effective, the dominoes started to fall, with bank after bank realizing it does not have sufficient cash generating assets to cover its debt let alone provide equity value (if I had to summarize the current crisis in a sentence, this would be it - the inability to find the right balance at which bank asset cash generation can satisfy liability obligations; all other things such as Mark-To-Market, TARP injections, TALF, etc., etc., are just fancy words to hide the simple truth that nobody has any clue at what fair value of assets and liabilities the system will be in equilibrium). Only once the values of assets cover the values of debt (debt, by the way is easily quantified - you know exactly what the notional value is after a 3 second check on Bloomberg; as for assets, nobody has any clue what their values are thanks to FASB's recent failed attempts at elucidation), will any incremental asset value generated create equity value, and only at that point will it make sense to buy bank stocks. It is really as simple as that...

And also not all that simple... Why - because the government, like we said, screwed the pooch, which it did by coming up with not one consistent, underlying methodology of dealing with bank failures but treating each one on a case by case basis, thereby leaving investors guessing how they would be screwed over any time they built up the risk affinity to invest a penny anywhere in a bank's capital structure. Our advice to Geithner, all else being equal, is at least stick to one program, even if it is completely faulty. The market will find a way to correct your mistake... Just don't change the system every 24 hours or whenever is convenient. That would really lead to a financial system collapse. And when we say the government was fickle, it really was. CreditSights has prepared data which we have tabulated to show just how different a random sampling of full-blown (or semi) failures both in the U.S., and globally, were treated by their respective governments/regulators.

[Feb 11, 2009] Investing for deflation

In response to a question submitted earlier in the week about how one goes about "investing for deflation", Kevin Depew at Minyanville writes
Conventional wisdom is that there is always something to buy in a bear market and sell in a bull market. However, if the long-term deflationary debt unwind thesis is correct, the point of recognition will result in the simultaneous decline of virtually all financial assets.

Under those circumstances, shopping for bargains among the rubble is like groping around in a pile of knives. This is a difficult concept to grasp, especially given the length and magnitude of the secular bull market in social mood and, subsequently, financial assets, that brought us to this point. But the reality is that during a deflationary debt unwind there are no good long-term investments other than cash.

Wow - what a prospect.

The best you could reasonably expect to do is earn one or two percent on your cash...

It really sucks that our health insurance just went up 20 percent.

[Feb 11, 2009] Buyback halts may spell more trouble for Wall St. Reuters

Reuters

"The suspension of buybacks hurts the market," said Eric Kuby, chief investment officer at NorthStar Investment Management Corp. in Chicago. "Corporations are basically saying we're taking this conservative approach, we're conserving our cash."

The latest bit of bad news arrives as Wall Street attempts to recover from an 11-year low reached in November. Buybacks serve as crucial underpinnings of market psychology and sentiment, according to analysts.

"The buybacks have totally fallen off," said Howard Silverblatt, senior index analyst at Standard & Poor's in New York. "The companies are shy about commitment. We're seeing companies pulling back in order to conserve cash."

Around this time last year, corporate America had more than $63 billion of share repurchases announced, but through February 5 there have been $4.32 billion of announced buybacks, according to data from market research firm Birinyi Associates.

The benchmark S&P 500 .SPX is down more than 40 percent since hitting a record in October 2007, and down more than 8 percent since the start of 2009.

With share repurchases, companies tread a fine line between returning wealth to shareholders and maintaining a sufficient financial cushion.

Credit rating agencies often take a dim view of share buybacks, because of the constraints they place on cashflow and because of the reliance by some companies on debt to fund the share buybacks.

[Feb 11, 2009] Ed Balls minister fears rise of fascism amid economic gloom - Telegraph

Ed Balls, the Children's and Schools Secretary, said the downturn was likely to be the most serious for 100 years, and his comments appeared to raise the prospect of a return to the Far Right politics of the 1930s and the rise of Facism.

His warning, in a speech to activists at the weekend, came after a trade union baron warned that far right parties were trying to hijack the campaign for "British jobs for British workers".

The row over foreign workers has gathered momentum in recent weeks and Mr Balls seemed to suggest the recession could trigger a return to the Far Right politics that prospered in the Great Depression of the 1930s.

He told Labour's Yorkshire conference: "The economy is going to define our politics in this region and in Britain in the next year, the next five years, the next 10 and even the next 15 years.

"I think that this is a financial crisis more extreme and more serious than that of the 1930s and we all remember how the politics of that era were shaped by the economy."

The remarks are significant because Mr Balls was a key adviser to Mr Brown during his decade at the Treasury as Chancellor of the Exchequer.

Mr Balls said that he believed this to be "the most serious global recession for over 100 years".

He said: "We now are seeing the realities of globalisation, though at a speed, pace and ferocity which none of us have seen before. The reality is that this is becoming the most serious global recession for, I'm sure, over 100 years as it will turn out."

Last week Derek Simpson, the general secretary of Unite, gave warning that far right elements were hijacking a campaign against foreign firms bringing in non-British workers.

He said: "We are deeply concerned that other organisations like the BNP are latching onto the movement for their own racist agenda."

Last night, George Osborne, the shadow Chancellor, said Mr Balls' comments were at odds with Treasury forecasts suggesting a recovery in the third quarter this year.

[Feb 11, 2009] 1930s Unemployment vs. Today It's About People, Not Percentages

Seeking Alpha

For anyone that still has a job, percentage unemployment numbers mask the misery and potential for unrest felt by those who have lost a job and are nearing the ends of their financial (and other) ropes. Percentage comparisons with employment in the great depression (25% vs now "7.6%") seem to indicate we have a huge distance to cover if we are to approach the misery experienced in the great depression.

But a vastly more interesting and important comparison is of actual total human beings without jobs or who are severely underemployed. The number of people affected at the peak of the depression was 13.5 million unemployed vs today's official number of 11.6 million. Eleven million six hundred thousand human beings unemployed is within a dangerously short distance of the worst number the Great Depression ever printed - and the calculations then were much more conservative than they are today.

Since the 90's, 'discouraged workers', or those had given up looking for a job because there were no jobs to be had, were redefined by the Clinton administration so as to be counted only if they had been 'discouraged' for less than a year. This time qualification defined away the bulk of the discouraged workers. Adding them back into the total unemployed, actual unemployment in order to make a fair "apples to apples" comparison, as estimated by the SGS-Alternate Unemployment Measure, brings us to 17.9% in January!

Even worse, we are treated to this forward looking info from From CNNMoney.com yesterday. Since 2000, the Labor Department has also tracked hiring, job openings and layoffs. And the most recent readings on those statistics show that the level of hiring and job openings has actually tumbled more than layoffs have soared.

Through November, the number of layoffs was up 17% from year-earlier levels. But the amount of workers who were hired during November was down 26%, and the number of job openings tumbled 30%.

While layoffs are likely up from the November levels, the hit to hiring has also gotten much more severe, according to experts. And that means that once people do lose their job, it's going to be even tougher to find a new one.

The Conference Board's tracking of online job listings shows a decline of more than 1 million listings in the last two months alone. That's a 23% decline in postings since November. The weakness in job postings is widespread, with only two states, North Dakota and Wyoming, having fewer unemployed people than advertised job openings.

During the last recession in 2001, there was not nearly as sharp a drop in hiring and job openings. In fact, the hiring and job opening rates, which compare new hires and openings to the overall number of workers, are both at their lowest level on record.

And economists say that even if the number of layoffs peaks soon, the pace of hiring and job openings may remain soft for months to come.

"The issue of hiring is often overlooked," said Gad Levanon, senior economist for The Conference Board. "But it's the key to the labor market. In the last recession, layoffs reached their peak in late 2001. But hiring didn't reach its lowest level until 2003, and that's when the job losses finally ended."

While things are less dire now due to unemployment insurance, if that resource were to dry up, we would have a most daunting civil problem on our hands.

[Feb 11, 2009] Black Hole Alert- Fannie, Freddie Cash Needs May Exceed $200 Billion

naked capitalism
Martin, the Netherlands said...
As a European, I am rather surprised that the American public accepts that their government is putting such large sums at the disposal of banks without ensuring that the government has more influence on how they are run. No board members are sacked, no voting rights are insisted upon...
 
doc holiday said...
Flapping wings, in a violent rage and crowing as loud as possible -- My American flag is flying upside down and it's time for an S.O.S:

"Stimulus? The Dollar Is Toast" Says Harvard MBA Juan Enriquez

Says the Harvard trained MBA,

The only part of the economy that generates new output are start-up companies. The fortune 500 have generated net negative jobs over the last 30 years. It's startup companies that are .2 percent of GDP that have generated 17.8 percent of economic output. That's where we've got to be investing.

Enriquez has a strongly worded warning for President Obama: "Quit spending money you don't have, because our kids - it isn't just our kids who are going to pay for it, we're going to pay for it and this crisis is going to get a lot worse if we don't start controlling our spending."

>> Juan Enriquez
The day started on a sobering note with Juan Enriquez, a philosopher and researcher, who explored how the U.S. economy is floundering but encouraged people to “dance through the flames” and focus on the long term.

> If you have not seen him speak, go here: Dialogue on the Global Economic Crisis

Anonymous said...
Martin:

Your average American is not fully aware of the epic scale of the fraud and theft being perpetrated on them. Imagine some tragic mix of ignorance, self-satisfaction, confusion, and vague fear. If they voted for Obama, add some post-election irrational Hope.

lineup32 said...
martin: Americans unlike the rest of the world can buy with little or no cash using OPM/credit, auto's, RV's, large homes, motorcycles, large screen TV, computers, vacations, and lets not forget for our public employees' 90% income retirement and if you are lucky enough to be a federal employee well two or three retirement packages are in your future! So while the rest of word may consider Americans NASCAR lifestyle over the top we want to thank you for buying our T-bills and agency debt keep up the good work.
FairEconomist said...
I have no access to specific numbers, but the foreclosure moratorium must be making their losses explode. Every month of moratorium is a month of lost payments, and when you have thinly-capitalized entities like Fannie and Freddie that are *supposed* to operate on the margin of rare defaults, that rapidly becomes catastrophic. Just 3 months of nonpayment would soak up all of a typical 1.5% fee.

Anger is increasingly becoming part of the blend, but I think most will not be deeply outraged until they lose their job, and take a moment to assess the landscape.

I myself looked with envy at France's general strike. Such an outrage in the US - given the implicit threat that we are a heavily armed and slightly crazy populace - might well have brought the plutocrats to heel.

For now, the lootings will continue. (A bond market dislocation can of course change that overnight.)

[Feb 10, 2009] Letters - The Showdown Over the Stimulus

February 9, 2009 | NYTimes.com

To the Editor:

Re “Competing Bills on the Stimulus Divide Congress” (front page, Feb. 8):

President Obama is letting bipartisanship stand in the way of what’s best for America.

We need a still-larger stimulus package, not one pared down to obtain the votes of a recalcitrant Republican minority that has already spurned cooperation.

We need to increase immediate aid to the unemployed and the poor and to the states, not dilute the stimulus to placate the party whose bankrupt philosophy got us into this mess.

Emphasizing once more the failed conservative theory that tax cuts cure all ills to buy support from Republicans is unnecessary and dangerous.

It is time to reject the antidemocratic notion that a Republican Senate minority has the right to veto legislation that is supported by the president and by a majority of each house of Congress. If we need to get rid of the filibuster to avoid economic collapse, so be it. But compromise with rule-or-ruin Republicans for the sake of “unity” is a sad mistake.

Mitchell Zimmerman
Palo Alto, Calif., Feb. 8, 2009

===

To the Editor:

Paul Krugman (“The Destructive Center,” column, Feb. 9) is correct in asserting that so-called moderate senators have effectively gutted the stimulus plan by offering their hard bargain for passage of the measure. But all is not lost. It is reasonably anticipated that when both houses confer, vital elements will be restored.

The real test will come when the Senate is faced with approval of the enhanced final version of the bill and the Republicans threaten filibuster. It will then be time for the Congressional and White House leadership to dig in their heels and let them try.

The more they talk and delay, the more they will demonstrate that during the greatest economic crisis facing the nation in a lifetime, they were the obstructionists stubbornly standing in the way of relief.

Arthur L. Yeager
Edison, N.J., Feb. 9, 2009

===

To the Editor:

Paul Krugman’s column highlights why the so-called centrist compromise could short-circuit the surge the economy needs to get its pulse rate going again. The heart of the problem is that, constrained by their balanced budget requirements, state and local governments must cut jobs and raise taxes just at the time the opposite is needed.

These policies undermine the whole thrust of the stimulus package. The fight to restore the aid levels in the bill that passed the House is thus critical to an early recovery.

Richard C. Leone
Princeton, N.J., Feb. 9, 2009

The writer is president of the Century Foundation and a former state treasurer of New Jersey.

To the Editor:

Paul Krugman’s column highlights why the so-called centrist compromise could short-circuit the surge the economy needs to get its pulse rate going again. The heart of the problem is that, constrained by their balanced budget requirements, state and local governments must cut jobs and raise taxes just at the time the opposite is needed.

These policies undermine the whole thrust of the stimulus package. The fight to restore the aid levels in the bill that passed the House is thus critical to an early recovery.

Richard C. Leone
Princeton, N.J., Feb. 9, 2009

The writer is president of the Century Foundation and a former state treasurer of New Jersey.

To the Editor:

Re “Playing With Fire,” by Bob Herbert (column, Feb. 7):

For eight years, Republicans passed every spending bill George W. Bush put forward, creating the biggest deficits in our history and the current state of our economy. I have little doubt that if President Obama’s economic recovery plan were for Iraq, Republicans would pass it without flinching because, of course, anyone who balked would be considered antipatriotic.

But now that the “spending” is put forth by a Democratic president for people other than the wealthy, Republicans are playing political Russian roulette with the lives of millions of Americans.

There is something “‘stinking up the place,” as Senator Lindsey Graham said, but it’s not the economic recovery bill.

Michele Yulo
Tucker, Ga., Feb. 7, 2009

[Feb 10, 2009] The Rorschach plan (wonkish, or at least hard to read), by Paul Krugman

 An old joke from my younger days: What do you get when you cross a Godfather with a deconstructionist? Someone who makes you an offer you can’t understand.

[Feb 10, 2009] Kasriel on the Great Depression

The Mess That Greenspan Made

As might be expected from what appears above, government spending is viewed as the lesser of many evils during periods such as this as codified in the conclusion:

It is not my role to endorse government policies. It is my role to forecast the impact of government policies on the economy. I believe that large increases in federal government spending that are monetized by the Fed and the banking system will result in a recovery in real economic activity. When that recovery sets in depends on how quickly the federal government increases its spending and by the magnitude of that increase. We can debate whether tax rates should be cut or federal spending should be increased. We can debate what kinds of spending should be increased. We can debate whether the federal government should increase any of its spending. But the facts of the 1930s appear to be pretty clear - monetized increased federal government spending does result in increased real economic activity in the short run.

The economic data are likely to be abysmal through the first half of this year. The popular media will reinforce the gloom of the data. The same pundits who did not see this downturn coming will not see the recovery coming either. My advice to you is to keep your eye on the index of Leading Economic Indicators. If history is any guide, the LEI will signal a recovery well ahead of the pundits.

[Feb 10, 2009] Recession No, It's a D-process, and It Will Be Long By SANDRA WARD

Barrons.com

AN INTERVIEW WITH RAY DALIO: This pro sees a long and painful depression.

NOBODY WAS BETTER PREPARED FOR THE GLOBAL market crash than clients of Ray Dalio's Bridgewater Associates and subscribers to its Daily Observations. Dalio, the chief investment officer and all-around guiding light of the global money-management company he founded more than 30 years ago, began sounding alarms in Barron's in the spring of 2007 about the dangers of excessive financial leverage. He counts among his clients world governments and central banks, as well as pension funds and endowments.

No wonder. The Westport, Conn.-based firm, whose analyses of world markets focus on credit and currencies, has produced long-term annual returns, net of fees, averaging 15%. In the turmoil of 2008, Bridgewater's Pure Alpha 1 fund gained 8.7% net of fees and Pure Alpha 2 delivered 9.4%.

Here's what's on his mind now.

Barron's: I can't think of anyone who was earlier in describing the deleveraging and deflationary process that has been happening around the world.

Dalio: Let's call it a "D-process," which is different than a recession, and the only reason that people really don't understand this process is because it happens rarely. Everybody should, at this point, try to understand the depression process by reading about the Great Depression or the Latin American debt crisis or the Japanese experience so that it becomes part of their frame of reference. Most people didn't live through any of those experiences, and what they have gotten used to is the recession dynamic, and so they are quick to presume the recession dynamic. It is very clear to me that we are in a D-process.

Why are you hesitant to emphasize either the words depression or deflation? Why call it a D-process?

Both of those words have connotations associated with them that can confuse the fact that it is a process that people should try to understand.

You can describe a recession as an economic retraction which occurs when the Federal Reserve tightens monetary policy normally to fight inflation. The cycle continues until the economy weakens enough to bring down the inflation rate, at which time the Federal Reserve eases monetary policy and produces an expansion. We can make it more complicated, but that is a basic simple description of what recessions are and what we have experienced through the post-World War II period. What you also need is a comparable understanding of what a D-process is and why it is different.

You have made the point that only by understanding the process can you combat the problem. Are you confident that we are doing what's essential to combat deflation and a depression?

The D-process is a disease of sorts that is going to run its course.

When I first started seeing the D-process and describing it, it was before it actually started to play out this way. But now you can ask yourself, OK, when was the last time bank stocks went down so much? When was the last time the balance sheet of the Federal Reserve, or any central bank, exploded like it has? When was the last time interest rates went to zero, essentially, making monetary policy as we know it ineffective? When was the last time we had deflation?

The answers to those questions all point to times other than the U.S. post-World War II experience. This was the dynamic that occurred in Japan in the '90s, that occurred in Latin America in the '80s, and that occurred in the Great Depression in the '30s.

Basically what happens is that after a period of time, economies go through a long-term debt cycle -- a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren't adequate to service the debt. The incomes aren't adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.

As goes GM, so goes the nation?

The process of bankruptcy or restructuring is necessary to its viability. One way or another, General Motors has to be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again.

This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes -- the cash flows that are being produced to service them -- or we are going to have to raise incomes by printing a lot of money.

It isn't complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue.

Isn't the process of restructuring under way in households and at corporations?

They are cutting costs to service the debt. But they haven't yet done much restructuring. Last year, 2008, was the year of price declines; 2009 and 2010 will be the years of bankruptcies and restructurings. Loans will be written down and assets will be sold. It will be a very difficult time. It is going to surprise a lot of people because many people figure it is bad but still expect, as in all past post-World War II periods, we will come out of it OK. A lot of difficult questions will be asked of policy makers. The government decision-making mechanism is going to be tested, because different people will have different points of view about what should be done.

What are you suggesting?

An example is the Federal Reserve, which has always been an autonomous institution with the freedom to act as it sees fit. Rep. Barney Frank [a Massachusetts Democrat and chairman of the House Financial Services Committee] is talking about examining the authority of the Federal Reserve, and that raises the specter of the government and Congress trying to run the Federal Reserve. Everybody will be second-guessing everybody else.

So where do things stand in the process of restructuring?

What the Federal Reserve has done and what the Treasury has done, by and large, is to take an existing debt and say they will own it or lend against it. But they haven't said they are going to write down the debt and cut debt payments each month. There has been little in the way of debt relief yet. Very, very few actual mortgages have been restructured. Very little corporate debt has been restructured.

The Federal Reserve, in particular, has done a number of successful things. The Federal Reserve went out and bought or lent against a lot of the debt. That has had the effect of reducing the risk of that debt defaulting, so that is good in a sense. And because the risk of default has gone down, it has forced the interest rate on the debt to go down, and that is good, too.

However, the reason it hasn't actually produced increased credit activity is because the debtors are still too indebted and not able to properly service the debt. Only when those debts are actually written down will we get to the point where we will have credit growth. There is a mortgage debt piece that will need to be restructured. There is a giant financial-sector piece -- banks and investment banks and whatever is left of the financial sector -- that will need to be restructured. There is a corporate piece that will need to be restructured, and then there is a commercial-real-estate piece that will need to be restructured.

Is a restructuring of the banks a starting point?

If you think that restructuring the banks is going to get lending going again and you don't restructure the other pieces -- the mortgage piece, the corporate piece, the real-estate piece -- you are wrong, because they need financially sound entities to lend to, and that won't happen until there are restructurings.

On the issue of the banks, ultimately we need banks because to produce credit we have to have banks. A lot of the banks aren't going to have money, and yet we can't just let them go to nothing; we have got to do something.

But the future of banking is going to be very, very different. The regulators have to decide how banks will operate. That means they will have to nationalize some in some form, but they are going to also have to decide who they protect: the bondholders or the depositors?

Nationalization is the most likely outcome?

There will be substantial nationalization of banks. It is going on now and it will continue. But the same question will be asked even after nationalization: What will happen to the pile of bad stuff?

Let's say we are going to end up with the good-bank/bad-bank concept. The government is going to put a lot of money in -- say $100 billion -- and going to get all the garbage at a leverage of, let's say, 10 to 1. They will have a trillion dollars, but a trillion dollars' worth of garbage. They still aren't marking it down. Does this give you comfort?

Then we have the remaining banks, many of which will be broke. The government will have to recapitalize them. The government will try to seek private money to go in with them, but I don't think they are going to come up with a lot of private money, not nearly the amount needed.

To the extent we are going to have nationalized banks, we will still have the question of how those banks behave. Does Congress say what they should do? Does Congress demand they lend to bad borrowers? There is a reason they aren't lending. So whose money is it, and who is protecting that money?

The biggest issue is that if you look at the borrowers, you don't want to lend to them. The basic problem is that the borrowers had too much debt when their incomes were higher and their asset values were higher. Now net worths have gone down.

[Feb 10, 2009] Some Improvement in Bond Market

2009-02-09 | Calculated Risk

Bond Market in Winter Thaw

A growing number of big companies are taking advantage of the thawing credit markets to raise large sums of money at low interest rates, with Cisco Systems Inc. Monday selling $4 billion in bonds ...

The big Cisco offering follows a string of successful efforts just in the past five weeks to tap the market for corporate debt. The size of the offering -- and the relatively low risk premiums attached to the bonds -- indicate that investors are hungry for debt from highly rated companies that issue infrequently.
...
Cisco's 10-year notes were sold Monday at two percentage points above Treasurys for a yield of 4.979%, while a 30-year portion of Cisco's offering sold for a yield of 5.916%.
...
Cablevision Systems Corp. had to pay interest of 9.375% to borrow $500 million on Monday. [10 year notes]
...
Other companies are still shut out of the market completely.

The following graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

The Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.
Spread Corporate and Treasury Click on table for larger image in new window.

There has been some improvement (decline in spread) in recent weeks, but the spreads are still very high - even for higher rated paper - but especially for lower rated paper like Cablevision.

Selected comments

Citizen AllenM writes:

We must face up to the fact that banks and Wall Street have failed to adequately allocate capital to productive uses, and instead have turned into ponzi style machines using regulatory loopholes to fleece the public. The sooner we smash the paradigm, the faster we begin to make progress to a new solution that works in getting money to folks to buy houses, and a new finance structure to keep people from walking away when their economic incentive is currently screaming at them to take a hike.

Comrade Misean is Dope writes:

"The big Cisco offering follows a string of successful efforts just in the past five weeks to tap the market for corporate debt. The size of the offering -- and the relatively low risk premiums attached to the bonds -- indicate that investors are hungry for debt from highly rated companies that issue infrequently."

Gosh and goody. Cisco has been successful taping the debt market.

Um...Have they been successful selling kit? Gaining new customers? Expanding growth potential? You know things that indicate that the debt can be repaid.

Who cares..."investors" are hungry to buy debt. That's all that matters.

That that caused the current malady...

Nothing to see here...move along.

Nostrovia,
Comrade Misean is Dope | Homepage | 02.09.09 - 10:12 pm | #

brushes9 writes:
I'm sure some of you have already seen this Telegraph article..

Conclusion of Article: "Readers have berated me for a piece last week – "Glimmers of Hope" – that hinted at recovery. Let me stress, I was wearing my reporter's hat, not expressing an opinion. My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies."

http://www.telegraph.co.uk/finan...alls- apart.html
brushes9 | Homepage | 02.09.09 - 10:15 pm | #

teh googler writes:
"In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides"

TurboTaxTimmy is 47 years old. If he plays his cards right, he will have at least a dozen years to reach the chairmanship of whatever investment bank survives the current global decession. Any decision he makes now that is even remotely respectful of the taxpayer will surely alienate those likely to be on the board of directors when he goes to make his power move.
teh googler | 02.09.09 - 10:22 pm | #

crispy&cole writes:

CSCO also has 24 billion of debt...

crispy&cole | 02.09.09 - 10:23 pm | #

Tell The Truth writes:

The Telegraph tells us today that those private calculations of M3, like the publicly available monetary aggregates, show a sudden contraction, a deflationary signal. From the Telegraph: Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959. "Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist. Monetarists insist that shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation. "There are always short-term blips but over the long run M3 has repeatedly shown itself good leading indicator," said Mr Stein...

Tell The Truth | Homepage | 02.09.09 - 10:24 pm | #

JP writes:

I should have read the article.  I now remember that CSCO has hoards of cash offshore (Ireland had a bunch IIRC), and leaves it there to avoid taxes.

While Cisco has a cash hoard of $29.5 billion, the company can't readily tap those reserves to pay for outlays such as acquisitions. Only $3 billion to $4 billion of Cisco's cash is in the U.S. with the rest overseas, meaning that the money would be subject to taxes if Cisco tries to bring it home.

JP | Homepage | 02.09.09 - 10:24 pm | #

Elvis writes:

"If CSCO holds together, it will go up about a buck per share in 2009; is it worth the risk?

Tell The Truth"

Is sex in the alley from a hooker worth the risk?

Elvis | 02.09.09 - 10:29 pm | #

yagij writes:

Anyone up for some more Gold/PM discussion goodness?

brushes9 writes:
I represent FAII

I am the one-stop place for all your investment needs. Depression coming, send me you cash.

I accept all forms of transfers.

Just make it payable to:

"Forget About It Investments"

I'll take care of it..and you!
brushes9 | Homepage | 02.09.09 - 10:45 pm | #

I propose "'Paper gold market will crash at Comex'" to start us off.*
---
* - Grains of salt available as needed.

yagij | 02.09.09 - 10:30 pm | #

High Noon: Geithner v. The American Oligarchs

"Financial oligarchy essentially believe, correctly, that they have purchased an insurance policy through lobbying, which goes into effect should a financial crisis occur."

The Baseline Scenario

with 9 comments

There comes a time in every economic crisis or, more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that - they say - will deliver you back to growth.  The person has political support, a strong track record, and every incentive to enter the history books.  But one nagging question remains.

Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble?  The form of these vested interests, of course, varies substantially across situations, but they are always still strong, despite the downward spiral which they did so much to bring about.  And fully escaping the grip of crisis really means breaking their power.

Not only is this a standard way of thinking about crisis resolution in many developing and post-communist countries, it also turns out to be a good guide to thinking about the US today.  We have a powerful banking industry that has mismanaged its way into deep trouble.  Yet these banks obtained an initial bailout - the Troubled Asset Relief Program, or TARP - on generous terms, and have consistently failed to use the opportunity provided by this government support to turn their operations around.  Not only that, but they have flaunted their power - and their arrogance - through paying themselves large and largely inappropriate bonuses.

We come now, this week, to the podium.  And Treasury Secretary Tim Geithner takes the stand (on Tuesday), to tell us how he proposes to use the remainder of the TARP funds, support from the Federal Reserve, and other policies to turn around the financial system and pull us out of recession.  We previously posed relevant technical questions for this week; answers (or lack of answers) to these should determine if Geithner’s approach is likely to succeed.  Think of that as a framework for reasonable technocratic assessment.  But there is also the key political dimension to emphasize.

The elites who run the US banking industry have had a great run of economic good fortune.  They used this wealth to further strengthen their political power, both through donations to politicians of almost all stripes and more broadly through taking positions of formal and informal influence throughout the executive and legislative branches.

Our unsustainable debt-fuelled boom, in other words, produced both the conditions for a major global financial disaster, and a political strengthening of the people who benefited most from the risk-taking and associated compensation packages that made this disaster possible.  Ending the financial crisis is relatively straightforward - a forced recapitalization and change of ownership/management in the banking system - although this will not immediately lead to an economic recovery (more on that here).  But seen in deeper political terms, decisive action to restructure large banks is almost impossible.  Such action would require overcoming perhaps the single strongest interest group in the United States today.

How can you do it?  The answer must be by splitting this powerful interest group into competing factions, and taking them on one by one.  Can this be done?  Definitely, yes.  In particular, bank recapitalization - if implemented right - can use private equity interests against the powerful large bank insiders. Then you need to force the new private equity owners of banks to break them up so they are no longer too big to fail.  And then… there is always more to do to contain the power of a lobby that is boosted by any boom and which, the more it succeeds, the more likely it is to ruin us all.

(Note: this is also a guest post at http://www.growthcommissionblog.org/; if you’d like the World Bank potentially to take note of your comments, please post there as well as here.)

"Countervailing Power Vacuum"

This is my first entry in TPMCafe Book Club's discussion of Eric Rauchway's book, The Great Depression and the New Deal: A Very Short Introduction. Eric's post to start the discussion asked two questions, (1) why was there a Great Depression in the first place?, and (2) what happened to the principle of countervailing power after the New Deal?

Here's the post:

Countervailing Power Vacuum: I want to come back to Eric's first question in a later post, the question of how depressions come about, and turn to his second question, "what happened to the principle of countervailing power after the New Deal? Did it remain a core concept of American politics, and if so, for how long?"

The idea that countervailing power is needed to balance labor markets has faded over time, and I think the movement toward deregulation in the 1970s is part of the reason for this, and that economists were one of the driving forces behind this change. We hear a lot about the role that Nixon and the Republicans played in bringing about a push for deregulation, a push that found success, but we hear less about the role that the economics profession played in setting the stage for the deregulatory phase that began in the 1970s, a phase that continued for decades and has only recently been muted - perhaps - by the present crisis in the US and world economies. Thus, I'd like to focus on changes within economics that set the stage for the anti-union movement and gave intellectual credence to this movement.

Two changes within the profession that provided the intellectual foundation for the deregulatory movement come to mind (and I'll be interested to hear other takes on this). The first big event was the failure of the Keynesian model to provide an adequate framework for understanding and responding to the economic events and turmoil of the 1970s. The model did not have an adequate theory of supply, it had a relatively naive view of expectations, and it did not have much to say about inflation, a key question in the 1970s.

The failure of the Keynesian model left a void in the profession, and it was quickly filled by the Chicago School's New Classical model, a model that dragged a good deal of ideology about government intervention into the public discourse. The model was hailed as a great intellectual and scientific leap forward. It was claimed to have microfoundations unlike it's ad hoc Keynesian predecessor, i.e. it was based upon optimizing behavior of households and firms. In addition, unlike the Keynesian model which simply imposed things like rigid wages without thinking through whether such arrangements were consistent with optimizing behavior, the model was built from the ground up and hence was based upon defensible economic principles. The Keynesian model could not make such a claim (not so for the New Keynesian model used today, microfoundations are one thing that separates the New Keynesian model from the Traditional Keynesian model). And finally, the Keynesian model had a very naive model of expectations that was no match for the rational expectations embedded in the New Classical structure. So Keynesianism, and it's belief that government intervention could make things better, gave way to a new paradigm.

A key element of the New Classical model was its ability to explain why money and output appeared to be correlated in the data without admitting that government intervention could be useful in stabilizing the economy. The ability to explain this correlation was one of the Keynesian model's triumphs over the older Classical model that existed before the New Classical revolution. In the old classical model, money is neutral - it does not change real variables such as output and employment - so prior to the New Classical model, classical economists had a difficult time explaining why money and output appeared correlated (and causal) in the data. The New Classical argument was that any policy that can be anticipated in advance will be offset by private sector responses to the policy - it will be completely ineffective - unless the policy is unexpected. So policy rules that move money in predictable ways - up in recessions, down when there is inflation - will be useless. But if the policy is unexpected, in which case it is non-neutral and does change real output and employment, it makes people worse off rather than better off because it drives us away from the optimal full information solution.

The result of this was the idea that government intervention always makes us worse off. Policy rules don't work, and unexpected random policy is counterproductive. The best thing the government can do is to provide transparent, certain policy so that nothing unexpected ever happens. Best to just let the money supply grow at a fixed, known rate than try to manage the economy by manipulating the money supply. To buttress the result that government intervention was counterproductive, the New Classical economists also began to challenge the idea that fiscal policy could be used as a stabilization tool in place of monetary policy. The government, in this way of thinking, has no business whatsoever intervening in markets. It always makes us worse off, never better off, so the best thing to do is to simply get out of the way and leave it to the private sector to take care of itself.

The other factor was an assault on the idea of monopoly power in markets. For example, one idea that emerged was the idea was that markets, even markets that looked relatively concentrated, were actually quite competitive, i.e. they were contestable. That is, as soon as a firm in a top heavy industry begins trying to exploit its monopoly power, even when it is the sole or one of the few producers in markets, another firm waiting in the wings will quickly enter and contest the market (the nature of capital is important here, it needs to be able to move into these markets quickly). This discipline by the firms waiting to pounce at the first opportunity, it was believed, was sufficient to ensure that markets that appeared highly concentrated would in fact be competitive in terms of pricing and other behavior. (Globalization of markets was another factor that led people to discount market power at the firm level.)

I don't want to oversell the contestable markets story, it was but one of many developments, but the point I am making is that there was widespread belief that markets that appeared to be quite top heavy were, in fact, quite competitive. And, importantly, if they weren't competitive, an automatic self-correction mechanism would take care of the problem, there was no need for government to do anything, natural forces would intervene as needed and solve the problem.

The point, then, is that economists by and large began to believe that markets were self-correcting, even with respect to monopoly power, and anything governments do, from intervening to break up monopolies to supporting union power, gets in the way of this natural, self-correction process. Thus, unions were not needed as a countervailing force, markets would take care of the problem until there was nothing left to countervail, i.e. markets would naturally produce a competitive marketplace. All government had to do was step aside and watch the magic happen. Market power was bad, whether it be in the hands of firms or workers, and since firms operated in competitive markets, there was no need for unions to balance power. They would just make things worse by causing departures from competitive ideals and making it harder for business to compete in world markets.

We have now observed how well the idea of self-correction and self-regulation worked in financial markets - it didn't work well at all - and I see no reason why it should work any better in bringing about a competitive labor market where one does not exist previously. I don't think the self-correction ideas lived up to their promise, there was and still is an imbalance of power in labor markets with firms surely having the upper hand, and some means of balancing the negotiations between laborers and firms is needed. The only question for me, and it's one I don't have the answer to, is whether the old institutional structure supporting unions is the best possible institutional structure going forward in a highly globalized, interdependent, and flexible world economy. I'm not sure that it is, but I do believe that more balance is needed in labor markets, and until we have something better, unions will certainly more than suffice.

[Note: I'm not sure this is the main reason behind the change, so please feel free to offer other theories for the decline of the principle of countervailing power.]

Posted by Mark Thoma on Monday, February 9, 2009 at 06:03 PM in Economics, Market Failure, Unemployment 

Paul Krugman: The Destructive Center

President Obama's net return on his investment in bipartisanship isn't very good:

The Destructive Center, by Paul Krugman, Commentary, NY Times: What do you call someone who eliminates hundreds of thousands of American jobs, deprives millions of adequate health care and nutrition, undermines schools, but offers a $15,000 bonus to affluent people who flip their houses?

A proud centrist. For that is what the senators who ended up calling the tune on the stimulus bill just accomplished.

Even ... the original Obama plan — around $800 billion  ... with a substantial fraction ... given over to ineffective tax cuts — ...wouldn’t have been enough to fill the looming hole in the U.S. economy... Yet the centrists did their best to make the plan weaker and worse.

One of the best features of the original plan was aid to cash-strapped state governments... But the centrists insisted on a $40 billion cut in that spending.

The original plan also included badly needed ... school construction; $16 billion of that spending was cut. It included aid to the unemployed, especially help in maintaining health care — cut. Food stamps — cut. All in all, more than $80 billion was cut..., with the great bulk ... falling on ... measures that would do the most to reduce the depth and pain of this slump.

On the other hand, the centrists were apparently just fine with one of the worst provisions in the Senate bill, a tax credit for home buyers...: it will cost a lot of money while doing nothing to help the economy.

All in all, the centrists’ insistence on comforting the comfortable while afflicting the afflicted will, if reflected in the final bill, lead to substantially lower employment and substantially more suffering.

But how did this happen? ... Mr. Obama ... offered a plan that was clearly both too small and too heavily reliant on tax cuts. Why? Because he wanted the plan to have broad bipartisan support...

Mr. Obama’s postpartisan yearnings may also explain why he didn’t do something crucially important: speak forcefully about how government spending can help support the economy. Instead, he let conservatives define the debate...

And Mr. Obama got nothing in return for his bipartisan outreach. Not one Republican voted for the House version of the stimulus plan...

In the Senate, Republicans ... decried the bill’s cost — even as 36 out of 41 Republican senators voted to replace the Obama plan with $3 trillion, that’s right, $3 trillion in tax cuts over 10 years.

So Mr. Obama was reduced to bargaining for the votes of those centrists. And the centrists, predictably, extracted a pound of flesh — not, as far as anyone can tell, based on any coherent economic argument, but simply to demonstrate their centrist mojo. They probably would have demanded that $100 billion or so be cut from anything Mr. Obama proposed; by coming in with such a low initial bid, the president guaranteed that the final deal would be much too small.

Such are the perils of negotiating with yourself.

Now,... it’s possible that the final bill will undo the centrists’ worst. And Mr. Obama may be able to come back for a second round. But this was his best chance to get decisive action, and it fell short.

So has Mr. Obama learned from this experience? Early indications aren’t good.

For rather than acknowledge the failure of his political strategy and the damage to his economic strategy, the president tried to put a postpartisan happy face on the whole thing. “Democrats and Republicans came together in the Senate and responded appropriately to the urgency this moment demands,” he declared on Saturday, and “the scale and scope of this plan is right.”

No, they didn’t, and no, it isn’t.

Geithner Bank Bailout Plan Fiasco

Financial oligarchy is the most powerful part of the elite which really owns the government. And president Obama is the president because large part of financial oligarchy decided that he is good for the business. So what should we expect? It's stupid for them to act against their best financial interests...

naked capitalism

Let's start with the basics. The US banking system is insolvent. Got that? Insolvent. That does not mean every bank in the US is toast, in fact quite a few are probably just fine, and another large group is no doubt hurting and undercapitalized, but a couple of years of not shooting themselves in the foot again would enable therm (via earnings) to rebuild their equity bases sufficiently to proceed more or less as normal.

The problem is that a significant portion of the very biggest banks are insolvent. And on top of that, most of them have very large capital markets operations which have bean the nexus of credit intermediation. The regulators spent the last decade plus being in studious ignorance of those businesses, at least the complicated ones where all the risk resided. The SEC never was very interested in bonds, and the Fed took a hands-off, "let a thousand flowers bloom" approach to risk management, derivatives and what was called innovation. Author and market observer Martin Mayer warned "a lot of what is called innovative is simply a way to find new technology to do that which was forbidden with the old technology."

But the history of major banking crises unambiguously shows that insolvent financial institutions need to be resolved. There are variations on the theme: the government can take them over and recapitalize them, clean them up and re-sell them, a la Sweden; you can wipe out equity investors and bondholders; you can try new twists, like various good bank proposals that have surfaced lately (making new entities out of the deposits and good assets and leaving the dreck with the existing bond and shareholders). While there would be many important details to be sorted out, this is not path breaking, except in the scale at which it needs to occur. And now, having had four actute phases of a credit crunch, the Fed and other central banks have plenty of liquidity facilites ready to deal with any initial overreaction. Rest assured, although radical measures would not be pleasant or easy, there are plenty of models and precedents.

... .... ...

Now to get to the punch line, let us turn to the New York Times. The headline "Geithner Said to Have Prevailed on Bailout," is already bad news, since as we have discussed, Geithner is a living, breathing example of cognitive regulatory capture. But here is the troubling bit:
 

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.

He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.

Because of the internal debate, some of the most contentious issues remain unresolved.


In other words, Geithner followed the Paulson script of pushing hard to make the bailout industry friendly, to the extent of compromising the effort to get the plan fleshed out in adequate detail.

We'll see if the notion of a $500,000 salary cap survived. Lucien Bebcuck, Harvard Law professor and corporate governance expert, pointed out that in fact, that provision is not terribly restrictive. There are no limits on deferred pay, pensions, or incentive compensation in the form of equity. And executives have often taken non-recourse loans secured by shares.

 Selected comments

Anonymous said...
Great analysis, the passion helps.

Yeah, not much of a review, but I'm not sure any empire collapses in a reasonable fashion. It's collapsing because the top people feel they are immune to the aftermath of the destruction. I see Washington in spin control mode, thinking they can BS their way out of terminal cancer.

Where are our heroes?

Dubai Banker said...
"Inviting investors in with you on the buy side does not address the issue of the pricing gap, unless the deal with the investors is intended to help obfuscate the overpayment to the banks."

You hit the nail on the head, as usual - but of course that is precisely what the deal is intended . Public downside, private upside. This way the treasury can't be accused of overpaying, the banks still get more than they would in the open market, and all the upside goes to to hedgies and the PE types. This will be called a tremendous success ... at least until the next shoe drops...

Anonymous said...
These guys are going to turn insolvent banks into an insolvent country. Let the beatings continue.
February 10, 2009 2:45 AM
annon 2:04 said...
High Noon: Geithner v. The American Oligarchs. Frank talk from Simon Johnson.

Johnson: "...decisive action to restructure large banks is almost impossible. Such action would require overcoming perhaps the single strongest interest group in the United States today."

In an earlier post he remarks, "Speaking personally, I had no illusions about the power of the strongest on Wall Street - particularly after my experience on the SEC’s Advisory Committee on Market Information in 2000-2001."

Bust, Bankruptcy, Bailouts: What Should We Do Now? is the January 28 AEI forum I quoted Whalen from. Two hours, five panelists, worthwhile for me.

Cheers Yves! Thank you.

Anonymous said...
as a passionate supporter of Obama during the election season it really hurts to realize that those who called him a "empty suit" might be right. It is clear that he has no knowledge of economic matters and is a hostage to the same kleptocrats as the previous administration
Anonymous said...
As a guy who didn't expect much of Obama it also hurts to be given a choice between a senile fascist autocrat and a callow and malleable banker's dupe. It's sad to a see a decent man in over his head in a shark tank.

[Feb 10, 2009] I want to be a cockroach « Ultimi Barbarorum

Cockroach as an investment banker role model... I like the title...
... just because one is a cockroach–as an unspecialized advisory investment banker, I think I am the very model of the modern cockroach–does not mean per se that one will survive a generalized collapse of the system one inhabits.

... It will finally come to only three things: food, clothing and shelter. Everything else is optional. Companies that provide these three at a low enough cost will survive. Other fancy “aspirational” crap companies should go down the drain.

...TED, I agree that many, even most of us cockroaches (are you SURE you’re a cockroach, BTW? As a banker you may be more akin to a small rodent, like a rat) will get squashed in any coming conflagration.

[Feb 10, 2009] Bill Gross- Fed to Cap Ten Year Yield

"What is called for here is a program I've called the Mendacity of Hope and the Urgency of Not. "

Calculated Risk

Fair Economist writes:
Much of it is designed to finally cause an (speculative?) investment stampede back out of deflation.

Yeah, reflation via ultra-low interest rates is the wrong way to reflate after an asset bubble. That encourages more bubble malinvestment; Greenspan's choice to reflate that way in the early 2000's is a big part of the current mess.

Reflation by printing and stimulus will drive goods prices up and asset prices down and encourage a shift away from speculation to production. That's part of Bernanke's terror about actually printing - if inflation really starts up, interest rates will rise and it's sayonara to all these on-the-edge adjustable mortgage borrowers and thus to all the MBS holders.

Fair Economist | Homepage | 02.09.09 - 12:25 pm | #

MS writes:
Wrap your head around this:

"The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve. "

http://www.bloomberg.com/apps/ne...GKok& refer=home

Sickening....

Ciao MS

MS | 02.09.09 - 12:55 pm | #

scone writes:
I can't see 4.5% mortgages helping much. If prices are still falling, and/or you've lost your job, or you're terrified of losing your job, you probably can't justify taking the bait. And areas where prices *may* have bottomed, or at least where people think they have bottomed, e.g., parts of the O.C., are showing large sales increases at current mortgage rates. If you go by the way people are actually behaving in the market, it's all about price and perceived job security, not mortgage rates.

scone | 02.09.09 - 12:45 pm | #

Tim Geithner's Mom writes:
"Seeing that low tides caused the fishing boats to be stuck in the shallows, the king decreed that there shall be no more low tides. And it became the law of the land."

More like the king decided to melt the polar ice caps to solve the problem, as "low tides are bad. HE went on to say "in the LONG RUN we are all dead anyways".

Tim Geithner's Mom | Homepage | 02.09.09 - 12:45 pm | #

comrade swan writes:
OT

Don't Task, Don't Smell
My grandmother, who will turn 101 this year, eloped in 1928. Her father was a successful businessman in Chicago who owned a number of cosmetology schools. A year later she was back home ... a couple years after that her father went bankrupt. My father grew up in poverty on the South Side, his career choices were be a priest, be a cop or join the army. After halfheartedly attempting the first two he opted for the last.

When the Summer of Love hit Chicago, my Dad was one of those guys in the white short sleeve shirt from Sears with black-rimmed glasses. My parents bought their first home on the North Side and ran such a tight budget that they had to ration out the pieces of bread they used for sandwiches in order to make the loaf last through the week.

One of the main goals my father held to was that his children would all be able to graduate from college ... later on he too got his degree by going to night school.

I am a card-carrying member of the liberal 'establishment', wealthier than the aggregation of all my descendants since they came off the boat, but cognizant of the days when, in my struggles, I carried my net worth in my wallet and wondered how I could pay my bills.

Life has taught me that hardship breeds opportunities, that only in tough times can you determine your true character, and that the blessings of America give all of us the promise that you can accomplish anything if you set your mind to it.

My family story is partially written as a generational battle from 'rags' to riches ... hopefully to be continued by my children as my current financial stability should allow them to broaden their aspirations towards a more global stage.

To achieve my success, I was never given a hand-out, but I was at several times given a hand-up. The recognition that life comes down to a few moments and that when you are tasked the integrity of your response determines your ultimate success was a lesson learned through trial and error. I learned in a fashion sometimes 'vainful' and sometimes painful that embracing your failures whilst accepting your mistakes and resolving to learn from both separates the winners from the sinners.

The election of Barack Hussein Obama as President of the United States was such a potentially game-changing event that it was hard not to feel great optimism and admittedly joy at the promise of actually turning a page in reality as opposed to pablum narrative.

Unfortunately it appears that this page-turning window of opportunity is quickly closing.

Preliminary indications are that, despite the apoplexy of the arch conservatives, Soros isn't Barry's puppetmaster. The Soros plan would necessitate the doctor cutting off the patient's morphine and instead performing elective surgery. The Obama plan would appear to be nothing more than increasing the dosage.

What is called for here is a program I've called the Mendacity of Hope and the Urgency of Not. Failure to liquidate the insolvent banks through adjusting their capital structure so that they can be viewed as fairly valued by the free markets will end up liquidating a majority of the productive economy.

It's the demand stupid. You cannot fix a dam with more water. In a debt crisis only debt destruction can take you to the promised land.

The Obama plan will rely heavily on guarantees, which in the end will only guarantee that there will be more 'emergency' measures needed down the road.

The Obama plan will try to restart the 3-4 trillion dollar shadow banking system with a pittance 200-400 billion, which will neither have the desired effect nor be implemented in such a way that it doesn't result in both gaming by the pirates and hedgies as well as covering as opposed to discovering the true folly of rich folks' bad speculative bets.

The Federales have determined that they don't want to take the risk of putting assets on their books so instead they will take the same risk by writing a put and give any potential return to the same folks that are causing the taxpayers to bear this burden. Heads they win ... tails we lose ... and unless the coin lands on its' side we'll be back to the bailout well in short order.

What is needed is simple. Dip the banks in the acid of price discovery. Let the chips fall where they may. Governments role here is to provide a safety net for capitalism's excesses. For the financial system, I call genius in the Soros 'side pocket'. For the household balance sheet, strengthen existing unemployment programs to mitigate the damage and offer a 'tax holiday' that will spur demand by restoring balance sheets. Demand won't be restored tomorrow ... it will take time and price. But unless we pay the price NOW all we're going to do is extend the time ... but make no mistake the devil will be paid his due.

Don't task (take your medicine) and don't smell (price discovery) is doomed to fail.
comrade swan | Homepage | 02.09.09 - 11:55 am | #

Hysterian writes:
It seems like these govvie dudes will do anything to kick the can down the road a bit farther. No matter how bad the idea is, they are willing. I doubt the buck will make it until 2012.

Hysterian | 02.09.09 - 11:56 am | #

[Feb 10, 2008] ‘Cult of Equity’ Is Under Attack, Citigroup Says: Chart of Day

By David Wilson

Feb. 9  | Bloomberg

“The cult of the equity” that arose in the past half-century has come under attack and may be headed for the dustbin, according to Robert Buckland, Citigroup Inc.’s global strategist.

The CHART OF THE DAY compares the total returns since 1990 on MSCI Inc.’s World Index of developed markets and a global government-bond index compiled by JPMorgan Chase & Co., as Buckland did in a report last week.

“Miserable returns and extreme volatility” in stocks this decade have led some investors to reappraise their ownership of equities, their favored holding since dividend yields dropped below bond yields in the late 1950s, he wrote.

MSCI’s index has tumbled 27 percent since 2000. The index has declined about 50 percent since October 2007, just as it did from March 2000 to October 2002. JPMorgan’s bond gauge, by contrast, has risen 80 percent.

Buckland, who said a month ago that shares were at bargain prices worldwide, wrote in his latest report that higher-quality corporate bonds may be the biggest beneficiaries of a shift away from equities.

“Investment grade seems to be the asset class of choice amongst most investors we meet,” he wrote in referring to the debt. As for stocks, he added, “Some disillusioned investors may remain sellers into any rally.”

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

Last Updated: February 9, 2009 10:53 EST 

[Feb 10, 2009] Media Appearance CNBC’s Fast Money (2-9-09) The Big Picture

  1. ECONOMISTA NON GRATA Says:

    February 9th, 2009 at 4:56 pm

    Barry:

    I don’t mean to sound trite, however, don’t you think that we should also talk about accountability. We seem to be relying on a cast of characters who have demonstrated high degrees of incompetence and quite possibly criminal negligence.

    I only hope that you will call these MSM sycophants out, enough is enough.

    Best regards, Econolicious
     

  2. newsieuzi Says:

    I totally agree with Econolicious. The economy was being run up by banks and investing institutions playing a game of hot potato(e). They used these now-toxic investment instruments to “pass the risk” and now no one wants to use their bare hands to catch the damned thing as it plumets to the ground. Someone is going to have to admit defeat and lower themselves to pick up the damned thing. And the loser has to be someone who was playing the game. They dropped the ball for all of us.

    Meanwhile, I saw this, it made me sick the way the reps are still passing the buck: http://tv1.com/playlists/225

[Feb 10, 2009] Paul Krugman: The Destructive Center

President Obama's net return on his investment in bipartisanship isn't very good:

The Destructive Center, by Paul Krugman, Commentary, NY Times: What do you call someone who eliminates hundreds of thousands of American jobs, deprives millions of adequate health care and nutrition, undermines schools, but offers a $15,000 bonus to affluent people who flip their houses?

A proud centrist. For that is what the senators who ended up calling the tune on the stimulus bill just accomplished.

Even ... the original Obama plan — around $800 billion  ... with a substantial fraction ... given over to ineffective tax cuts — ...wouldn’t have been enough to fill the looming hole in the U.S. economy... Yet the centrists did their best to make the plan weaker and worse.

One of the best features of the original plan was aid to cash-strapped state governments... But the centrists insisted on a $40 billion cut in that spending.

The original plan also included badly needed ... school construction; $16 billion of that spending was cut. It included aid to the unemployed, especially help in maintaining health care — cut. Food stamps — cut. All in all, more than $80 billion was cut..., with the great bulk ... falling on ... measures that would do the most to reduce the depth and pain of this slump.

On the other hand, the centrists were apparently just fine with one of the worst provisions in the Senate bill, a tax credit for home buyers...: it will cost a lot of money while doing nothing to help the economy.

All in all, the centrists’ insistence on comforting the comfortable while afflicting the afflicted will, if reflected in the final bill, lead to substantially lower employment and substantially more suffering.

But how did this happen? ... Mr. Obama ... offered a plan that was clearly both too small and too heavily reliant on tax cuts. Why? Because he wanted the plan to have broad bipartisan support...

Mr. Obama’s postpartisan yearnings may also explain why he didn’t do something crucially important: speak forcefully about how government spending can help support the economy. Instead, he let conservatives define the debate...

And Mr. Obama got nothing in return for his bipartisan outreach. Not one Republican voted for the House version of the stimulus plan...

In the Senate, Republicans ... decried the bill’s cost — even as 36 out of 41 Republican senators voted to replace the Obama plan with $3 trillion, that’s right, $3 trillion in tax cuts over 10 years.

So Mr. Obama was reduced to bargaining for the votes of those centrists. And the centrists, predictably, extracted a pound of flesh — not, as far as anyone can tell, based on any coherent economic argument, but simply to demonstrate their centrist mojo. They probably would have demanded that $100 billion or so be cut from anything Mr. Obama proposed; by coming in with such a low initial bid, the president guaranteed that the final deal would be much too small.

Such are the perils of negotiating with yourself.

Now,... it’s possible that the final bill will undo the centrists’ worst. And Mr. Obama may be able to come back for a second round. But this was his best chance to get decisive action, and it fell short.

So has Mr. Obama learned from this experience? Early indications aren’t good.

For rather than acknowledge the failure of his political strategy and the damage to his economic strategy, the president tried to put a postpartisan happy face on the whole thing. “Democrats and Republicans came together in the Senate and responded appropriately to the urgency this moment demands,” he declared on Saturday, and “the scale and scope of this plan is right.”

No, they didn’t, and no, it isn’t.

Selected comments

lark says...

Yes, and this sorry exercise is followed by the "bank bail out", which is really a bail out of bank shareholders and bond holders. Bait and switch: bank debt traded in for debts borne by the tax payers.

Yuck!!

Posted by: lark | Link to comment | February 08, 2009 at 10:55 PM

archilochusColubris says...

The tyranny of the majority can not be contained, only undeniably exposed.

Posted by: archilochusColubris | Link to comment | February 08, 2009 at 11:16 PM

Larry says...

His "investment"? He had a meeting and referenced his own nobility in a speech. Not shockingly, Obama has been reduced to increasingly hysterical podium-pounding, and is otherwise mostly a bystander in this Congresionally-operated drama.

It was quite sad to see Summers today trying to explain how the current bill fits through his "targeted, timely, and temporary" filter on the talk shows, when obviously only a fraction of it fits through any one of the three. Politics really sucks.

[Feb 10, 2009] Bond Investors Call Fed's Bluff

naked capitalism

From the Telegraph:

The yield on 10-year US Treasury bonds – the world's benchmark cost of capital – has jumped from 2pc to 3pc since Christmas despite efforts to talk the rate down.

This level will asphyxiate the US economy if allowed to persist... The US is already in deflation. Core prices – stripping out energy – fell at an annual rate of 2pc in the fourth quarter. Wages are following. IBM, Chrysler, General Motors, and YRC, have all begun to cut pay.

The "real" cost of capital is rising as the slump deepens. This is textbook debt deflation. It was not supposed to happen. The Bernanke doctrine assumes that the Fed can bring down the whole structure of interest costs, first by slashing the Fed Funds rate to zero, and then by making a "credible threat" to buy Treasuries outright with printed money.

Mr Bernanke has been repeating this threat since early December. But talk is cheap. As the Fed hesitates, real yields climb ever higher. Plainly, the markets do not regard Fed rhetoric as "credible" at all.

Who can blame bond vigilantes for going on strike? Nobody wants to be left holding the bag if and when the global monetary blitz succeeds in stoking inflation. Governments are borrowing frantically to fund their bail-outs and cover a collapse in tax revenue. The US Treasury alone needs to raise $2 trillion in 2009.

Where is the money to come from? China, the Pacific tigers and the commodity powers are no longer amassing foreign reserves ($7.6 trillion). Their exports have collapsed. Instead of buying a trillion dollars of extra bonds each year, they have become net sellers. In aggregate, they dumped $190bn over the last fifteen weeks.

Selected Comments
alexblack said...
Anyone who would lend the US government money for 30 years at 2.5% interest was insane. Or 3%. Or 3.5%. Or 4%. I'll stop shorting the 30-yr bond at 5%, but only out of cowardice.

February 9, 2009 12:16 AM

[Feb 9, 2009] HaloScan.com - Comments

FFDIC writes:
I received an e-mail today from an attorney with a federal bank agency, who shall remain nameless to protect the guilty. His/her entire e-mail was the following sentence: "Perhaps the new initiative should be referred to as the 'Bad Asset Resolution Fund' or BARF for short." Not only hilarious, but soon to become a classic. Inasmuch as he/she must remain anonymous, I plan to shamelessly steal this acronym. Who said government lawyers don't have a sense of humor?
http://www.banklawyersblog.com/3...y- blogging.html
FFDIC | 02.07.09 - 11:46 pm | #
karelian writes:
The number one priority should be to ameliorate the massive lay-off tsunami washing over states like California, Florida and New York. Yes, the state payrolls have to be cut - but if we get a sudden 10-20% drop it will push the whole country into a tailspin.
karelian | 02.07.09 - 11:46 pm | #
Black Star Ranch writes:
“The government of the United States is a definite government, confined to specified objects. It is not like the state governments, whose powers are more general. Charity is not part of the legislative duty of the [federal] government.” — James Madison
Black Star Ranch | 02.07.09 - 11:56 pm | #
RE writes:
MrM,

I have troubling finding it but my point is that we have incoming and outgoing waves of economic consequences.  The first one emanated from the U.S. and it has now engulfed the rest of the world resulting in a huge reduction in trade.

This reduction in international trade will reflect back to the source/developed world in the form of vastly reduced domestic trade and profits because the exporters, in most cases, were not the primary beneficiaries (i.e. they have low profit margins) as they generally do not own the distribution and retail framework.  It is even worse in the case of platform companies.

This implies that the losses to developed economies and especially the U.S.  will be at least as great and IMO potentially much greater because the service labor multiplier in relation to manufacturing jobs has gone up dramatically in the past 40 years. 

Presently we are creating another wave with huge government financing requirements.  This will crowd out potential borrowers in emerging countries as "safe" government debt floods the market.  As an example, I have heard that India needs approx. $45 billion just next year.  It will be extremely difficult for these countries to sell this debt.  This should undermine confidence even further and will likely result in a repeat of the 1997 Asian financial crisis but this time it will engulf just about any emerging country with the potential exception of China. 

To make it even worse, this time the IMF will likely be out of bullets very early in the process and therefore the blowback to developed countries will be even more severe.

Unless drastic steps are taken very soon, I am very concerned about a downward spiral.

I hope this helps.

RE | 02.07.09 - 11:57 pm | #


joe shmoe writes:
Avg Joe

You are right, but I think you are asking the wrong question.

The issue is not whether any possible stimulus package could return the economy to its (shambolic) performance in 2006 before the pop. That is not possible.

The issue is whether this and additional stimuli can give us something like 1935 economic performance, as opposed to something like 1932 economic performance without this or other stimulus packages.

joe shmoe | 02.07.09 - 11:57 pm | #


bobn writes:
Black Star: Joe Public and Joe Politician say "James who?"


bobn | Homepage | 02.07.09 - 11:57 pm | #


fried writes:
If the entire stimulas monies centered around backstopping the States - it would mean more bang for the buck."

BSR,
Unless you've got a state gov't like NY, noted for corruption and its enthrallment to unionized government workers. The later are now funding expensive TV campaigns to keep the spending going...no sense of fiscal reality at all.
fried | 02.07.09 - 11:59 pm | #


non-TARP haiku writes:
Black Star: Joe Public and Joe Politician say "James who?"

Agreed.

Until inflation returns with a vengeance and they start printing Madison on the currency again...
non-TARP haiku | 02.08.09 - 12:01 am | #


joe shmoe writes:
Black Star Ranch writes:
“The government of the United States is a definite government, confined to specified objects. It is not like the state governments, whose powers are more general. Charity is not part of the legislative duty of the [federal] government.” — James Madison
Black Star Ranch | 02.07.09 - 11:56 pm | #


neither was a national police force (FBI), much of a standing army, a Center for Disease Control, or the power to declare a slave a free person, but then some things changed.
joe shmoe | 02.08.09 - 12:01 am | #


RE writes:
The issue is whether this and additional stimuli can give us something like 1935 economic performance, as opposed to something like 1932 economic performance without this or other stimulus packages.
joe shmoe | 02.07.09 - 11:57 pm | #


Exactly, but let's conquer 1934 first.
RE | 02.08.09 - 12:02 am | #


evelyn woods graduate writes:
Too many bright minds with strong egos - great for think tanks, not so great for leading the country in crisis.
MrM | 02.07.09 - 11:42 pm | #

Perhaps a speed chess time clock would help.

Civics...yes...the 2 year election cycle forces reps to go for instant pork

Cali can make it on their own if tough love is allowed to prevail.
evelyn woods graduate | 02.08.09 - 12:02 am | #


Broward Horne writes:
nless drastic steps are taken very soon, I am very concerned about a downward spiral.

That's the nature of pyramid schemes. Globalism was never founded on "comparative advantage". It was founded on relative positions in the credit cycle, currency manipulations and temporary price differentials. The idea of building a huge, complex system to "extract gains" was doomed to fail, and we now have empirical proof of that.

It was a just a big pyramid scheme.
.
Broward Horne | Homepage | 02.08.09 - 12:02 am | #

[Feb 7, 2009] Prediction Great Depression Ahead DGL,DGP,GDX,GLD,IAU,USO - TheStreet TV

Harry S. Dent Jr., author of the best-selling book The Great Depression Ahead, says gold and oil prices will rise as the economy and the stock market crash in the second half of 2009.

[Feb 7, 2009] David Sirota: "Obama's Team of Zombies"

With all his fake "change" rhetoric Obama is linked very closely to financial elite. And the social psychology of the financial elite — with its wealth, special privileges and its control over the organs of public opinion — resembles medieval aristocracy. In an earlier period of history the US had its “robber barons,” such as Rockefeller, Vanderbilt, Carnegie created enormous industrial empires. The latter-day robber barons of Wall Street, on the other hand, have made their billions from the destruction of the industry and productive capacity built up over decades. This differences between old and US aristocracy are not limited to the greed, arrogance, stupidity of modern banksters. It lies deeper in changes in the society...
naked capitalism

David Sirota at Salon gives a concise, brutal assessment of Obama's economic team and its priorities.

We've now had two bait and switch Presidents in succession. Bush promised "compassionate conservatism" and dragged the country far to the right, enriching those at the top of the food chain and leaving everyone else with the empty promise of "trickle down economics."

Obama promised change, but his economic team is slavishly loyal to the interests of the financial elite who steered the financial system onto the shoals and now expect all of us to patch the hull and somehow get it back into navigable water.

Yes, we have some gestures to appease the downtrodden, like restrictions on private jets and largely meaningless promises of salary caps (Lucien Bebchuk, a Harvard Law professor and expert on corporate governance, described how they do little to restrict total comp). Summers and Geithner are proteges of Robert Rubin, former Goldman co-CEO, and they are proving true to form, promoting even more borrowing in a doomed-to-fail-or-be-counterproductive effort to achieve status quo ante, the very conditions that lead to this shipwreck. Paul Volcker, who is enough of an old-fashioned banker that he might have been able to exert a moderating influence, appears to have been marginalized.

And we also like the fact that he highlights the use of "newspeak", as we did in a post on one of Team Obama's bank rescue trial balloons.

From Sirota:

America was told that finally, after years of yes men running the government, we were getting a president who would follow Abraham Lincoln’s lead, fill his administration with varying viewpoints, and glean empirically sound policy from the clash of ideas. Little did we know that "team of rivals" was what George Orwell calls "newspeak": an empty slogan "claiming that black is white, in contradiction of the plain facts."...

Of course, that lockstep [defense policy] uniformity pales in comparison to the White House's economic team -- a squad of corporate lackeys disguised as public servants....

Now, this pinstriped band of brothers is proposing a "cash for trash" scheme that would force the public to guarantee the financial industry's bad loans. It's another ploy "to hand taxpayer dollars to the banks through a variety of complex mechanisms," says economist Dean Baker -- and noticeably absent is anything even resembling a "rival" voice inside the White House.

That's not an oversight. From former federal officials like Robert Reich and Brooksley Born, to Nobel Prize-winning economists like Joseph Stiglitz and Paul Krugman, to business leaders like Leo Hindery, there's no shortage of qualified experts who have challenged market fundamentalism. But they have been barred from an administration focused on ideological purity.

In Hindery's case, the blacklisting was explicit. Despite this venture capitalist establishing a well-respected think tank and serving as a top economic advisor to Obama's campaign, the Politico reports that "Obama's aides appear never to have taken his bid (for an administration post) seriously." Why? Because he "set himself up in opposition" to Wall Street's agenda.

The anecdote highlights how, regardless of election hoopla, Washington is the same one-party town it always has been -- controlled not by Democrats or Republicans, but by Kleptocrats (i.e., thieves). Their ties to money make them the undead zombies in the slash-and-burn horror flick that is American politics: No matter how many times their discredited theologies are stabbed, torched and shot down by verifiable failure, their careers cannot be killed. Somehow, these political immortals are allowed to mindlessly lunge forward, never answering to rivals -- even if that rival is the president himself.

Remember, while Obama said he wants to slash "billions of dollars in wasteful spending" at the Pentagon, his national security team is demanding a $40 billion increase in defense spending (evidently, the "ludicrous" faction got its way). Obama also said he wants to crack down on the financial industry, strengthen laws encouraging the government to purchase American goods, and transform trade policy. Yet, his economic team is not just promising to support more bank bailouts, but also to weaken "Buy America" statutes and make sure new legislation "doesn't signal a change in our overall stance on trade," according to the president’s spokesman.

Indeed, if an authentic “rivalry” was going to erupt, it would have been between Obama's promises and his team of zombies. Unfortunately, the latter seems to have won before the competition even started.

Update 2/8, 12:45 AM: An only slightly less caustic take on the Obama economic team comes from the New York Times' Frank Rich:
The new president who vowed to change Washington’s culture will have to fight much harder to keep from being co-opted by it instead. There are simply too many major players in the Obama team who are either alumni of the financial bubble’s insiders’ club or of the somnambulant governmental establishment that presided over the catastrophe.

This includes Timothy Geithner, the Treasury secretary. Washington hands repeatedly observe how “lucky” Geithner was to be the first cabinet nominee with an I.R.S. problem, not the second, and therefore get confirmed by Congress while the getting was good. Whether or not this is “lucky” for him, it is hardly lucky for Obama. Geithner should have left ahead of Daschle.

Now more than ever, the president must inspire confidence and stave off panic. As Friday’s new unemployment figures showed, the economy kept plummeting while Congress postured. Though Obama is a genius at building public support, he is not Jesus and he can’t do it all alone. On Monday, it’s Geithner who will unveil the thorniest piece of the economic recovery plan to date — phase two of a bank rescue. The public face of this inevitably controversial package is now best known as the guy who escaped the tax reckoning that brought Daschle down.

Even before the revelation of his tax delinquency, the new Treasury secretary was a dubious choice to make this pitch. Geithner was present at the creation of the first, ineffectual and opaque bank bailout — TARP, today the most radioactive acronym in American politics. Now the double standard that allowed him to wriggle out of his tax mess is a metaphor for the double standard of the policy he must sell: Most “ordinary Americans” still don’t understand why banks got billions while nothing was done (and still isn’t being done) to bail out those who lost their homes, jobs and retirement savings.

As with Daschle, the political problems caused by Geithner’s tax infraction are secondary to the larger questions raised by his past interaction with the corporations now under his purview. To his credit, Geithner, like Obama, has devoted his career to public service, not buckraking. But he still has not satisfactorily explained why, as president of the New York Fed, he failed in his oversight of the teetering Wall Street institutions. Nor has he told us why, in his first major move in his new job, he secured a waiver from Obama to hire a Goldman Sachs lobbyist as his chief of staff. Nor, in his confirmation hearings, did he prove any more credible than the Bush Treasury secretary, the Goldman Sachs alumnus Hank Paulson, in explaining why Lehman Brothers was allowed to fail while A.I.G. and Citigroup were spared.

Citigroup had one highly visible asset that Lehman did not: Robert Rubin, the former Clinton Treasury secretary who sat passively (though lucratively) in its executive suite as Citi gorged on reckless risk. Geithner, as a Rubin protégé from the Clinton years, might have recused himself from rescuing Citi, which so far has devoured $45 billion in bailout money.

Key players in the Obama economic team beyond Geithner are also tied to Rubin or Citigroup or both, from Larry Summers, the administration’s top economic adviser, to Gary Gensler, the newly named nominee to run the Commodity Futures Trading Commission and a Treasury undersecretary in the Clinton administration. Back then, Summers and Gensler joined hands with Phil Gramm to ward off regulation of the derivative markets that have since brought the banking system to ruin. We must take it on faith that they have subsequently had judgment transplants.

Obama’s brilliant appointees, we keep being told, are irreplaceable. But as de Gaulle said, “The cemeteries of the world are full of indispensable men.” You have to wonder if this team is really a meritocracy or merely a stacked deck. Not only did Rubin himself serve on the Obama economic transition team, but two of the transition’s headhunters were Michael Froman, Rubin’s chief of staff at Treasury and later a Citigroup executive, and James S. Rubin, an investor who is Robert Rubin’s son.

A welcome outlier to this club is Paul Volcker, the former Federal Reserve chairman chosen to direct Obama’s Economic Recovery Advisory Board. But Bloomberg reported last week that Summers is already freezing Volcker out of many of his deliberations on economic policy. This sounds like the arrogant Summers who was fired as president of Harvard, not the chastened new Summers advertised at the time of his appointment. A team of rivals is not his thing.

Americans have had enough of such arrogance, whether in the public or private sectors, whether Democrat or Republican. Voters turned on Sarah Palin not just because of her manifest unfitness for office but because her claims of being a regular hockey mom were contradicted by her Evita shopping sprees. John McCain’s sanctification of Joe the Plumber (himself a tax delinquent) never could be squared with his inability to remember how many houses he owned. A graphic act of entitlement also stripped naked that faux populist John Edwards.

The public’s revulsion isn’t mindless class hatred. As Obama said on Wednesday of his fellow citizens: “We don’t disparage wealth. We don’t begrudge anybody for achieving success.” But we do know that the system has been fixed for too long. The gaping income inequality of the past decade — the top 1 percent of America’s earners received more than 20 percent of the total national income — has not been seen since the run-up to the Great Depression....

The neo-Hoover Republicans in Congress, who think government can put Americans back to work with corporate tax cuts but without any “spending,” are tone deaf to this rage. Obama is not. It’s a good thing he’s getting out of Washington this week to barnstorm the country about the crisis at hand. Once back home, he’s got to make certain that the insiders in his own White House know who’s the boss.

Selected comments

Anonymous said...
Anyone who did not accept Obama's campaign rhetoric about small donations and actually looked at the financial backers behind Obama isn't surprised.

He is going to be the corporate gift that keeps on giving. Behyond his bank and insurance backers, his work with Lugar on commodities trading, his ties to Pakistan, his leave no corporation behind healthcare, his love of Volcker and Reagan.... Some of his true believers are going to be walking around shell shocked.

Boomka said...
Of course, many of us are not surprised in the least by this. Obama was obviously a PR project, well executed.

I mean, take the fact that we were first told that he was qualified to be a president based on a single speech he gave. I remember when I first heard that I laughed, until I realized they were serious.

The problem is, many people in US realize that there is no democracy here. But for majority of them, the answer has been in political apathy. What should Americans do? My opinion is that we should forbid campaign donations from any private parties and make all politicians compete based on fixed amount of money specified by law and provided by the taxpayers.

doc holiday said...
Obama and his alleged lack of experience in real policy making is being tested by those that have stronger backbones and better lobby connections (and experience with bribes).

I hope Obama takes this opportunity to grow a backbone faster than Lincoln, who was initially tested by inept generals and poor strategies.

As some may recall:

Historian Allan Nevins argues that Lincoln made three miscalculations in believing that he could preserve the Union, hold government property, and still avoid war. He "temporarily underrated the gravity of the crisis", overestimated the strength of Unionist sentiment in the South and border states, and misunderstood the conditional support of Unionists in the border states.[23] In connection with Nevins's conclusions, it is interesting to note an incident from this period reported in the memoirs of William Tecumseh Sherman. Then a civilian, Sherman visited Lincoln in the White House during inauguration week, with his brother, Ohio Republican John Sherman. This meeting left the future General Sherman "sadly disappointed" at Lincoln's seeming failure to realize that "the country was sleeping on a volcano" and the South was "'preparing for war.'"

Despite his inexperience in military affairs, Lincoln wanted to take an active part in determining war strategy. His priorities were twofold: to ensure that Washington, D.C. was well defended; and to conduct an aggressive war effort in the hope of ending the war quickly and appeasing the Northern public and press. McClellan, a youthful West Point graduate and railroad executive called back to active military service, took a more cautious approach. He took several months to plan and execute his Peninsula Campaign, with the objective of capturing Richmond by moving the Army of the Potomac by boat to the peninsula between the James and York Rivers. McClellan's delay irritated Lincoln, as did his insistence that no troops were needed to defend Washington, D.C. Lincoln insisted on holding some of McClellan's troops to defend the capital, a decision McClellan blamed for the ultimate failure of the Peninsula Campaign. ... blah, blah, blah

although McClellan was meticulous in his planning and preparations, these attributes may have hampered his ability to challenge aggressive opponents in a fast-moving battlefield environment. He chronically overestimated the strength of enemy units and was reluctant to apply principles of mass, frequently leaving large portions of his army unengaged at decisive points.
McClellan's Peninsula Campaign in 1862 ended in failure, with retreats from attacks by General Robert E. Lee's smaller army and an unfulfilled plan to seize the Confederate capital of Richmond. His performance at the bloody Battle of Antietam blunted Lee's invasion of Maryland, but allowed Lee to eke out a precarious tactical draw and avoid destruction, despite being outnumbered. As a result, McClellan's leadership skills during battles were questioned by U.S. President Abraham Lincoln, who eventually removed him from command, first as general-in-chief, then from the Army of the Potomac. Lincoln was famously quoted as saying, "If General McClellan does not want to use the army, I would like to borrow it for a time." Despite this, he was the most popular of that army's commanders with its soldiers, who felt that he had their morale and well-being as paramount concerns.

Forget the backbone, grow some balls Obama and defend America, as you swore to do!

Koshem Bos said...
Sirota goes with the same old bromide that he and his fellow prejudiced guys have gone with since they blamed everything on Clinton. This camp now divides the original fact-free Clinton hate to political blame, it's Rahm, and economic blame, Summers and Geithner.

In the primaries I sided with Hillary and never thought too much of Obama. Now, however, we are in free fall and we should give team Obama a chance.

It's way too early to pronounce failure or any verdict for that matter.

Explaining to Sirota the real issues are way of his pay grade, suffice to say: Sirota shut up.

Moopheus said...
I am disappointed that Obama is relying on guys like Geithner and Summers, and appears to be going with a warmed-over version of Paulson's Tarp to address the banking problems, as has been discussed here much. On the other hand, I'm not convinced Clinton or McCain would have done any better--they all know the same people, after all--and I'm pretty certain McCain would have been worse. And he's made a lot of good choices in other areas. All of this just means that Obama's election didn't end the way our political process works here, and we shouldn't expect it to. Which means the onus is still on, you know, us, to make our voices heard and take what actions we can to keep the democratic process functioning.
step314 said...
Somehow I think it unlucky to criticize Obama much at this point. How ever he wants to run the country, probably he wants to be true to himself in doing so.
 
He strikes me as a person who is much more likely to listen to those who have an air of Harvard respectability about them. If his reasonable critics are saying after only two weeks that he already is destined to be controlled by Kleptocrats, maybe the prophecy in some sense will prove self-fulfilling, because it does seem somewhat, shall we say, not audaciously hopeful?
 
I can't imagine his personality viewing such harsh assertions as anything but distasteful and indicative of the common black-and-white hysterical thinking he comes across as especially disliking. He's not going to listen to people like that, whom he'll view as controlling. I agree with Sirota that he is getting dreadful advice when it comes to the banking system.
 
But at least he is doing something that could be beneficial, namely the stimulus package. We should say also what he is doing right. Especially if his good advisers are respectful and polite enough, Obama may come to distinguish his good advisers from his bad, and policies that work from policies that don't, and even better maybe he'll come to a better understanding of economics so that he won't have to mainly rely on advice of recognized experts. Pragmatically, since there is no election for a while, it is now preferable to talk about the pluses and minuses of particular policy options than about how good or bad Obama is doing.
The Group of Dirty said...
Taleb / Roubini - j'accuse - petition for Rubin et al. to pay back their bonuses (Independent.co.uk)

"Nassim Nicholas Taleb is making ripples again. The brilliant author of The Black Swans has set up a petition on his Facebook page calling on the US government to force bankers to give back their bonuses. Taleb tells me that more than 800 people have signed up to the cause – a number that is growing daily. His co-conspirator is another great mind, the New York University economist Nouriel Rou-bini, which is nicely unpredictable as Taleb doesn't rate economists. But Roubini is rather different as one of the few forecasters to have warned years ago that the world's economy was heading for the buffers..."

February 7, 2009 10:02 PM

Anonymous Don said...
Real and far reaching social change requires more than changing party leadership in the Executive and Congress. It requires, at risk of sounding a cliche, that it build from the grassroots - wide ranging social movements that constitute a critical mass. The votes that placed Obama in office did not constitute such a mass social movement, however much some may wish to believe.

Remember, the job makes the man, not the reverse. The institutional weight behind the status quo are immense, and moving that ship will require much more than what one might realistically expect to come out of D.C. And while we are conditioned to 'believe' in leadership, as in Great Man theories, in this case believing that Presidents have power that exceeds by far what is actual - said notion will likely suffer. Lets hope so.

On a strictly subjective note: I don't own a TV and so have seen little of Obama on television. This past weekend I spent three nights in a hotel (having been required to my remote mountain cabin to enter a small urban area, however distasteful), and watched more boob tube that I can stomach. In any case, I found it humorous the transparently scripted drama being played out, of the ruling party and the opposition party playing their assigned roles, with the media playing up the celebrity celebration, a celebration for which the news media will no doubt grew increasingly tired of. I also got the chance to read the NYTimes and simply could not get over the photo and the four generals standing firmly erect behind our great leader who inspires hope. When it comes to foreign policy, any idea where the real power lies? I am talking of the only bubble remaining: the Obama hope bubble.

It will serve us as long as it does, and that may not be for all that much longer, but its real importance was in getting him elected. Now that that has been accomplished . . .

Saying these things runs the risk of finding oneself ostracized from liberal companions, who find such thoughts pure cynical - convenient means of discounting the credibility of contrary views.

February 7, 2009 11:05 PM

Blogger Todd Wood said...
What did you all want, Jesus Christ? I agree that Obama is a PR President, but let him completely screw up before you say that he completely screwed up. While a PR President, he could still lead us in the right direction. You are an idiot to expect too much from anyone man.

Yea, sorry, Obama is not your Daddy. He is not Jesus Christ. He is coming on with the nation in the toilet. We are lucky not to have Caligula in office, right now.

You all are a bunch of morons. Like Newt Gingrich playing like he has lessons to teach Obama. FU.

February 7, 2009 11:16 PM

Anonymous Anonymous said...
Let's face it the American public, for the most part, don't appear to be bright.

The previous GOP administration gave away $1 trillion in taxapyer to favored Wall Street firms and the public is focused on Super Bowls.

Ken Lewis, whose bank paid a pittance for nearly $150 billion in CDS on CDOs (risk sold by the taxpayer for a fraction of fair value) can come on CNBC and prattle on about not needing 'anymore' TARP money.

People only get the government that they deserve.

February 7, 2009 11:17 PM

Blogger Yves Smith said...
I've see we've had two charges of idiot so far. I'd appreciate it if we try to attack arguments and not get so personal.

As for "let's give Obama a chance", the point is that Obama has picked as the key members of his economic policy team two individuals, Geithner and Summers, who were big-time architects of the current mess. They are die hard advocates of the financially-driven system that has served us so well (not). They are, as Willem Buiter so aptly put it, prime examples of cognitive regulatory capture. They are the last people who would be able to admit the current model is broken and try to figure out what, if any, elements are worth preserving and which need to be scrapped.

Doc's comparison to Lincoln's generals is apt. Unfortunately, I don't have the sense that Obama is the sort who will change personnel at the top until abject failure is evident, and by then it will probably be too late. Defeat on the battlefield is easier to recognize than in economics, where it is too easy to ascribe blame to factors other than bad policy.

February 7, 2009 11:28 PM

Blogger Yves Smith said...
Nick,

I suggest you read Dean Baker's "The Conservative Nanny State." He illustrates in nauseating detail how the measures of the last eight years, including the expansion of government, were not to the benefit of the poor and middle, the traditional targets of the left, but the upper classes.

Bush's moves, including his spending policies, aided big business and the investing classes. That can hardly be depicted as left wing. And his social policy cannot be described as liberal either.

February 7, 2009 11:33 PM

Blogger
Anonymous Anonymous charlie said...
Yves, I was thinking of trying to send you an email in regard to your views on Obama. I found it hard to actually distill your views down, but after seeing this post I'll give it a shot.

Obama is a politician, and will do what politicians do: listen to their advisors, read the papers, and make a decision. I don't believe much in the regulatory lock-in argument -- whether Sumner is a creature of Wall Street or not is a question for the Inquisition, not the secular state.

I think the key think is to establish what are failures. 10-12 percent unemployment. It hurts, but we can live with that. 5-6 percent inflation? Painful, but in reality the official rates don't capture real inflation anyway (compare the cost of harvard in 1980 to today). Deflation? I don't think we can live with that. Corporate zombies -- as long as the Chinese buy our bonds we can last 10+ years that way.

So at what point do you draw a line and say "obama's policies have failed?" I've been saying for several months we are in the Great Depression (not at the absolute level, but at the rate of demand destruction). We're now looking at 2 quarters of G.D. rates of destruction, and if you think Obama's policies won't work maybe another 2-3 before that reality kicks in and the feedback loop becomes live. Shorter version: fall of 09.

What I'm not sure about, economically, is there a trigger point for the next feedback loop to go live, as we can really live with this level of pain. The great depression ran from 29 to 32 without that much significant blowback (bonus march being one exception).

February 7, 2009 11:52 PM

Blogger scrollbar said...
@Boomka
re:Of course, many of us are not surprised in the least by this. Obama was obviously a PR project, well executed.

I mean, take the fact that we were first told that he was qualified to be a president based on a single speech he gave. I remember when I first heard that I laughed, until I realized they were serious.

The problem is, many people in US realize that there is no democracy here. But for majority of them, the answer has been in political apathy. What should Americans do? My opinion is that we should forbid campaign donations from any private parties and make all politicians compete based on fixed amount of money specified by law and provided by the taxpayers.
--

That sort of reform would be wonderful, but what are the odds of our elected officials shaking up the status quo like that? It would kill the two-party system, so I'd imagine it would be near impossible to push through.

While we're dreaming, another reform I've been thinking of: using a runoff voting system. This would completely eliminate the whole game of "you're throwing your vote away!" being an excuse for not voting with your conscience.

Here's to hoping...

February 7, 2009 11:53 PM

Anonymous Anonymous said...
Taking a page from Jim Sinclair's writings, when all else fails and fails miserably, Volcker will emerge front and center to stem the dollar's fall after nearing .52. His fix will only appease our foreign debt holders leaving the taxpayers to continue clawing their way back to just treading water.

It's interesting to see some calling for large bear rallies or retracements. I can't discount those calls while reviewing past history. Sucker rallies to glean profits.

Corporations sacrifice their own to aid their bottom lines causing the natives to get hungry and restless. From here it is only a short trip to depression. Hoping the silent majority who's spendthrift ways can effect a bottom sooner than later.

February 7, 2009 11:56 PM

Blogger Brad said...
Jesse's Cafe Amercain has a crosslink about JP Morgan Bonuses that is fairly stunning. Airing that here, if it passes muster, may help the case for reality available to majors looking for a prebuilt story, even if watered down as in mish/schiff/wsj. In the spirit of honest argument, avoiding cynical retreat and synthesizing strong viewpoints will have long term gains. I've never considered paying the ny times but paying yves has occurred to me a good idea. (And there's the future of journalism.)

February 7, 2009 11:57 PM

Blogger Yves Smith said...
Todd,

I don't know how large the business you ran was, but a President, given the span of activities of the Executive Branch, has to do a lot of delegating. Micromanagers like Jimmy Carter generally do not do well. He really can't step in and shore up a Cabinet member discovered to be weak the way a private businessman can.

The problem with Obama's economic picks aren't that they are conventional per se. Convention would be fine if it had worked well. But it hasn't in the economic realm.

The story that I heard about Obama that troubles me most is that in law school, it was a standing joke than whenever Obama spoke in class (and mind you, he was generally well liked) he would always give a very nuanced and articulate statement of something absolutely conventional. So I am concerned that his selecting the team he did doesn't simply reflect a bias towards picking known, seasoned quantities in troubled times, but also reveals an unwillingness to shake up the status quo too much, even in areas where that is what is clearly needed.

As I too often say, it would be better if I were proven wrong.

February 8, 2009 12:07 AM

Anonymous Waldo said...
There is a simple way to stop a good portion of the corrupt behavior in Congress.

Simple: term limits.

Where would we be if Bush could serve another term! Washington set the precedent and Congress made it law after FDR.

Two terms for senators and three terms for reps.

There is so much in-place corrupted motives by all the 20-year plus congressional leaders (thugs).

If the economy here in the States gets as bad as some of these very bright bloggers say then we need to learn and gain from the oncoming pain.

Criminally prosecute Bush and get an Amendment for congressional term limits - maturation step for our Democracy.

February 8, 2009 12:29 AM

Blogger Jim Lippard said...
Sirota's take on Hindery is ludicrous. Obama was right not to seriously consider him. Just Google "Hindery Global Crossing" and "Hindery Daschle".

February 8, 2009 12:29 AM

Anonymous Anonymous said...
Dear learned economists:

I appreciate reading your sharp debates!

I am wondering how you parse Nouriel R's pronouncements recently, on Bloomberg tv. He praises Summers and Geithner (at least at some level), and then (it seems to me) gives angst-ridden (?) comments on what *should be* happening... Is he praising with faint damns, which are apparent to the cognoscienti (sp?)? As a Byzantinist, I can appreciate this sort of thing (if that's indeed what it is)...

very best wishes from linda in chicago

February 8, 2009 12:31 AM

Anonymous bionic said...
Why does this surprise anyone? All you had to do to find out what was coming is to look up the list of Obama's campaign contributors – GS, JP Morgan, etc are top contributors. Or look at it this way, who has money now – the easy answer of course is those who regulate the money flow – bankers. Looking through the list of top contributors for all three “serious” contenders (including Clinton and McCain) we find those same bankers' names. The could be no other outcome...

February 8, 2009 12:36 AM

Anonymous WalrusBank said...
Jim Rogers on the macro economy:

http://changealley.blogspot.com/2009/02/jim-rogers-retrospective.html

...

February 8, 2009 12:39 AM

Blogger Edwardo said...
Obama is out of his depth, and he has proven, time and time again, that he is as conventional as they come. His reputation for being some sort of new, supremely gifted visionary leader is the result of very effective public relations acting on a large, despondent, and quite frankly, impaired segment of the electorate under the spell of a strange zeitgeist.

Obama is no Lincoln in the making. He is much closer to far less successful Presidents of more recent vintage. That will become evident to even Obama's most die hard supporters by the end of the year.

February 8, 2009 1:05 AM

Blogger Benign Brodwicz said...
It is gut-wrenching to be fooled twice in a row. And so quickly!

Minorities of Americans support either the bank bailouts or the stimulus bill.

A pastor once told me of a study about how congregations treat succeeding priests after a pastor has had an affair with a parishioner: the next three pastors are chewed up and spit out by the congregants.

Americans had their trust abused by Bill Clinton, who despite his solid fiscal performance was a true scumbag repugnant to many--and then, of course, there was W.

Obama is looking like a one-term president unless he changes his stripes real fast. He was elected by a grass roots movement of people who can actually think, and as one of them, I am not thinking well of President Obama right now.

February 8, 2009 1:11 AM

Blogger Doug Wollkon said...
Economic philosophy would suggest that no top-down government styled entity will work in the long run.

Don't ask Obama to fix a system that is broken. We liquidated $75 trillion in a about 10 years time through credit derivatives, a phantom marketplace that was at least twice the size of the real economy; and we are asking one man to fix such stupidity?

And yes, we were all stupid to believe that some government entity can fix our problems.

February 8, 2009 1:51 AM

Anonymous Richard Kline said...
Sirota: "We've now had two bait and switch Presidents in succession." Three, and of them Clinton was the worst. The last stand-up guy was Bush pere, who promised to be a muddle-and-bluster-through Yankee bluenose, and more or less was. (Nothing to be proud of, that.) And Obama, co-opted _in the future tense_? Brother, that has been the entire political strategy of Bo Prez since he announced for his first candidacy: "Co-opt me, PLEASE; I'm safe for the Man." And puh-leeze, let's eighty-six the Lincoln references, these are spiel and fantasy. It is not impossible that Bo Prez may do something right over the next four years, but he is _nothing_ like Lincoln, and his Administration, for *meh* or worse will go nothing like that of Lincoln. I don't say that to favor the latter, they are simply entirely different personalities with totally different political philosophies.

Come Monday, 9 Feb, it will be too, too fitting and choice for a known tax cheat to stand up before the cameras in front of half the nation, and tell the Sheeple why their earnings are going to be simply handed over to the banksters on pallets from backdoor of the Treasury for the rest of our lives, not only free of charge but we'll pay _them_ to take it. It is one more example of why rules, of law or any other, don't apply to the gold collar class.

Everything being done in the District at this time is about posturing; nothing more than that. No one except a few academic economists and small businessfolks really care whether any of the Big Plans really work. Everybody in politics needs to be seen 'doing something,' so they are all noisily talking up their pet somethings, but really, no one there knows or really cares if any of these plans are efficacius. This, y'know, a recession, and it will run it's course, and somebody will take credit for solving it. If they were seen doing something. The craptastic Big Boost Bill is a misconceived mess, too small and sidewise to work but too large for us to afford much of anything more later if we can afford it at all as designed. The Bank of Potemkin financial plan is authorized theft, nothing more. It will not save a bank; it will not stimulate the economy; it will not put a single zombie firm down; it will not end the requests for money: All it will do is come right out of your pocket for the next ten years or more while those holding bad debt take the cash flow and run. . . . It would be far better if everyone inside the Beltway did _nothing_ than THESE somethings. Worse than useless, that's the 'leaders of the American people.'

But for all that, I am, wierdly, for all this to go down. It brings us one day closer to insurrection, and if we can't save ourselves calmly and rationally that's the next best thing.

February 8, 2009 3:10 AM

Anonymous Jojo said...
Yves said "The story that I heard about Obama that troubles me most is that in law school, it was a standing joke than whenever Obama spoke in class (and mind you, he was generally well liked) he would always give a very nuanced and articulate statement of something absolutely conventional. So I am concerned that his selecting the team he did doesn't simply reflect a bias towards picking known, seasoned quantities in troubled times, but also reveals an unwillingness to shake up the status quo too much, even in areas where that is what is clearly needed."

But what you describe is the type of person who has, in the past, typically been most successful in politics and the corporate world. So it is understandable that Obama would hew to what has worked for him previously.

However, this is a different time and Obama needs to recognize this. We need someone who is going to speak forcefully and lay down the law to create a new path forward. Like Lincoln, Obama is going to have to take control, grow a pair of balls and do it fast. Or Obama is going to wind up being a one-term president with the final two years of his presidency being as a lame duck when the Democrats lose their majority in the next elections.

Obama was elected to make big changes, not continue doing business the old way, which is what seems to be happening by his employing the same people who have been neck deep in creating the problems and profiting from them. We need new blood, Failure to do so may well lead to much spilled blood (speaking both literally and figuratively). The people of the USA are restless, riled up and becoming more disenchanted and dissatisfied daily.

[Feb 7, 2009] IMF Says Advanced Economies Already in Depression (Update1) By Angus Whitley and Shamim Adam

Strauss-Kahn said today the fund’s forecast for a recovery to start in 2010 is “very uncertain.”
Feb. 7 | Bloomberg

 Advanced economies are already in a "depression" and the financial crisis may deepen unless the banking system is fixed, International Monetary Fund Managing Director Dominique Strauss-Kahn said.

“The worst cannot be ruled out,” Strauss-Kahn said in Kuala Lumpur, where he was attending a gathering of central bankers from Southeast Asia. “There’s a lot of downside risk.”

Ten days ago, the IMF cut its world-growth estimate for this year to 0.5 percent, the weakest pace since World War II. Stimulus packages alone won’t succeed in dragging the global economy out of recession unless confidence is restored in the banking system, Strauss-Kahn said today.

“All this will work if, and only if, the different countries are likely to do what they have to do in terms of restructuring the banking sector,” he said. “And today it’s not done.”

The U.S. economy has lost 3.57 million jobs since a recession started in December 2007, its biggest employment slump of any economic contraction in the postwar period as companies from Macy’s Inc. to Caterpillar Inc. cut costs. The U.K. economy will shrink this year by the most since 1946, the IMF forecasts.

“There is hope that the fiscal and monetary stimulus measures being implemented around the world can help turn things around,” said David Cohen, Singapore-based director of Asian economic forecasting at Action Economics. “But there is still the risk it can be short-circuited by further financial turmoil.”

$780 Billion Package

The U.S. Senate is due to vote early next week on an economic stimulus package totaling at least $780 billion that President Barack Obama said is needed to prevent the economy from sinking into a deeper recession. Asian nations from China to Singapore and India have pledged more than $685 billion on their own spending programs.

The Obama administration is considering subjecting banks to a new test to determine whether they require fresh capital injections as part of a rescue plan to be unveiled by Treasury Secretary Timothy Geithner next week, people familiar with the matter said.

Governments should be ready for “full-fledged” intervention, acting quickly to sell or wind-up insolvent lenders, Strauss-Kahn said. While the European Central Bank, which left interest rates unchanged this week, may have more room to cut borrowing costs, such a policy may not be as important as restructuring the region’s banks, he said.

Borrowing Costs

“We’re probably not very far from the point where the question of interest rates is not the most important question,” Strauss-Kahn said. “Providing direct liquidity to the market, restructuring the banking sector, may have more influence on demand than interest rates.”

In Asia, “there’s still room for bigger stimulus packages,” the IMF official said. Malaysia, for example, may introduce a second stimulus package larger than November’s 7 billion-ringgit ($1.9 billion) plan, he said.

Developing Asia will probably expand 5.5 percent this year, the slowest pace since 1998, the IMF said in last month’s update of its World Economic Outlook report. The region may expand 6.9 percent next year, the fund forecasts.

Asian nations will need a recovery in the global economy before the region can exit a slowdown, the IMF said this month. Strauss-Kahn said today the fund’s forecast for a recovery to start in 2010 is “very uncertain.”

Demand for Loans

Demand for IMF loans is rising in nations suffering from weaker export sales, banking industry turmoil and deteriorating investor confidence. The organization has so far agreed to lend $47.9 billion to countries affected by the crisis, including Belarus, Hungary, Iceland, Latvia, Pakistan, Ukraine and Serbia.

Strauss-Kahn said he agreed with Poland that the eastern European nation isn’t in need of assistance from the fund now, but may require financial aid in the future.

The fund may collaborate with some countries to restore confidence, without necessarily providing immediate loans, the official said.

“Some need for precautionary arrangements may appear,” he said, without naming specific countries.

Critics of the fund say it’s failed to keep up with the pace of change as the worldwide recession deepens.

The IMF and similar institutions are “incapable” of coping with the global financial crisis, because their resources can’t keep up with demand, former World Bank President Paul Wolfowitz said on Feb. 4.

Russian Prime Minister Vladimir Putin has criticized the World Bank, IMF and World Trade Organization as anachronistic organizations that give no voice to emerging economies.

The IMF and the World Bank were set up at the 1944 Bretton Woods conference. The IMF was designed to prevent crises in the international monetary system and to provide financing to distressed countries.

To contact the reporters on this story: Shamim Adam in Singapore at sadam2@bloomberg.netAngus Whitley in Kuala Lumpur at awhitley1@bloomberg.net

[Feb 7, 2009] Senate Republicans and the Stimulus: Playing Politics When the Economy Burns

Old habits die last ;-). The shadow of Phil Gramm is too strong in the Senate...
Feb 05, 2009 | Robert Reich's Blog
Tomorrow's job report is likely to be awful. January's job losses could easily top half a million. We're deep into the most vicious of economic cycles: Consumers are slashing their spending because they're perilously in debt and worried about keeping their jobs. But as a result, businesses are facing shrinking sales of goods and services, so they're slashing payrolls, which of course makes consumers even more anxious and further reduces their spending power. Meanwhile, businesses are cutting way back on new investments in equipment, which hurts upstream suppliers, who are now slashing their payrolls. And so it goes, downward. The gap between what the economy could produce if it were running near full capacity and what it's now producing continues to widen. The shortfall is projected to be over a trillion dollars this year.

How do we get out of this downward plunge?

Regardless of your ideological stripe, you've got to see that when consumers and businesses stop spending and investing, there's only entity left to step into the breach. It's government. Major increases in government spending are necessary, and the spending must be on a very large scale. In the last several weeks the President has put forward the outlines of a stimulus plan, and has left it to the House and Senate to fill in the details. A tiny portion of the details that made it into the House version should be stripped away because they seem like old-fashioned pork. But most spending in the bill is absolutely appropriate. My worry is there's not nearly enough of spending to fill the shortfall in overall demand.

Yet at this very moment, Senate Republicans are seeking to strip the President's stimulus package of many of its spending provisions and substitute tax cuts.

Part of this is pure pander: They know tax cuts are more popular with the public than government spending, even though spending is a far more effective way to stimulate the economy (more on this in a moment).

Another part is pure partisan politics: Republicans are emboldened by Obama's willingness to court Republicans (taking three Republicans into his cabinet, bringing Republican leaders into the White House for consultations, putting all those business tax cuts into the stimulus bill in order to gain Republican favor) without getting anything at all back from the GOP.

House Republicans snubbed the bill entirely. So, Senate Republicans say to themselves, what's to lose?

[Feb 7, 2009] Fed's Yellen: Economic Outlook and Community Banks

Community banks are going bust en mass due to overexposure to commercial real estate...
2/06/2009 | CalculatedRisk

From San Francisco Fed President Janet Yellen: The Economic Outlook for 2009 and Community Banks. A few excerpt on a common topic: CRE and non-residential investment:

Nonresidential construction declined modestly at the end of last year but, surprisingly enough, has not yet shown the steep declines that have been expected for some time. However, such declines are almost surely imminent. With business activity slowing and new buildings coming on line, vacancy rates on office, industrial, and retail space are all on the rise. For developers, financing is indeed extremely hard to get. The market for commercial mortgage-backed securities has all but dried up. Banks and other traditional lenders have also become less willing to extend funding. It’s no wonder that my contacts are talking about substantial cutbacks on new projects and planned capital improvements on existing buildings.
...
Many community banks have significant commercial real estate concentrations, and these loans are a particular concern in the current environment. At present, the performance of such loans has deteriorated only mildly. But, as I suggested earlier, we can’t count on that situation to continue, since the downturn in commercial real estate construction is just getting started and is likely to be quite challenging.

[Feb 7, 2009] Trust And Interest Rates on Treasuries

Moon of Alabama

Obama has an op-ed in the Washington Post promoting his 'stimulus' package. Boilerplate bipartisan stuff David Broder could have written.

The package is getting bigger by the day, but the effective part of - timely, temporary and targeted measures - is shrinking.

The economic team Obama assembled is certainly proving that it is as bad as many have feared. 'Bad bank' plans and buying up 'troubled assets' are simply the wrong measures.

Temporarily nationalize the banks under some bankruptcy rule. Write down their 'assets' to some realistic value, make the shareholders and debt-holders take the necessary big haircuts and in two a three years privatize those banks again.

Willem Buiter compares the U.S. and the UK's economies to emerging market economies in trouble. The only plus side the U.S. still has above an emerging market in trouble is the reserve status of the dollar.  But that status depends on trust. The U.S. and Obama's administration now have little credibility and doing all the wrong stuff risks a rout in treasuries and the dollar value. There are signs that the process already started:

The US Treasury on Wednesday opened the floodgates of government bond issuance, revealing plans for a record debt sale in February and more frequent auctions in the months to come.

The announcement came amid growing fears about US government deficits and sent the yield on the benchmark 10-year Treasury note rising to 2.95 per cent, up from just over 2 per cent at the end of December.

Buiter therefore now argues against any 'stimulus'. Better do nothing than all the wrong stuff.

Nouriell Roubini compares the U.S. to Japan in the 1990s and sees a repeat of all mistakes the Japanese made. Especially not cleaning up the banks will turn out to be disastrous.

In short: The Obama administration is trying its best to turn a sharp recession that could recover into a prolonged period of no or lower growth that will for many feel like a depression.

There is one guy who is supposed to advice Obama that still has international credibility. That would be Paul Volkers. But Obama's National Economic Council Director Lawrence Summers is shutting him out.

With trillions of new treasuries on offer this year but decreasing trust in the ability of an Obama administration do the right things now to later increase taxes to pay back all the new debt, interest rates might get out of hand pretty fast.

[Feb 6, 2009] Stiglitz: Depression in Davos

"At least for the moment, financial market liberalisation seems to be dead. ..."
Economist's View

Joseph Stiglitz reflects on the recent World Economic Forum in Davos:

Davos Man’s Depression, by Joseph E Stiglitz, Commentary, Project Syndicate: For 15 years, I have attended the World Economic Forum in Davos. Typically, the leaders gathered there share their optimism about how globalisation, technology, and markets are transforming the world for the better. ...

But this time, as business leaders shared their experiences, one could almost feel the clouds darkening. ... Equally striking was the loss of faith in markets. In a widely attended brainstorming session at which participants were asked what single failure accounted for the crisis, there was a resounding answer: the belief that markets were self-correcting.

The so-called “efficient markets” model, which holds that prices fully and efficiently reflect all available information, also came in for a trashing. So did inflation targeting...

Most American financial leaders seemed too embarrassed to make an appearance. Perhaps their absence made it easier for those who did attend to vent their anger. ... Indeed, some American financiers were especially harshly criticised for seeming to take the position that they, too, were victims. The reality is that they were the perpetrators, not the victims, and it seemed particularly galling that they were continuing to hold a gun to the heads of governments, demanding massive bailouts and threatening economic collapse otherwise. Money was flowing to those who had caused the problem, rather than to the victims. ...

This crisis raises fundamental questions about globalisation, which was supposed to help diffuse risk. Instead, it has enabled America’s failures to spread around the world, like a contagious disease. Still, the worry at Davos was that there would be a retreat from even our flawed globalisation, and that poor countries would suffer the most. ... At least for the moment, financial market liberalisation seems to be dead. ...

As if all this were not enough, as the Davos meeting opened, America’s House of Representatives passed a bill requiring American steel to be used in stimulus spending, despite the G-20’s call to avoid protectionism in response to the crisis.

To this litany of concerns we can add the fear that borrowers, wary of massive American deficits, and holders of US dollar reserves, worried that America may be tempted to inflate away its debt, might respond by draining the supply of global savings. At Davos, those who trusted the US not to inflate away its debt intentionally worried that it might happen unintentionally. There was little confidence in the none-too-deft hand of the US Federal Reserve...

President Barack Obama seems to be offering a needed boost to American leadership after the dark days of George W Bush; but the mood in Davos suggests that optimism and confidence may be short-lived. America led the world in globalisation. With American-style capitalism and America’s financial markets in disrepute, will America now lead the world into a new era of protectionism, as it did once before, during the Great Depression?

[Feb 5, 2009]  Trust And Interest Rates on Treasuries

Lawrence Summers was and is dangerous and corrupt economic lunatic with the deregulation bent.  As a close associate of Rubin he shares the responsibility for the current mess...
Moon of Alabama

Obama has an op-ed in the Washington Post promoting his 'stimulus' package. Boilerplate bipartisan stuff David Broder could have written.

The package is getting bigger by the day, but the effective part of - timely, temporary and targeted measures - is shrinking.

The economic team Obama assembled is certainly proving that it is as bad as many have feared. 'Bad bank' plans and buying up 'troubled assets' are simply the wrong measures.

Temporarily nationalize the banks under some bankruptcy rule. Write down their 'assets' to some realistic value, make the shareholders and debt-holders take the necessary big haircuts and in two a three years privatize those banks again.

Willem Buiter compares the U.S. and the UK's economies to emerging market economies in trouble. The only plus side the U.S. still has above an emerging market in trouble is the reserve status of the dollar.  But that status depends on trust. The U.S. and Obama's administration now have little credibility and doing all the wrong stuff risks a rout in treasuries and the dollar value. There are signs that the process already started:

The US Treasury on Wednesday opened the floodgates of government bond issuance, revealing plans for a record debt sale in February and more frequent auctions in the months to come.

The announcement came amid growing fears about US government deficits and sent the yield on the benchmark 10-year Treasury note rising to 2.95 per cent, up from just over 2 per cent at the end of December.

Buiter therefore now argues against any 'stimulus'. Better do nothing than all the wrong stuff.

Nouriell Roubini compares the U.S. to Japan in the 1990s and sees a repeat of all mistakes the Japanese made. Especially not cleaning up the banks will turn out to be disastrous.

In short: The Obama administration is trying its best to turn a sharp recession that could recover into a prolonged period of no or lower growth that will for many feel like a depression.

There is one guy who is supposed to advice Obama that still has international credibility. That would be Paul Volkers. But Obama's National Economic Council Director Lawrence Summers is shutting him out.

With trillions of new treasuries on offer this year but decreasing trust in the ability of an Obama administration do the right things now to later increase taxes to pay back all the new debt, interest rates might get out of hand pretty fast.

Selected Comments

Now that the neolibs have joined forces with their kissing cousins, the neocons, in expanding their sphere of influence to include the Dems, the Rethugs can no longer be solely blamed for selling America down the river to the ports of Banana-Republic-Land.

Posted by: Cynthia | Feb 5, 2009 10:16:31 AM | 1

===

This Administration's economic team is composed entirely of Rubin acolytes and devotees -- the very people who drove the shadow economy off the cliff, which dragged the global economy along with it.

We can expect them to look out primarily (if not exclusively) for the existing corporatized power structure, and to assist in the ongoing corporatization of national government since these avenues are the source of their own wealth, prestige, and power. This holds for Congress as well, which demonstrably follows the Hamiltonian philosophy of protecting wealth and property, and letting excess wealth trickle down like a golden shower upon the working populace.

Well, trickle down has never resulted in anything but a whole lot of pissed on, pissed off people, and this time it has resulted in an economy on dialysis. Has this changed anyone's mind in Congress? Not really. They can and will wait out whatever this recession slash depression slash global economic collapse thing decides to do. These are well to do people, and well connected. Their concern is to be safe throughout, and to come out the other side of this thing heroes in the eyes of their contributors, which is done through protecting wealth and property, since it is the corporations and persons of wealth who contribute to political campaigns.

You are in the tender care of Congress, which does not care about you.

Gentle Reader, if you have not yet grasped that the common man and woman and child between these shining seas is adrift in this process, grasp it now for your own safety and survival. It is not going to be OK, and America is not going to climb back on the hyperconsumer gravy train we had going as recently as last spring. That is gone forever. The means, the money, the credit, the resources, the full faith and confidence of the consumer and the government have all been exhausted. We are living in the afterwards now.

Instead of a 'Bad Bank' to hide the shadow economy's toxic assets for a decade or two, what is needed is a 'Good Bank' in every working community in America. Take all the healthy loans, assets, insurance, pension and bond investments in the current banks, and set them up in one National Bank with branches in every Post Office. National Credit Unions, if you will. Take the rest of the assets in the nation's banks, and let them be sold to investors for what investors will pay for them. Give them 90 days to sell it or burn it.

What's being missed here is the opportunity to launch America in a new direction, away from oil, away from foreign empire, and away from hyperconsumer debt-fueled lifestyles.

The will of the people has long, long been the fringe element in America. It still is.

Posted by: Antifa | Feb 5, 2009 10:41:48 AM | 2

===

Obama is offering all the benefits of Socialism (free money from the government) with none of the drawbacks (government control of businesses). What more could a neolib wish for?

Posted by: ralphieboy | Feb 5, 2009 10:51:58 AM | 3

===

This is a clash of world views. Neo-liberal tax cuts verses Keynesian stimulus and nationalization of failing banks. Papered over the top of the dung pile are the Wall Street acolytes working for President Obama trying to save their mentors' financial asses. Unfortunately, following his life history, the President is trying to join the implacable and spending a trillion dollars for nothing.

Add in a war that lost its supply line through Pakistan and not enough money or grunts. Without a basic strategy for conquering Afghanistan / Pakistan, or, if not possible, withdrawal; President Obama has many more mistakes to admit to in the future.

Posted by: VietnamVet | Feb 5, 2009 11:56:21 AM | 6

[Feb 5, 2009] 2009 GDP Forecasts

They are forecasting a severe recession, with GDP turning slightly positive in the 2nd half of 2009, but unemployment to continue to rise into 2010. Kasriel's forecast is available online and he is projecting unemployment to rise to 8.8% by the end of 2009. Although he thinks GDP growth will turn positive in Q4, he is concerned about a double dip recession.
2/04/2009 | CalculatedRisk

I was asked earlier today about UCLA Anderson Forecast's current outlook. They are forecasting a severe recession, with GDP turning slightly positive in the 2nd half of 2009, but unemployment to continue to rise into 2010.

Here are a few recent 2009 GDP forecasts from UCLA Anderson Forecast, Paul Kasriel at Northern Trust, and David Rosenberg at Merrill Lynch.

Rosenberg is fairly optimistic on GDP growth in the 2nd half of 2009 based on the impact of the stimulus package (although he thinks GDP growth in 2010 will be tepid). He sees unemployment rising to double digit rates in 2010.

Looking at the details, I'm more pessimistic than Merrill on non-residential structures, and a little less pessimistic on residential investment going forward.

2009 GDP Forecasts Click on graph for larger image in new window.

Kasriel's forecast is available online and he is projecting unemployment to rise to 8.8% by the end of 2009. Although he thinks GDP growth will turn positive in Q4, he is concerned about a double dip recession.

Just some forecasts to discuss on the comments ...

 

[Jan 5, 2009] Bill Gates warns of tough economy Reuters

Reuters

LONG BEACH, California (Reuters) - Microsoft Corp (MSFT.O) founder Bill Gates foresees another three-to-four "very tough" years for the U.S. economy.

Gates, making those comments at the annual Technology, Entertainment, Design conference in California on Wednesday, called on governments to keep investing in education and healthcare.

[Jan 5, 2009] Preprivatize the Banks

If the banks are insolvent, Nationalize Preprivatize them.

Comments

Fasten seat belts and prepare for impact.

The SEC .. "is busy protecting the big financial predators from investors."

Anonymous writes:

Mr. T. writes:
It's almost as if he is trying to make his rhetoric and his policy actions be as opposite as humanly possible.
Mr. T. | 02.04.09 - 3:36 pm | #

It's almost as if he is not the one making the substantive decisions, as though he were a figurehead, just like Bush.

purple writes:

The various factions of the plutocracy/oligarchy have the long knives out. They are a bit desperate, and I imagine the infighting is vicious. Obama, is basically an incrementalist - the Chicago political scene is all backroom deals - so it doesn't play to his strength as a collaborator when few are interested in collaborating.
purple | Homepage | 02.04.09 - 3:54 pm | #

Jett Rink writes:

When the previous administration kicked the can down the road, that was fine - the new admin should make the call and take the blame or credit however it pans out. Why the incoming administration hasn't nationalized by now makes me wonder. I don't want nationalization, but I don't want to relive Japan's lost decade. My conclusions as to why are either:

a. There is a large land mine they don't want to trip.

or:

b. They are owned by those that will benefit from the bad bank.

Either way, it seems a bad bank at best is a large transfer of funds but more likely just a gigantic sucking sound.
Jett Rink | 02.04.09 - 3:45 pm | #

Wisdom Speaker writes:

@"R" - To carry the reboot analogy a little farther: I think you're saying that we can't swap out the motherboard and main RAM and then reboot the system, because there are too many CDS-linked "peripherals" that will blow up during the power outage. I haven't seen any hard evidence that triggering the CDS linkages would be that destructive (and would love to see some), so I think for now that may just be a bankers' bluff to try to extract more taxpayer funding.

But if in fact that problem is real and someone can prove it... if in fact the Gordian Knot of the CDS entanglements is too snarled to allow reprivatization of the near-death institutions as the first step ... Then we need to tackle the CDS mess as part of the reprivatization process in each case.

One idea would be to use an "Eminent Domain" type of authority to strip each reprivatized institution of its CDS portfolio, in exchange for some reasonable value (funds to be supplied by the Federal Reserve which would then hold the CDOs in Maiden Lane XXVIII etc.).

The reprivatizing might trigger side-bet CDSs, but those are the responsibility of the idiots who entered into the losing side. If the losers of those bets can't pay out, then reprivatize them too, dammit!

The fundamental issue is that the network of institutions has become too entangled, such that a failure of one might imply a failure of all. A stable network needs to be created in which failure of a few junctions won't bring down the whole system. We have to break the entanglements through government action because the private-sector rules are broken.

My choice for Treasury's team of saviors would include someone from a place like Cisco, who understands network architecture theory and also corporate behavior and finance.
Wisdom Speaker | Homepage | 02.04.09 - 4:12 pm | #

5 Foot 3 Pablo Picasso writes:

There's a lot of "Obama doesn't have clue" gnashing going on. Maybe it's entirely true and deserved.

Just a thought, though.

Maybe our current darling situation is one of the most complicated problems ever confronted.

Think back to the start of the Great Depression. Imagine that you have to solve that problem in real time. It's easy to look back today and say, "Well, here's where they went wrong. They should have . . . ."

I think one can argue that today's situation is at least as daunting as 1929-1932.

We're you expecting Obama to resolve this in 16 days? Do you think there's some magic solution?

Sure, maybe he and his new administration are going about this all wrong. Maybe they're as bad or worse than the Bush crew. Maybe.

But maybe, just maybe, extricating ourselves from this mess is going to look like a long, drawn out, back and forth chess game.

It seems to me some of the commenters here, if they were running the Federal government, would have lost the game within the first day or two with their simplistic diagnosis and prescriptions.

Maybe Obama and his team, new and inexperienced as they are, have an appreciation that the way to work our way out of this is first to proceed with "no fast moves." You know, methodical, piece by piece.

Then again, maybe some of you are right. He should just announce that "the banks" are nationalized, and the react to whatever shit storm follows.

5 Foot 3 Pablo Picasso | 02.04.09 - 4:18 pm | #

bgates writes:

" is one of the most complicated problems ever confronted."

not really... fake growth was created using fake money, fake credit standards and real leverage.

not much else to it.

bgates | 02.04.09 - 4:20 pm | #

[Feb 04, 2009] A world out of work - Business Analysis & Features, Business  by Sean O'Grady

Despite pledges to resist "the retreat to protectionism", the pressure on governments to "protect" domestic industries and jobs has become irresistible
The Independent

UK unemployment is on the verge of breaking through 2 million, but joblessness is a global epidemic and the number of workers at risk is without precedent. Sean O'Grady reports

... ... ...

In America, last week saw "Bloody Monday" – 72,000 jobs cut by seven different companies in 24 hours. That brings American jobs lost to the recession to 2.6 million since December 2007.

But, as Mr Brown often reminds us, this is a global problem looking for global solutions. The population of the world is still growing regardless, but the downturn means that, more than ever, employment is not keeping pace, and the rapid descent into protectionist activity seems set to make matters even worse. The 1930s showed what unpalatable political movements can spring from even the most civilised nations in the face of unemployment levels in excess of 20 per cent and the apparent uselessness of democracy. It is an unhappy precedent.

Next year, the IMF says, worldeconomic growth will be at its slowest since the Second World War, and global trade will decline for the first time since 1982. The International Labour Organisation predicts that another 50 million or so will join the jobless queues around the world, out of a world workforce of around 3billion. The wildcat strikes at refineries and power stations across the UK, and anti-government protests from Latvia and France to China and Mexico, may be just the beginning of much more radical, violent backlash against globalisation.

Despite pledges to resist "the retreat to protectionism", the pressure on governments to "protect" domestic industries and jobs has become irresistible; legislators on Capitol Hill plead that they can do no other than inject "Buy American" clauses into the fiscal packages and other bailouts now being assembled, such is the public anger about what has happened to the economy. Having just elected the most protectionist Congress in 60 years, Americanvoters expect their legislators – and their President – to deliver on promises about "American jobs", and are deaf to the arguments for free trade. America's new roads and bridges will be built with US steel.

Selected comments

a world out of work reply
a_bba07 wrote:

Tuesday, 3 February 2009 at 01:56 pm (UTC)

Dear Sean

If this is bad now what will the employment and the state of the people be in some years hence when the planet runs out of "Iron ore,Copper ,Tin and other the other materials that we use to feed a population of soon to be 9 billion +.

Could you do an survey on this subject. It will happed in the next two to five hundred years. I read an article some years ago that said that mankind had used up nearly 50% of all know deposits of essential materials.
I would love to come back in 500 to 1,000 years to see what has became of the Human race, I don't expect I would see 9 billion people + living on earth, especially as we are destroying the life support systems at present of most to the other life on this planet (i.e. fish. coral, the rain forest etc).

Cree Indian----When the last tree as been cut down, the last fish eaten, the last drop of clean water drunk, Mankind will have learned that man cannot eat MONEY.

"MANKIND IS THE FIRE, THE EARTH IS THE FUEL, WHEN THE FUEL RUNS OUT, THE FIRE DIES"
ARTHUR METCALFE---ME! bradford yorkshire
cornishbreeze@yahoo.co.uk

[Feb 04, 2009] Dow Chemical claims bid would force collapse

Times Online

Andrew Liveris, the chief executive of Dow, said that the company expected the US recession to last for the rest of the year and as a result its factories are operating at their lowest capacity for more than 25 years.

[Feb 04, 2009] Why Not Nationalization? By Barry Ritholtz

February 4, 2009 | Big Picture

In an otherwise worthwhile commentary called We Can Do Better Than a ‘Bad Bank’, George Soros too easily dismisses the nationalization of insolvent banks:

“It is estimated that an additional $1.5 trillion would be required to adequately recapitalize the banks. Since their total market capitalization has fallen to about $1 trillion, this raises the specter of nationalization, which remains politically and even culturally unpalatable.”

Why not (temporary) nationalization?

If your financial institution is insolvent, if the risk management has destroyed your company, if the management team essentially gutted your bank, then why-oh-why maintain this silly fiction that these are viable entities? Its only going to make the ultimate cost that much greater.

Look, we’ve already nationalized Fannie and Freddie, Bear Stearns and AIG. Can we please stop pouring money into these giant black holes with very little to show for it? (Paying 100%+ of the market cap of a company for 8% of its stock might as well be nothing)

Anyway, here’s some more of Soros commentary:

“The Obama administration should come out of the gate with a comprehensive economic program that has two pillars in addition to a fiscal stimulus package. One would prevent housing prices from overshooting on the downside by making mortgages cheaper and more available and reducing foreclosures to a minimum; the other would enable banks to resume lending by adequately recapitalizing them. It would take several months to implement the program and a further period before it impacts the economy. But in the meantime, people could see that there is a way out, and that would help mitigate the severity of the downturn.

Adequate recapitalization of the banking system now faces two seemingly insuperable obstacles. One is that former Treasury Secretary Henry Paulson has poisoned the well by the arbitrary and ill-considered way he implemented the $700 billion Troubled Asset Relief Program (TARP). As a result, the Obama administration feels it cannot ask Congress for more money at this time. The other is that the hole in the banks’ balance sheets has become much bigger since TARP was introduced. The assets of the banks — real estate, securities, and consumer and commercial loans — have continued to deteriorate, and the market value of bank stocks has continued to decline.”

Good bank or bad, we still have a vastly undercapitalized financial system. Temporary Nationalization and pre-packaged chapter 11 reorg is the fastest most effective way to deal with what ails the sector: toxic assets and not enough cash.

[Feb 04, 2009]  Even Worse Than You Imagined

Economist's View

esb says...

Looks like Yves will not be getting a invitation to the next Bilderberg gathering.

Posted by: esb | Link to comment | February 04, 2009 at 01:52 AM

BJ Feng says...

Let me propose an alternative view on why Bernanke and Geithner are continuing down this path. Perhaps it the best option available at this time. Below is from another thread, but maybe it belongs here.

Both Bernanke and Geithner know more about the situation than we do. I speculate they are being secretive because the situation is very bad. One of Bernanke's major goals was to make the FED more open and clear to everyone, that he is resisting all efforts to do so says to me that he knows it will be disastrous should the truth get out. We operate under a system that depends on confidence. My guess is that Citi has a huge amount of bad loans and toxic crap in off balance sheet vehicles. If that was revealed, Citi would need hundreds of billions in equity immediately and even then firms might not do business with it. And should the FED reveal what banks have given it in exchange for T-bills, people would see all the crap and panic would ensue, perhaps they would lose confidence in even the FED.

If things are as bad as I suspect, I would fight tooth and nail to be secretive too, the banks need time to digest all their losses, and yes this will prolong the crisis, but perhaps the crisis will not be as deep.

They have all the information and with full information, they've decided that going down the Japan path is the best course of action after all. What could they possibly know that scares them so much that they're willing to go down the path that they assured everyone America would never follow? How horrible is the alternative that they would pick the Japan route? My guess, and it's only a guess, is that they foresee an absolute collapse of the financial system should banks be forced to reveal all their bad debts and assets. The entire system is insolvent as a whole and it would take several trillion, maybe tens of trillions to recapitalize the system, but the FED system cannot create that kind of money without putting the dollar at risk of collapse. This might be too big for even the FED to backstop, and asking taxpayers to be on the hook for all that money is simply not politically possible. Given time, the real estate sector could get better and investors might start taking some bad debt off of the banks. Perhaps hope is all they have left.

bakho says...

Smith is correct. In ages past, the FDIC closed down banks with inadequate capitalization paid off insurance on the losses and sold the good assets. The RTC even recovered some money. Although GHWBush had some political hacks installed, they were still able to close down the S&L belonging to Bush's son.

Bush and Paulson were ideologically opposed to government takeover and tried to privatize the RTC function. This has led to the stronger banks acquiring bad assets that need to be written off. My guess is that policy is difficult to reverse.

The current club looks to continue to prop up the elite special interests and carry them as deadweight on the system. The US economy does not depend on the elites having a lot of money. It depends on a strong middle class. Until the elite special interests are beaten down and their insolvent banks the recovery will be delayed.

S Brennan says...

The US government has the right to go in seize the bank records and sell off the assets of those who are poisoning the well. Done.

But we won't.

Since 1978 there has been a loud and consistent chorus of media voices telling us that the prosperity of the FDR era of government 1933-80 could be outdone by multiple orders of magnitude if we just encouraged unbridled greed.

Jarvis, Milton, Reagan & all the other Anne Rand types who preached nihilism as a higher moral calling, a higher calling than the forty years of sacrifice and prosperity that preceded Reagan.

Is "helicopter drop" Bernanke about to be replaced by...

.."bank bailout" Barack?

The guy can't fake being a reformer for a couple of weeks...jeeze, that was quick.

I guess fooling some of the people some of the time is all it takes.

Well folks, how you like the US now?

Obama's amazing rise to power was through abject sycophancy to power and a rhetoric of pleasing platitudes. Reformer? Change? Hope? Hope for change and reform? Yeah...that's the plan...hope.

We need a third party, the Democrats have turned their collective backs on FDR's miracle.

[Feb 3, 2009]  The Bad Bank Assets Proposal- Even Worse Than You Imagined

"The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was."
naked capitalism

The Obama Administration, if the Washington Post's latest report is accurate, is about to embark on a hugely expensive "save the banking industry at all costs" experiment that:

  1. Has nothing substantive in common with any of the "deemed as successful" financial crisis programs
  2. Has key elements that studies of financial crises have recommended against
  3. Consumes considerable resources, thus competing with other, in many cases better, uses of fiscal firepower.

The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was. We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company. Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting).

Selected comments

Steve said...
Americans should be delighted to learn that the taxpayer's recent largesse has permitted Citi to submit a $2B bid to purchase a British airport.

Political tip: get the public riled up over symbolic, de minimus expenses such as private planes, while silently permitting our financial welfare queens to look abroad to deploy taxpayer capital.

Yves Smith said...

Kosta,

The IMF paper, and the Swedish and Norwegian experience all say that taking the losses early in the process (and shutting down bad institutions) stops the bleeding and puts the economy on the road to recovery faster, resulting in lower overall losses and a faster and stronger rebound. The cost is it takes political will and the downturn is sharper, although not necessarily any deeper.

Look specifically at the IMF quotes. They clearly say shoring up weak banks often merely prolongs the inevitable and increases the ultimate scale of losses.

And look what is happening to bank stocks anyhow. Yes, we have periods when the bad 'uns come back from near death, but they keep retesting low values. Who are we kidding?

It isn't as the US says one day, "OK we will assess who lives and dies today. In the ones we deem dead, we wipe out the shareholders and whack the bondholders by x%". Banks hit the wall when and if they do, and the degree of bondholder haircut gets guesstimated then.

Anonymous said...
hi Yves,

anon 2:19am here. Thank you for your response. It's a shame we aren't privy to the discussions being waged right now in the inner circles of power, but listening to only Geithner and Summers would show a critical lack of judgment in our new president.

Thank you for your hard work on the blog!

Off topic, but I think people are missing your nuances because there are a lot of very scared, pissed off people in this country who don't really understand more than that the dream of homeownership has turned into a nightmare, their 401(k) is now a 201(k), and their children will inherit a broken country.

keenan said...

Excellent post, Yves, and great comments people!

I didn't vote for Obama, only because I'm in California and my voting for Cynthia McKenny (Green Party) did not risk increasing McInsane's chances one iota, so I voted my conscience.

And now that it's become more than obvious to an increasing percentage of the population that President Hope-N-Change is neither, especially when it comes to the 2 most important issues of our nation, #1) wars (so much for the "anti-war" candidate promising to merely shift troops from one country to another) and prepartion for war (criminally extravagent military budgets to continue indefinately), and #2) the economy (a continuaton of the screwing and sacrificing of the poor and middle classes and their kids and grandkids to pay for the extravagances of the wealthy) I hope that the population will finally get so enraged at the total moral bankruptcy and corruption and rot of our political-economic system, equally infecting both Democrats and Republicans, that our only hope is for a second American Revolution to finish the job that the first one failed to do.

We can either have a civilized democracy, or we can have a Corporate Plutocracy founded upon a Ponzi-style fractional reserve banking capitalist system, but we cannot have both.

We would do well to head Thomas Jefferson's foreboding regarding our unfinished revolution:

"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs."
--Thomas Jefferson

"I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial by strength, and bid defiance to the laws of our country."
--Thomas Jefferson

"I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."
--Thomas Jefferson

"It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world."
--Thomas Jefferson

Abraham Lincoln also was not sitting to well with the way our society is so corrupted by capitalism:

"We may congratulate ourselves that this cruel war is nearing its end. It has cost a vast amount of treasure and blood. . . . It has indeed been a trying hour for the Republic; but I see in the near future a crisis approaching that unnerves me and causes
me to tremble for the safety of my country. As a result of the war, corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed. I feel at this moment more anxiety for the safety of my country than ever before, even in the midst of war. God grant that my suspicions may prove groundless."

pd130 said...

On Tuesday's TODAY show Pres. Obama and Matt Lauer had this exchange:


MATT LAUER: Are you planning in the near future to announce an idea that will buy up the toxic debt from the balance sheets of these banks with perhaps a so-called bad bank? And if so, what do you think that could cost? ’Cause Chuck Schumer came out and said since we don't really know what those debts are worth, this could cost $4 trillion.

PRESIDENT OBAMA: No, it — we're not gonna be spending $4 trillion worth of taxpayer money. It's conceivable that we have more — not only is it conceivable, it is likely that the banks have not fully acknowledged all the losses that they're gonna experience. They're gonna have to write down those losses. And some banks won't make it. Other banks — are gonna make sure that — we strengthen. All deposits are gonna be — safe for ordinary people. But we're gonna have to wring out some of these bad assets.


It must be brutal thinking you were going to be the Health Care President or something only to have to learn enough finance in about a week to weed out a regiment of shysters.

At least that's the way I'm thinking about it for now, and what I'm hoping is that the statement means he's likely to propose some kind of line past which unsalvaged banks are put in the regular kind of FDIC receivership, and only the viable banks get to sell to the Bad Bank. I still don't like this for all the reasons said, but a) maybe it'll be better than a bailout down the line, and b) maybe Obama's willing to be argued further on the Bad Bank.

gordon said...

The "he's getting bad advice" from Obama loyalists reminds me of the similar and widespread feeling in Revolutionary France about Louis XVI. That feeling came to an abrupt end when it was discovered that he and Marie Antoinette were intriguing with Austria to demolish the revolution.

But don't be too hard on Obama. He's not Louis. He's just a political product, carefully created to appeal to the right demographics and win an election. The election itself was the issue. All this isn't his fault.

And as for the inability of Govt. to deal with the crisis, well, it's not what they're prepared for. These guys (all the political appointees and "experts" like Summers and Geithner) are products of the era of deregulation and small Govt. The idea that Government should actually govern is something they've struggled against all their lives.

Here's a final thought, just for fun. Where does the Mob put its money? In the bank. Who launders it? The bank. Who's going to get very pissed off if the money disappears or some Govt. accountant starts asking questions? The Mob. Who wants to live to see next Christmas? Everybody.

Anonymous said...

somebody said:

"... bailouts will ultimately be abandoned if they begin to seriously threaten the federal government's ability to borrow money. The hated "bond vigilantes" will enforce upon President Obama the discipline that he and his economic advisors apparently lack."

I would really like to believe this but what is happening now, and what will happen if long term interest rates rise, is the Fed will "loan" the government money by printing it and buying treasuries.

i.e., if the US government can't borrow the money, they will print it!

Independent Accountant said...

Bissell:
I don't believe there are bond vigilantes. They are some fantasy of Bill Gross. With 30-year T-bonds at 3.5%, where are they?

[Feb 4, 2009] FBI saw mortgage fraud early By PAUL SHUKOVSKY

January 28, 2009 | seattlepi.com

The FBI was aware for years of "pervasive and growing" fraud in the mortgage industry that eventually contributed to America's financial meltdown, but did not take definitive action to stop it.

"It is clear that we had good intelligence on the mortgage-fraud schemes, the corrupt attorneys, the corrupt appraisers, the insider schemes," said a recently retired, high FBI official. Another retired top FBI official confirmed that such intelligence went back to 2002.

The problem, according to the two FBI retirees and several other current and former bureau colleagues, is that the bureau was stretched so thin that no one noticed when those lenders began packaging bad mortgages into bad securities.

"We knew that the mortgage-brokerage industry was corrupt," the first of the retired FBI officials told the Seattle P-I. "Where we would have gotten a sense of what was really going on was the point where the mortgage was sold knowing that it was a piece of dung and it would be turned into a security. But the agents with the expertise had been diverted to counterterrorism."

[Feb 3, 2009] The over-selling of bare-knuckle capitalism - The Boston Globe

Did we oversell bare-knuckle capitalism
A CENTURY and a half ago, the Swiss Alps experienced a storied tragedy. An international team of seven climbers, linked together on a rope, ascended the Matterhorn, which had never been climbed before. All went well on the way up. It seemed so easy. But on the way down they slipped and fell. The rope connecting them was not as strong as expected. It broke, and four went down into the abyss. Three were saved, but bitter recriminations followed the survivors to their graves.

Even as late as a year ago it still seemed so easy with an economy climbing ever upward. Any downturn was expected to be short and shallow. "A global recession was simply inconceivable," said Stephen Roach, Morgan Stanley's Asia chairman, at the World Economic Forum here last week. As Time magazine's Michael Elliott put it, those were the Goldilocks years, the economic porridge was neither too hot nor too cold, but just right.

Now that the bears have savaged Goldilocks, I heard an American businessman ask: "Did we oversell bare-knuckle capitalism?" The resounding answer was "yes."

Yale economist Robert Shiller, puts the bar a little lower and adds a time element. He says that he would begin calling it a depression when unemployment rose to 15 percent and lasted for five years. He added that that is very likely to happen.

Comments

oldgearhead
no one has mentioned the real problem. look at the rise in middle class debt in the last decade. sure, the pols may have made it easier to borrow but we borrowed the money. more than we can pay back. poco was right. Public works usually produce public benefits. I am not opposed to spending on public works. I am opposed to bailing out banks and investment houses who failed in their fiscal responsibilities.
rekording
Have we forgotten the proverbs about throwing good money after bad? Too big to fail is a ridiculous thought. From the way the bailout has gone so far, it might have been better to let them fail and deal with the consequences, rather than enable these crooks for one more day. If you go by what has happened to the Dow, then 50% of value has simply disappeared, supposedly into these "toxic securities". 50% of the value of everything was simply overvaluation? How the hell does this economic engine we call capitalism work? Someone is either getting away with a lot of money, or money itself is an illusion. 2% of the world still has 50% of the wealth and 1% of america has 40% of its wealth. Something must change.

[Feb 3, 2009] Economist's View The Populist Revolt

Wake up and smell the populism:

Tom Daschle and the Populist Revolt, by Robert Reich: Tom Daschle's surprise withdrawal today shocked most Washington insiders... So what happened? My guess is that official Washington underestimated the public's pique at what appeared to be the old ways of Washington. Hill staffers tell me that many offices have been inundated with telephone calls, emails, letters and faxes expressing concern (to put it mildly) about Daschle -- not only his failure to pay back taxes but his relationships with major players in the health care industry and rich consulting contracts with the private sector since leaving the Senate, and even the fact that he was given a car and driver by one of them.

What's going on here? Maybe official Washington, much like most of Wall Street, is still not quite getting it.

Typical Americans are hurting very badly right now. They resent people who appear to be living high off a system dominated by insiders with the right connections. They've become increasingly suspicious of the conflicts of interest, cozy relationships, and payoffs that seem to pervade not only official Washington but our biggest banks and corporations. In short, many Americans who have worked hard, saved as much as they can, bought a home, obeyed the law, and paid every cent of taxes that were due are beginning to feel like chumps. Their jobs are disappearing, their savings are disappearing, their homes are worth far less than they thought they were, their tax bills are as high as ever if not higher -- but people at the top seem to be living far different lives in a different universe. They're the executives and traders on Wall Street who have lived like kings for years off a bubble of their own making while ripping off small investors, the financial louts who are now taking hundreds of billions of taxpayer bailout money while awarding themselves huge bonuses and throwing lavish parties, the corporate CEOs who are earning seven figures while laying off thousands of workers, the billionaire hedge-fund and private-equity managers who are paying a marginal tax rate of 15 percent on what they say are capital gains while people who earn a fraction of that are paying a higher rate, and, not the least, the Washington insiders who have served on the Hill or in an administration and then gone on to pocket millions as lobbyists for the same companies they once regulated or subsidized. To the American who's outside the power centers ... the entire system seems rotten. ...

[T]he public wants change, real change, big change. There's no tolerance any longer for the way things used to be done.

Selected comments

Bruce Wilder says...

DD: "I'm now detecting very bad attitudes from people who are generally apathetic toward politics. . . The politicians and plutocrats better take cover."

"bad" in the sense of angry and hostile -- and with plenty of cause, but "bad" also in the sense of stupid and ignorant and undiscriminating.

"Populism" is stupid and easy for the plutocrats to manipulate. The plutocrats don't fear it, at all -- they are out there encouraging it, and channelling it -- that's what Limbaugh and O'Reilly and Lou Dobbs do for a living, they model and channel resentment into political impotence by making it into cynicism, hostility to "liberal elites", and a misplaced respect for "serious" and "tough-minded" conservatives.

That's what all the economic nonsense spilling out from Republicans -- politicians and academics -- is about. It's propaganda, part of a setup for the Republicans to re-claim their authoritarian base with a populist rejection of Democrat's bailout and stimulus.

Forgotten is who destroyed the banks and the economy, and how.

It's amazingly effective. We've gone back and forth on this blog, with nonsensical statements from UofChicago types on the stimulus. No one listening has the critical reasoning skills to see what that's about. It's just squabbling, and evidence that economists can't agree and know nothing useful or reliable.

Mark Thoma linked elsewhere to Blanchard roundtable: In conclusion | Free exchange | Economist.com:

"To me, the thing which has stood out through this roundtable, . . . is the extent to which we're able to discuss the issues involved at an extremely broad and vague level. We don't sound like expert diagnosticians debating which of several potential infections could be causing a patient's trouble. We sound like witch doctors who can't agree on just where in the body the lifeforce can be found. We're not comparing engineering schematics. We're pondering the shape of the earth."

And, that's the educated readership and correspondents of the Economist, not a bunch of guys at the watercooler or gathered Saturday morning at the barbershop.

Economics is not witch-doctoring, but it might as well be, because there's no discrimination, no ethics, when their plutocratic masters call, at least a few right-wing academics are willing to make no more sense in public than Republican Senators, and a few more will loyally try to make that nonsense "legitimate" criticism. Pretty soon, Chris Matthews is on my teevee declaring that Republican Senators will be fighting to get "some of the junk" out of the stimulus bill.

The plutocrats win, if a majority give up on democracy, give up on knowledge and expertise.

The Right is a political wrecking crew. They are out to destroy this country. And, so far, they are way ahead on points, and apparently believe they occupy good field position.

[Feb 3, 2009] naked capitalism The Rise and Fall of the US Mortgage and Credit Markets

Anonymous said...
Anyone care to guess what caused the inflection in credit expansion in the 70s? That's right we snapped the back on the gold standard and went fully fiat.

Anyone care to guess what caused the second inflection in credit expansion in the 90s? That's right, Greenspan went ballistic with his moral hazard bailouts and monetary easing.

Is it not amazing that there are still people around who argue against the austerity of a gold standard?

Richard said...
Actually, the Case-Schiller charts are inflation adjusted prices. It is actually better to see the a chart where the nominal prices, and the real prices are shown as it better explains how astounding the recent bubble was, how far we still have to fall (especially since it appears that a general debt-deflation is setting in and that because of over investment there is now an over supply of housing units), and it explains why the earlier small bubbles bursting in the early eighties and early nineties were not notice since those real price declines were masked by the higher general inflation of those years. http://mysite.verizon.net/vodkajim/housingbubble/

As for those who think Gold is the panacea for all our economic woes, all I can say is: Panic of 1837, Panic of 1857, Panic of 1873, Panic of 1893 (and the subsequent depression led to W.J. Bryan's famous Cross of Gold speeech in 1896), and finally the Panic of 1907. Further, Gold did not stopp WWI from producing inflation which the Federal Reserve had to stop by raising interest rates sufficiently to cause the 1920-21 recession (now famous on right-wing blogs as the "Harding Depression"), with the economy reviving as interest rates fell, what was to become the classic post WWII business cycle until this most recent event. This event has more in common with 1929, 1893, and 1873 in that it arises from excessive financial speculation, an overinvestment spree (particularly in setting up factories for export in China), and huge asset bubbles (I am sure the guy making loan on a tulip bulb in 1635 Amsterdam thought it as a AAA safe investment as well).

The upper class and upper middle class (I am one) get a tremendous tax subsidy if we buy real estate. Because our asset prices are falling, we are going to use our political clout to try to keep back the tide. Which is why you hear both Democrats and Laissez-faire free market Republicas make proposals to "fix housing," e.g. use tax dollars to support bubble prices. Its not pretty, its not right, and blame the politicians as we will, the fault is in ourselves.

[Feb 3, 2009] So Why is the Journal (Sort of) Defending Peter Schiff's Simply Wretched Investment Performance

Nice note about systematic underestimate of risk

naked capitalism

Selected comments

Yves Smith said...
Anon of 7:10,

The research is badly contested. If you really believed research you'd never ever put money in individual stocks and most certainly never with a money manager, you'd just buy index funds and be done with it.

McKinsey has its own in-house investment management operation (it chooses managers) and its research found that in PE and hedge fund, a cohort of top managers did outperform. So you tell me. I am quite skeptical of that sort of finding, but I know the work was rigorously done (and contrary-wise, McKinsey was early to tout that equity managers do not outperfrom over time).

A big problem with all this research, BTW, is that it is done with comparatively short time horizons that assumes comparability over time. It gives no weight to changes in tax treatment, regulations, institutional arrangements (for instance, the legal and regulatory regime of the 1990s was clearly more business friendly than the 1970s).

15-20% across an entire portfolio is a big number. People have become inured to that due to the big stock market declines. The purpose of investing is is earn a positive return on capital (preferably, a positive real return).

People have asymetrical return preferences (this is WELL demonstrated in abundant research). They would rather not lose money than make money. And recall, the way the math works actually says that is not mere risk aversion. If you lose 20%, you have to make 25% on your now lower amount of dough to get back to square zero.

Benoit Mandelbrot has written at some length about how most of the widely accepted notions of finance as taught in CFA courses and business schools are badly flawed, including CAPM, the efficient market hypothesis, and Black Scholes. Because the main assumptions of finance theory (normal distribution and that market prices are independent of each other) are flawed, all constructs built on them are flawed too. Specifically, they understate risk. They overprice stocks, they underprice options, and they therefore understate the equity financial institutions need to hold to be able to bear market risk.

Now as far as academic theory is concerned, it says that investors should be diversified by asset class. That greatly reduces risk while only somewhat lowering returns, which in the long run leads to superior performance. But the industry has touted that people should be heavily invested in stocks, 50-80%. Frankly, having worked on Wall Street and seen what goes on on the sell side, I have long thought that was way too high, and Mandelbrot confirms that.

Equities are a lousy promise. Management will pay you dividends if and when they feel like it and can dilute you or announce stupid acquisitions. To make a proper evaluation of an equity holding, you need to have a private equity type relationship: you need to know management's intentions and integrity, understand their strategy and competition. Disclosure is a partial but inadequate solution. A company cannot disclose enough for an investor to make a truly informed decision; they'd be giving too much competitively valuable information away.

But investors have been lulled into complacency and because markets are liquid (most of the time) they have come to accept investing based on inadequate information.

FYI, the notion of "asset classes" as defined in academia is far narrower than what is touted in the media. Hedge funds, for instance, probably do not qualify as an asset class, In theory, commodities could, but there is evidence that managed CTAs don't fit.

But real estate, domestic stocks, foreign stocks, domestic bonds, foreign bonds are asset classes.

Anonymous said...
Boy, there are some real doozies in this thread.

Per Yves' comment on 300% up and 65% down, and the rejoinder on asset class volatility. Name me an asset class that has that sort of volatility. Yves' point was that that sort of return would almost certainly be the product of leverage.

What is so wrong with saying that no one holding himself out as a money manager should every lose 65-70% of client money in a year? That is either incompetent or criminal. Even with 2008 being the worst investment year because so many different markets did badly, can you name a market index that fell that far? There is no way to justify this result.

bg said...
Yves of 7:45 PM
I strongly agree with all of your observations about Mandelbrot and general euphoria in the public perception of the safety and profit possible in the stock market. I also agree that money managers are on average mediocre performers. I think there are two disadvantages they have. First, if they could reliably perform, they wouldn't manage your money. They can make more managing a different clientel. Second, investing for a fee creates an asyncronous incentive, which encourages risk taking and flock following.

Neither of these cases imply the market is efficient. Today Municipals are cheap, and treasuries are dear today. Smart, informed people can, and do, make smart investments on public information.

I will also tell you that my blue blood family has had money diversified in the market on a consistent strategy for over 100 years. It was a good move.

January 30, 2009 11:09 PM
Anonymous said...
Will I invest in the stock market now, no.

Do I think that the Government is doing the right thing, No.

Do I know what the right thing is ? NO.

Let's just stay in short term cash for now, ever vigiliant, eh. There is not one currency in the world worth a fiddlers damn.

As I look at my beautiful home, and we go forword with this thing, I recall my grandfar's experience. He worked a four shift in the Mountain Con Mine.

[Feb 3, 2009] U.S. Property Lost $3.3 Trillion in Home Value Last Yearby dan levy>

Feb. 3 | Bloomberg

The U.S. housing market lost $3.3 trillion in value last year and almost one in six owners with mortgages owed more than their homes were worth as the economy went into recession, Zillow.com said.

The median estimated home price declined 11.6 percent in 2008 to $192,119 and homeowners lost $1.4 trillion in value in the fourth quarter alone, the Seattle-based real estate data service said in a report today.

“It’s like a runaway train gaining momentum,” Stan Humphries, Zillow’s vice president of data and analytics, said in an interview. “It’s difficult to say when we’ll see a bottom to the housing market.”

The U.S. economy shrank the most in the fourth quarter since 1982, contracting at a 3.8 percent annual pace, the Commerce Department said on Jan. 30. Record foreclosures have pushed down prices as unemployment rose. More than 2.3 million properties got a default or auction notice or were seized by lenders last year, according to RealtyTrac Inc., a seller of data on defaults.

About $6.1 trillion of value has been lost since the housing market peaked in the second quarter of 2006 and last year’s decline was almost triple the $1.3 trillion lost in 2007, Zillow said.

Values have dropped for eight straight quarters. They fell in Manhattan for the first time since Zillow began including the New York City borough in its records two years ago.

Manhattan Declines

Manhattan’s estimated median price dropped 5.8 percent to $914,544. Seattle and Portland, Oregon, values tumbled 12.1 percent and 11.7 percent, respectively, the first time those cities dropped more than the national decline, Zillow said.

More than 2.6 million U.S. jobs were cut in 2008 and the unemployment rate rose to 7.2 percent in December, the highest in almost 16 years, the Labor Department said.

“A witch’s brew of economic insecurity, foreclosures and tightened lending standards are helping to keep hard-hit markets down and to widen the scope of markets showing declines,” Humphries said in a statement accompanying the report.

The number of homeowners with negative equity, or those who owed more on their homes than the property was worth, rose to 17.6 percent from 14.3 percent in the third quarter, Zillow said. The company began its quarterly reports in 2006.

More Foreclosures

“Negative equity will trigger new foreclosures, and that will add to inventory and depress prices,” Humphries said.

Almost 90 percent of the 161 metropolitan areas Zillow surveys showed values falling in the fourth quarter, including Rochester, New York and Winston-Salem, North Carolina, which had previously held up, Zillow said.

The company compiles data from multiple listing services, county assessors and recorders, and information from its users.

Estimated median prices tumbled 6.2 percent to $395,478 in the New York-Northern New Jersey-Long Island metropolitan area. They fell 21 percent to $410,692 in Los Angeles. Values dropped 26.8 percent to $182,483 in Las Vegas and decreased 22.3 percent to $179,847 in Phoenix, according to Zillow.

Fayetteville, North Carolina, led the nine Zillow markets showing price increases, with a 6.9 percent gain to a median $112,737. Values in Yakima, Washington, advanced 6.2 percent to $134,545. Utica-Rome, New York, rose 5.3 percent to $107,595, according to Zillow.

[Feb 2, 2009] Goldman Says Buy Puts Because U.S. Stocks May Resume Retreat By Jeff Kearns

Proved to be very true --NNB Mar 1, 2009

Feb. 2  | Bloomberg/CWEI Message Board Posts

Investors should buy put options on the Standard & Poor’s 500 Index because the benchmark for U.S. stocks may fall back to the 11-year low it reached in November, Goldman Sachs Group Inc. said.

“Dismal” fourth-quarter profits and forecasts from companies as well as waning investor confidence in President Barack Obama’s economic stimulus plan may drive the S&P 500 toward 752.44 in the next month, Goldman strategists said.

... ... ...

The U.S. economy probably shrank this quarter at a faster rate than the 3.8 percent annual pace in the final three months of 2008, according to Goldman Sachs economists.

“Our U.S. economics team sees little evidence that the downward spiral is abating,” the options strategists wrote.

[Feb 2, 2009] Grimmest’ Davos Ever Brings Anger, Finger-Pointing at Bankers By James Hertling and Simon Kennedy

Feb. 2 | Bloomberg

The theme of the World Economic Forum’s annual meeting was “Shaping the Post-Crisis World.” Unfortunately, the assembled executives, policy makers and do- gooders were stuck in the here and now.

The search for scapegoats and the worst economic prospects since World War II resulted in a gathering marked by fear, anger and bitterness, a far cry from the usual search for consensus.

Turkish Prime Minister Recep Tayyip Erdogan stormed out of a panel discussion and Russian Prime Minister Vladimir Putin hectored the U.S. as the font of the world’s economic woes. Almost everyone blamed the few bankers who showed up for the near-collapse of the financial system.

Attendees were “less reluctant to criticize, and sometimes very vocally criticize, the U.S. and its capitalist system because of the problems we’re having,” said David Rubenstein, co-founder of the Carlyle Group, who first came to Davos a decade ago. “Maybe that’s deserved, but it’s a big change.”

“Everyone I spoke to says it’s the grimmest Davos they’ve ever been to,” said Kenneth Rogoff, professor of economics at Harvard University and a World Economic Forum regular since 2002. “The mood has been very depressed. It’s a low-burn depression.”

Another big change was the virtual absence of Wall Street figures among the 2,500 delegates at the conference, which ended yesterday.

‘Stupid Things’

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon was the only U.S. banking chief who showed up. He made a concession to the mood of this year’s event by accepting some blame for the collapse that has led to more than $1 trillion of writedowns. He deflected the rest at regulators.

“God knows, some really stupid things were done by American banks and by American investment banks,” Dimon said. “To policy makers, I say: ‘Where were they?’”

That attitude was tough for some to swallow. At one session, a call for curbs on bankers’ bonuses was met with applause by sections of the audience.

“We should not trust these bankers,” said Nassim Nicholas Taleb, author of the best-selling book “The Black Swan.” “Look at their track record. The only way to stop the process is for the government to own those banks.”

With the world’s elite nursing a collective hangover after the greatest era of global prosperity came to an end, there was enough bile to go around.

... ... ...

Deepening Recession

That led many attendees to predict they’ll still be in a funk when they return in 2010.

“We’re in a multi-multi year problem,” Howard Lutnick, chief executive officer of Cantor Fitzgerald LP., said. “We’ve weathered horrible times before. That’s what lies ahead of us now.”

[Feb 2, 2009] S&P 500 to Fall as Bank Bailout Stalls, Barclays Says (Update2)By Lynn Thomasson

Feb 2, 2009 | Bloomberg

The Standard & Poor’s 500 Index will fall, wiping out its 9.8 percent gain since November, as President Barack Obama’s so-called bad bank plan takes months to carry out and the recession worsens, Barclays Plc said.

“We suggest putting down the champagne glass and drinking a cup of coffee,” Barry Knapp, chief U.S. equity strategist at Barclays said in a report dated Jan. 30. “The policy euphoria associated with the ‘bad bank’ plan will prove to be short lived.”

The S&P 500 jumped 3.4 percent on Jan. 28, last week’s biggest daily gain, when government officials said the White House is moving closer to a plan to buy toxic assets from banks. The complexities of the program mean it will take months to implement, said Knapp, who reiterated his forecast that the U.S. stock benchmark will drop to 750 in the first quarter, the lowest level in 11 years.

Economic data that is still “unequivocally negative” will also prevent a rally in the stock market anytime soon, the strategist wrote. The S&P 500 dropped less than 0.1 percent to 825.44 today after the Commerce Department reported U.S. consumer spending fell in December for a record sixth consecutive month.

Barclays joins Goldman Sachs Group Inc. in predicting the S&P 500 will retreat back to the Nov. 20 low of 752.44 as approval of legislation to support the economy and financial system takes longer than investors anticipate.

‘Critical Milestones’

“Passage of a stimulus plan and resolution regarding the remaining TARP capital are critical milestones that must be passed for the S&P 500 to trade higher,” Goldman’s David Kostin wrote in a note last week.

David Bianco at UBS AG disagrees. Investors will gain confidence after the government releases more details on its program to buy bank assets and push the S&P 500 to 1,000, a level last reached on Nov. 4, the equity strategist said in a research report.

Bianco’s end-of-year estimate for the S&P 500 to reach 1,300 is the most bullish of the 10 Wall Street strategists surveyed by Bloomberg. The UBS forecast implies a 57 percent surge from the S&P 500’s Jan. 30 close.

Barclays is the most pessimistic with a projection of 874, a 5.8 percent advance. Goldman Sachs’s estimate for the U.S. stock benchmark is 1,100, a 33 percent gain. All three strategists are based in New York.

[Feb 2, 2009] January ends with grim news on stocks, jobs, shipping

The stock market decline that started over a year ago picked up some steam in the Worst January ever for Dow, S&P 500. It was the worst January ever for the Dow industrials and S&P 500, according to Stock Trader's Almanac data.

The Dow lost 8.8% and the S&P 500 lost 8.6% in the month.

The Nasdaq's loss of 6.4% was eclipsed by last January's loss of 9.9%. That 2008 loss was the worst in the tech average's history, going back to its inception in 1971.

As goes January so goes the year. Or so they say.

...The International Air Transport Association is reporting Cargo Plummets 22.6% in December

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