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Financial Skeptic Bulletin, July 2009

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[Jul 26, 2009] Raw Story » Spitzer Federal Reserve is ‘a Ponzi scheme, an inside job’

[Jun 12, 2009] Doomsville by Neil Hume

[Jul 10, 2009] The Stimulus Trap, by Paul Krugman, Commentary, NY Times

This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.

[Jul 5, 2009] Yield Forecast Further Rise Ahead in 2010 - Barrons.com

[Jul 5, 2009] Econbrowser Back to the Stimulus Debate W, Timing, the States, and Baselines

Martin Feldstein predicts a relapse into recession (a beautiful symmetrical W)

[Jul 5, 2009] Whitney “I call this the great government momentum trade” by Tracy Alloway

[Jul 3, 2009] A different sort of crowding out

July

[Jul 31, 2009] US GDP comes in at minus 1%

naked capitalism

Anonymous said...

I think it will be a W recovery. After inventories are rebuilt manufacturers will discover that there are still no buyers. Look at the cars for clunkers to depress demand after is over. Same for RE in CA

ccie779 said...

It will be a VL shaped recovery.

Government spending makes at least 40% of today's economy and would be interesting to see when that figure comes down.

PacoCanada said...

I also fully expect a W, unfortunately. The second dip will come when the govt stimulus effect fades away, some time in late 2010 or 2011. As all mention, there needs to be a resurgence of "non stimulus" (i.e. private-sector-led) growth, which should take the lead after stimulus effect...

The problem seems to be in the transition between the hospital and the street:

  1. Government could perhaps come up with a second mega stimulus package, but the political context might not allow this to materialize.
  2. If there is a shift away from bonds towards equities due to a perceived upward shift in GDP, bond prices will fall, interest rates will rise, and it will make it that much more difficult for the recovery to really take hold. This could be countered by Fed interventions, however.
  3. With rising unemployment even months after the start of the recovery (as we all know happens), will households and firms have deleveraged enough to free up buying power to pave the way for recovery?

Man I am worried!

Anonymous said...

Most people I know are scared "sh--less" about their jobs, debts, 401K's, etc. I think we've experienced a "generational" shift in consumer attitudes towards debt and spending.

The deleveraging and defaulting hasn't even really begun yet. No lasting recovery is coming. What we've got going is the worlds largest Ponzi scheme.

Anonymous said...

Barry Ritholz wrote in his Big Picture blog: "Bottomline: An improving, but weak report."

How could Barry make such a basic error? Sure the 2nd derivative is improving, but -1.0% is not improving.

Clinton said...

According to Bloomberg y/y GDP is down 3.9% from 2nd quarter 2008. Personally, I expect 2nd quarter 2009 GDP to be revised down just like all the others quarters were.

From the article:

"GDP was down 3.9 percent from the second quarter in 2008, the biggest drop
since quarterly records began in 1947. Last quarter’s decline was the fourth in a
row, also the longest losing streak on record. "

http://www.bloomberg.com/apps/news?pid=20601103&sid=ayA7HltOFSHM

Donlast said...

The US economy is being re-calibrated to a lower level of total output. The previous one was false based on a debt binge. So why assume inventories will be re-built? True, if inventory purge stops it will be a minor positive but so what? Note too that if it were not for the fact that imports fell faster than did exports the GDP metric could have been as much as -2.5%. Better than minus 5%-6%, Yes. But again, so what.

If you are the bottom of a well down which you slipped by degrees and the last slip was less than the previous one you are still at the bottom of the well. Easing slippage provides no assurance that you can climb out.

Cat said...

-1% is the new +2%. Any negative number close to zero will be called "growth" from now on. "Not falling as fast as last time" will be hailed as improvement.

People really do think that way. We only work well around relative numbers.

Cat said...

Donlast: You hit it. The most frustrating part of the last 2 years has been the constant refrain from pundits (and two administrations) that we're going to return to our previous experience of economic growth. Continuing this claim is completely irresponsible. It is setting people up with false expectations rather than preparing them for a more sober reality.

If nothing else, the cost (and eventual scarcity) of oil will force us into a very much reduced level of productivity and already has. The importance of free energy in the growth seen post-WW2 simply cannot be overstated.

An era has just ended. Any thinking person can see this, and many are relieved to see it go. Nobody can say for sure what follows, but it will be slower, less glamorous, and less energy intensive than it was. Probably by an order of magnitude. Just maybe, by more than that. Taking the opportunity now to prepare people for that should be Job #1, but we've not seen even the first step in that direction. People are going to wake up to a different world at some point and may feel cheated and lied to, and start looking around for someone (or some group) to vent their grievances against. The European experience of this in the last century does not inspire confidence.

plschwarz said...

"The estimates released today reflect the results of the comprehensive (or benchmark) revision of the national income and product accounts (NIPAs)."

Am I wrong in assuming that the figures released today are a result of recalibration of the benchmark instrument, and that any direct comparison with earlier estimates must be made with extreme caution?

I would assume (??) that recalibration of the instrument would be accompanied by using it on relevant earlier data to give a proper comparison. Am i naive

PacoCanada said...

Quite obviously, everyone here is sane and sees the cold reality we are all confronted with. Why the constant sidestepping by the Obama team? DO "change" from the past, please - just be casually sane, rational, and realistic. It would help a great deal in paving the way forward. And it would be SO refreshing!

Emerging markets might kickstart their own internal domestic demand and take the flag for supporting world aggregate demand to which us Western economies could perhaps export to. Quite frankly, it seems to be the ONLY way out of this mess that could potentially give interesting positive growth going forward. Otherwise, indeed, 0 or 1%will be the new normalcy...

What do you people think?

Anonymous said...

Wow, this from Yves??? Ah, it's Ed Harrison. Damn, I'm starting to detect blogger styles.

Ed, how can we expect an uptick in consumer demand if people are still paying down debt?

We KNOW interest rates have nowhere to go but up. Not the same as saying they will rise, but paying down debt now is guaranteed to be cheaper than paying later.

Can the government pump another 10% increase into the economy?

Hugh said...

I agree with Donlast too. What indication is there that once companies have gotten rid of their excess inventory they will seek to rebuild that inventory? Yes, current inventory is a drag but wouldn't reduction and maintenance at a new lower level just produce fresno dan's flat line?

Where does the up come from? As anonymous says, consumers are paying down debt or saving because of fears about their jobs and future security. So if companies aren't expanding and consumers aren't buying where is the uptick to come from? From government? How given current political conditions would this happen and even if it did, would it be enough and intelligently directed (as did not happen in the first stimulus plan)?

And how do we know that this is not part of a deflationary spiral: cutting inventory and with it jobs which will reduce consumption further creating another inventory overhang necessitating further job cuts, etc.?

Neal said...

The GDP would at least be a minus 4% without the 12 percent increase in government spending.

Does this really represent a sustainable growth pattern?

So, if the GDP turns up in the next quarter on the basis of additional government spending, is this a real end to the recession, or just another numbers game?

D said...

There need to be a post on the "Cash for Clunkers" program that looks like it is going to vacuum up another few billion dollars in the next few weeks.

One of the irony of this program is that clunkers that are at least 1984 are vehicles that by and large, have relatively modern exhaust emission systems and greatly downsized from the behemoth engines that are first generation electronic ignition / mechanical controls mated with inefficient drivetrains and transmission ratios of pre-1980 cars.

The cars that qualify in the program, namely, 1984 or later models, are actually not the most inefficient vehicles on the road.

If they are driven relatively few miles, they actually are very economic and energy efficient if the alternative is to consume energy to manufacture a brand new vehicle that is in turn, driven few miles.

Furthermore, by spurring the auto industry to build and sell more new cars when we already know peak oil is upon us is simply not very clever

This temporary lull in oil prices is deceiving buyers to buy more car and engine than they need.

Furthermore, the industry is within 2 to 3 years of delivering a generation of gasoline fueled vehicles with much better mileage --- e.g. the new Fords with direct gasoline injection and small turbo/super chargers.

At the same time, we are still at the peak of the horsepower race - which like the tailfin race of another era - gave us sedans like a Toyota Corolla with standard engines that develop over 130hp in the USA.

This level of performance is far in excess of any reasonable, sensible need that a sedan optimized for fuel economy should have, and comes at the expense of lifetime fuel economy penalties in the form of heavier engines, transmissions, brakes, chassis, that is paid even in the absence of a lead footed driver.

By having the US (and EU) governments purchase cars now to "stimulate demand", they have taken these buyers out of the market for many years, and perhaps, make it less likely for them to upgrade to a truly fuel efficient vehicle that will be widely available in a few years --- when petroleum is back to $200 a barrel and gasoline is scarce and expensive at over $7 a gallon.

Then there is the stupidity of the program administration --- which required cars turned in to be disabled by having a mixture of water and sodium silicate and water poured into the engine and run --- in effect, sanding the engine and making it unusable from the inside.

The only problem is, scrap yards routinely salvage engines and transmissions from their wrecks --- it is probably one of the best profit makers in a yard to salvage these parts and resell them to be either rebuilt or, if the mileage is low enough, placed straight into another car with a bad motor/transmission.

Not surprisingly, scrap yards are now saying they may not accept the vehicles (unless they are compensated otherwise) because the disabled vehicles are nearly worthless, or worse, actually cost the scrap yard money to dismantle (drain fluids, etc.) them --- except to be shredded and sold for scrap to China or other steel mills.

No one that rammed this program through, which is really a car dealer bailout and bribery program to complement the GM / Chrysler / Auto Parts bailout program, truly understand energy economics.

While the study of energy impact on the USA has yet to be done on this program, I have a suspicious hunch that this program will end up costing more energy than it saves.

But Congress, in their rush to spend money, didn't think of that one.

Ina Pickle said...

The figures will just be revised downward. That, and by Q4 even more of the people who are losing jobs daily will have run through all of their unemployment insurance - and a goodly number from the beginning of the depression will have run out of even the extended benefits. Guys, if people don't have money, they don't buy things.

What I want to know is where is the real economy going to come from. I have yet to hear one single person, ANYWHERE, suggest what we're going to do for an export-based economy. We had already become a new UK, exporting services (insurance and banking) as they did when their empire collapsed. What will we be exporting now? Where will the jobs be developed?

Until someone can give me a solid answer on that, I don't believe that an end to the recession is in sight. I just don't.

[Jul 31, 2009]  A Reality Check on U.S. 'Economic Recovery'

Seeking Alpha

U.S. equities are rallying again today, and (as usual) it is a rally with no basis in reality. Most of the enthusiasm comes from another string of corporate quarterly results which “beat expectations”. I had hoped that the sheep were starting to clue-in to this silly game, however it appears there is a still a large pack of Pavlov's Dogs out there – who respond to their propaganda cues without a moment of actual thought.

The truth is that all of the companies “beating expectations” are still reporting steadily worse results year-over-year – and in many cases, much worse results. Among the few exceptions are U.S. financial corporations. However, since accounting-fraud was legalized in the United States (see “FASB strong-armed into mark-to-fantasy accounting”), their bottom-lines have had absolutely no connection to their business operations.

The obvious point here is that if expectations are set low enough, it is almost impossible not to exceed these “estimates”. The question that must be asked is this: given that all these “market experts” are claiming that the U.S. economy is “turning the corner”, why are all these same “experts” continuing to predict terrible bottom-lines for U.S. corporations – every quarter?

The other element fueling today's rally is the continuing stream of propaganda pretending that both employment and the U.S. housing sector are “stabilizing”. This aspect of U.S. propaganda is especially egregious.

The optimism in U.S. housing is built entirely on the fact that declines in U.S. home prices have not been as bad as before – when they were falling three times as fast as during the Great Depression. This is a result of several factors.

First and foremost, U.S. banks are holding millions of foreclosed properties off the market. In this case, the numbers don't lie. There were 1.9 million foreclosures in the first 6 months of 2009, and Realty Trac (an industry-friendly group) predicts at least 4 million foreclosures this year – meaning that the rate of foreclosures will continue increasing. How is this “stabilization”?

These foreclosure numbers become even more interesting when we look at the ratio of foreclosure-sales relative to total sales. With total housing sales forecast at 4.8 million (after a recent jump in sales) and (at least 4 million foreclosures this year alone), foreclosure sales would have to account for over 80% of total sales in order for U.S. banks to clear their inventory as fast as they are taking on new foreclosed properties.

In fact, foreclosure sales have never exceeded 50% of total sales, and in the last two months have only averaged 35% of total sales – meaning U.S. banks are selling much less than half of their foreclosed properties. This means that contrary to fraudulent reports that housing inventories are “moderating”, all that is taking place is that more and more properties are simply being taken off the market – unsold.

The other important point about U.S. banks holding millions of foreclosed properties off the market is that foreclosure sales are the primary force pushing down U.S. housing prices. It should be expected that with U.S. banks holding millions of foreclosed properties off the market that U.S. house prices would be (temporarily) less-bad.

As I have pointed out many times, U.S. delinquency rates are at all-time, record highs – meaning that when the dust settles at the end of this year, U.S. foreclosures will likely be well over 4 million units (meaning all the other numbers I discussed will get even worse). In addition, we are only months away from the largest wave of mortgage re-sets (see “U.S. mortgage crisis to get MUCH worse in 2010-11”) - which will last for two years.

Meanwhile, broke-and-retiring U.S. baby-boomers will have no choice but to dump $1 to $2 trillion of real estate onto the market, to make up for their under-funded retirements (see “U.S. pension crisis: the $3 trillion question”), and the HUGE cuts which must be made in government programs for seniors, to begin to reduce the $70 TRILLION (or so) in U.S. unfunded liabilities. This means at least a decade of vast amounts of new inventory being dumped onto the market. This is “stabilization”?

Then we come to U.S. employment fiction. Weekly lay-offs have “improved” (by a measly 10%), meaning there are 'only' about 2.5 million lay-offs per month, compared to a normal month where there would be less than 1 million. Lay-offs are 2 ½ times greater than normal, and this is called “stabilization”?

Fraudulent government numbers are claiming that there is only a net job loss of less than 500,000 jobs per month (which is an historically terrible number). However, the reality is that with 2.5 million lay-offs per month, there must be at least 1.5 million (net) jobs lost each month – based on those weekly numbers (see "U.S. economy to lose 20 MILLION jobs this year"). These are Great Depression-like numbers.

The fact that job losses are “stabilizing” at Great Depression levels is not good news for anyone living in the real world. Meanwhile, the collapse in the U.S. retail sector is just beginning to to impact retail sector employment (see “The Death of the U.S. Consumer Economy”), and U.S. state governments are just beginning to make the painful budget (and employment) reductions they must make – as a response to the largest plunge in state revenues in history.

In short, the “big picture” of the U.S. economy is completely clear, it's in terrible shape and rapidly getting worse. Meanwhile, the U.S. propaganda-machine continues to fuel the U.S. fantasy-rally with nothing more than “smoke-and-mirrors”.

[Jul 30, 2009] Blind to the Risks - Yahoo! Finance

The always excellent quarterly memo from Oaktree Capital Management Chairman Howard Marks is out on the firm's Web site and this quarters' is one of the best yet. Marks is a veteran of the markets, particularly the value and distressed areas that I frequent, and his commentary is a must-read.

This time out he summarizes the history of the investment markets and the continued chasing of returns while ignoring risk that has plagued investors over time. In particular, he thinks the excessive pursuit of ever-higher returns, and the thoughtless use of leverage to achieve them, is the cause of much of the current crisis.

He interestingly remarks that the democratization of investing with brokerage firms pushing the long-term reruns of stocks and the idea that anyone could be the next Warren Buffett was a huge disservice to investors. Rewards were overstated and risks understated.

The mantra of long-term returns from stocks caused investors to totally ignore risks and push prices higher for far longer than valuations justified. Even if stocks do always outperform bonds and bills over the long term, as we have found out in the last 10 years or so, 30 years can be a long time to wait.

The letter also talks about the dangers of ignoring risks. When all the focus is on missing an opportunity with little-to-no thought of the chance of losing money, there is danger in the air.

We are seeing some of that right now. Everyone feels an almost desperate need to get back into the stock market. There is no thought given to the risk inherent in current price levels. As Doug Kass pointed out yesterday, they are only focusing on the good news and dismissing anything that might counter a positive point of view.

I am always puzzled how the desire for larger returns causes people to buy things they do not even begin to understand. Given that there is no way to know the real risks contained in the balance sheet at Citigroup, why would you ever own that stock? What is the loss exposure at Bank of America from the Countrywide and Merrill Lynch acquisitions? I do not know and I do not think anyone else does either.

How many years out you we discount the earnings potential for growth stock like Green Mountain Coffee Roasters. What growth rates should I use and at what rate should I discount back the earnings stream?

Any answer to those questions is a guess at best. What is the probability of the holdings in my junk bond fund defaulting? No one takes the time to figure that out before investing and that worries me.

[Jul 30, 2009] Short-term Treasurys fall after 5-year auction -  By Sara Lepro, AP Business Writer

July 29, 2009  | Yahoo! Finance

"It's hard to describe it as anything but ugly," said Michael Pond, an interest rate strategist at Barclays Capital. "The market is beginning to choke on the increases in supply."" ...After the initial shock, the bigger concern should be whether there will be enough demand for 10-year and 30-year auctions in two weeks' time," Pond said.

...investors seem worried about holding on to debt for too long for fear of inflation, which eats into bonds' fixed returns over time. Many market players believe inflation is an inevitable consequence of the government's numerous efforts to stimulate the economy by flooding the financial system with cash and keeping borrowing costs low.

If demand for government debt wanes further, the Treasury will be forced to increase the returns on bonds to lure investors, which in turn can discourage lending by raising borrowing costs for consumers and businesses. Long-term Treasury yields determine interest rates on mortgages and other kinds of loans.

Treasuries got some support Wednesday from more purchases by the Federal Reserve, which bought up $3 billion of long-term Treasury debt. The Fed has been buying large amounts of Treasuries this year in an effort to offset the influx of supply.

[Jul 29, 2009] Pimco's Kiesel says: "sell your junk."

Jul 10, 2009
Mark Kiesel, at Pimco's Pacific Investment Management Company says it's best to sell your junk bonds now. Why is he saying this? The key factor is that economic growth is not there. Kiesel looks for only 1-2% growth in GDP next year.

All of this talk about "green shoots" simply is not materializing. Kiesel says the "green shoots" are turning to weeds. He further said that credit is not re circulating. Business financing costs range from 10-12%, making it difficult for some businesses to stay afloat.

So far, junk bonds have returned 29.6% this year. That beats most other investments by a country mile. So, again, do not let the "greed" monster take hold of your psyche.

The advice here is to stay in investment grade bonds, rated Baaa or BBB- by Moody's Investment Service and Standard & Poor's. The rate of return on these bonds is about 10-12%.

Kiesel points out that the government can print all the money they want, but that does not change you or your business. People are fearful that their house prices will fall. Only when people see the price decline ending will they decide to spend more freely.

Now for those who have a strong stomach US high default rate bonds may reach a yield of 18% this year.

What percentage of bonds should be in your portfolio? Hint. Use your age as a guide. If you are 50 years old, you should have 50% of your investments in bonds.

Tags: junk bonds, JunkBonds, Mark Kiesel, MarkKiesel, Pimco

[Jul 29, 2009] Bashing Goldman Sachs Is Simply a Game for Fools  by Michael Lewis

Humor aside, the way GS is making profits (excessive trading and pyramid lending is nothing but a way to extract cash pumped in by the government ) at the time when economy is in the downturn is perverse and, well, not entirely honest. The clawback provision in Sarbanes-Oxley should probably be used on GS executives including Paulson.
July 28, 2006  | Bloomberg

...America stands at a crossroads, and Goldman Sachs now owns both of them. In choosing which road to take, ordinary Americans must not be distracted by unproductive resentment toward the toll-takers. To that end we at Goldman Sachs would like to dispel several false and insidious rumors.

Rumor No. 1: “Goldman Sachs controls the U.S. government.”

Every time we hear the phrase “the United States of Goldman Sachs” we shake our heads in wonder. Every ninth-grader knows that the U.S. government consists of three branches. Goldman owns just one of these outright; the second we simply rent, and the third we have no interest in at all. (Note there isn’t a single former Goldman employee on the Supreme Court.)

What small interest we maintain in the U.S. government is, we feel, in the public interest. Our current financial crisis has its roots in a single easily identifiable source: the envy others felt toward Goldman Sachs.

The bozos at Merrill Lynch, the dimwits at Citigroup, the nimrods at Lehman Brothers, the louts at Bear Stearns, even that momentarily useful lunatic Joe Cassano at AIG -- all of these people took risks that no non-Goldman person should ever take, in a pathetic attempt to replicate Goldman’s financial returns.

For too long we have allowed others to emulate us. Now we are working productively with Treasury Secretary Tim Geithner and the Congress to ensure that we alone are allowed to take the sort of risks that might destroy the financial system.

Rumor No. 2: “When the U.S. government bailed out AIG, and paid off its gambling debts, it saved not AIG but Goldman Sachs.”

... ... ...

Rumor No. 3: “As the U.S. government will eat the losses if Goldman Sachs goes bust, Goldman Sachs shouldn’t be allowed to keep making these massive financial bets.

... ... ...

Rumor No. 4: “Goldman employees all look alike.”

... ... ...

Rumor No. 5: Goldman Sachs is “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

... ... ...

Those words are of course taken from a recent issue of Rolling Stone magazine and they are transparently false.

For starters, the vampire squid doesn’t feed on human flesh. Ergo, no vampire squid would ever wrap itself around the face of humanity, except by accident. And nothing that happens at Goldman Sachs -- nothing that Goldman Sachs thinks, nothing that Goldman Sachs feels, nothing that Goldman Sachs does -- ever happens by accident.

(Michael Lewis is a columnist for Bloomberg News and the author of “Liar’s Poker,” “Moneyball” and “The Blind Side,” soon to be a major motion picture. The opinions expressed are his own.)

[Jul 29, 2009] No Recovery in Sight  By BOB HERBERT

Unemployment crisis in the most serious of all in this recession...  The question "How do you put together a consumer economy that works when the consumers are out of work?" is really rhetoric. Wall Street deleveraging troubles are not significant in comparison with the unemployment problems but most of  government money were used for solving it. Too little money was devoted to solving unemployment problem.
June 27th, 2009 | NYTimes.com

How do you put together a consumer economy that works when the consumers are out of work?

Why this rampant joblessness is not viewed as a crisis and approached with the sense of urgency and commitment that a crisis warrants, is beyond me. The Obama administration has committed a great deal of money to keep the economy from collapsing entirely, but that is not enough to cope with the scope of the jobless crisis.

There were roughly seven million people officially counted as unemployed in November 2007, a month before the recession began. Now there are about 14 million.

There are now more than five unemployed workers for every job opening in the United States. The ranks of the poor are growing, welfare rolls are rising and young American men on a broad front are falling into an abyss of joblessness.

Workers under 30 have sustained nearly half the net job losses since November 2007.

This is not a recipe for a strong economic recovery once the recession officially ends, or for a healthy society. Young males, especially, are being clobbered at an age when, typically, they would be thinking about getting married, setting up new households and starting families. Moreover, work habits and experience developed in one’s 20s often establish the foundation for decades of employment and earnings.

l. chambers

Thank you, Mr. Herbert , for this serious and needed editorial. On a personal level, I feel that the unscrupulous morons whose failed gambles caused this disaster are the only ones benefitting. The folks from Goldman Sachs and Citi have the President on speed-dial, while middle-income citizens worry, not just with their children's education, but with simply keeping their homes.

The system is not just unfair; it is incorrigibly crooked and nothing that happened in the last election changed that for the better. People need to wake up and see who is really making the decisions in our government and our country.

 Recommended by 157 Readers

Jonathan G.

Very good, but short on solutions. As long as our priorities are to pour massive sums into things with limited amplifying benefits, such as armaments, intelligence gathering, drug enforcement, while letting oil companies exacting a huge tax on all citizens through windfall profits, insurance and pharmaceutical and financial companies diverting funds into the hands of the wealthiest few, it isn't clear what tools we have with which to fix things. High-paying jobs can't be created by waving a magic wand.

John

The high permanent unemployment is the result of massive immigration over the last 30 years. Technology, by design, eliminates jobs and an outsourced job also means the loss of its supporting jobs. So a modern society needs fewer people to run it and at the same time jobs are leaving the country. The bubble only masked the problem and now that the bubble has burst and excess labor is being squeezed out in the form of high unemployment there is nowhere for workers to go unless there is another bubble. The American people have been losing out year after year as immigration has ramped up and the competition for jobs has increased so much that wages (healthcare and pensions are wages) have fallen as people will work for less just to have a job. Everything has finally reached the end of the line. The middle class does not have money to spend so we do not have consumers which would put others to work. It's a real mess. Japan is trying to solve the problem by giving financial assistance to its foreigners in an attempt to send them home and lower its unemployment rate. Obama and gang will not solve the problem. They benefit too much by it. They receive the minority vote for continuing immigration and they receive money from the U.S. Chamber of Commerce, agribusiness and billionaire high tech entrepreneurs to continue this assault on the American people. Massive immigration and deregulation used to be the hallmark of the Republican Party until Clinton sold the working people out. It is a continuation of these policies which enriches the political class and for that reason it will continue. Obama has not imposed the tough regulations that are necessary to insure a healthy financial system due to the financial contributions nor will he address the lowered wages and loss of wages caused by immigration since it is not to his benefit to do so. Unfortunately, our people are paying for this lack of concern by the political class and it will continue.

Recommended by 81 Readers

LAS

During the last half of the twentieth century appliances and computers were invented with the purpose of saving time and labor. These devices do save labor, but our society still operates on the premise that people are expected to work full time plus overtime. European countries scaled back the work week to less than 40 hours and have given workers much more vacation and family time. The unemployment problem won't be remedied until there is a restructuring of the way work is distributed among people. More people need to work a shorter work week with more vacation time. The problem is exacerbated by increasingly narrowminded human resources policies. Jobs not requiring a college degree are now universally filled by means of psychological tests, so a person who doesn't score on the test as a business "type" will not be considered. At the professional level, anyone who is older, female, a minority, has a disability or who has gaps on a resume, etc. will fall into a cycle of unemployment. There will be a percentage of perfectly decent people who can never obtain full time work. The disabled, for example, have a much higher unemployment rate in spite of anti-discrimination laws.

We will need to have a public works program in which anyone who wants to work can sign up and work, and not just at a menial level of jobs, as well as an and to laissez faire employment law.

The success or failure of the current stimulus package cannot be evaluated yet because the federal government has not even given out a great deal of the money, particularly in scientific research.

Maryanne Conheim

Bravo, Mr. Herbert -- you are a brilliant diagnostician. Our economy and 10 percent of its work force is on life support, and the cure is not investment bank bailouts, but massive, WPA-style public works programs. I am sure that President Obama knows what should be done. One can only hope that he has the grace and stamina to sell it to the Congress.
 Recommended by 64 Readers

pdxtran

About 15 years ago, The Economist carried a cover story that asked what happened to working class men when their jobs moved overseas. It was a sensible, well-written article that admitted that such job losses devastated communities and caused untold social problems. In other words, the "Free" Trade Cultists in Britain and the U.S. KNEW that their neoliberal policies were disastrous for ordinary working people, and yet they continued insisting the outsourcing first production, then IT work, and then routine clerical work to low-wage foreign countries was the route to prosperity for all. Were they blinded by their mostly affluent origins and therefore unable to see blue collar workers as human, or were they purposely trying to reverse the progress that the working classes in the West made in the twentieth century? Or were they so addled by their ideology, "politically correct" in the original sense of the term, that if their ideology and reality clashed, then there had to be something wrong with reality?

If I were Economic Czarina, I would provide low-interest loans and training to displaced workers from shutdown plants who wanted to modernize and reopen their former workplaces. I would institute government purchasing policies that gave preferential treatment to manufacturers with U.S.-based workforces, no matter who the owners of the company were. I would shut down businesses that hired illegal immigrants and auction their tangible and intangible assets off to new owners who promised to use legal workers. I would put people to work on infrastructure projects, a WPA for the 21t century, building affordable housing, new recreation areas, mass transit, and intercity rail, and retrofitting existing communities for better access by non-automobile transport. (Such projects might help us catch up with Western Europe and East Asia.) How would I pay for this? Simply by cutting the Pentagon's budget back to a strictly defensive level and putting the world on notice that the U.S. was retiring from the policing business, since it isn't very good at that kind of work anyway.

Reversing the long-standing sicknesses in our economy will require bold moves, maybe not the ones I suggested, but ones that will upset and annoy the rich and powerful nevertheless. The Republicans will never go against the powers that be, and the Democrats seem more desperate for the Republicans' approval than for the voters' approval, so I'm not optimistic about either of these political dinosaurs.

My fondest wish would be for the more progressive elements in the Democratic Party to break away, unite with other left-leaning groups, and form a new party that realizes something that individual members of Congress have proved on a small scale: You don't need PAC money if you win the loyalty of the voters through your integrity and concern for the little person.

Recommended by 112 Readers

William

As a person under 30 myself, I do have to mention that in addition to a bad economy, generation Y is also getting steamrolled by the attitude that college is a place to pursue your passions rather than learn a marketable skill that sets you apart from the crowd. I love art history, music, pyschology, and general business as much as the next person, but these are a dime a dozen. Yet professors continually advised them that this was ok, that they should pursue their passions as expensive time consuming college degrees, rather than hobbies. Combined with the fact that many of the degrees that are currently still in demand required hard courses like the calculus III or organic chem that were just too much of a hassle to take and you have a recipe for disaster when the paper pushing jobs evaporate. I can't stress enough the disillusionment right now among my friends who have debt from their 4 years and a degree that is currently worthless. For those of us who slaved through more challenging degrees, often at the expense of a few parties, we feel a mixture of sympathy and vindication.

I suppose that what this means for recovery is that we should consider attacking this source of the problem as well, maybe by offering federal reimbursement for getting a degree in a field that is in demand (obviously a list that has to be revisited every so often). The nation gets its talent, the citizens who take advantage of the program get jobs. And I can assure the people who wanted to pursue studies in artistic fields that there is plenty of time to perfect those crafts outside of work, and often with more perspective than if it were a career in itself.

Recommended by 41 Readers

Anna

"The first step in dealing with a crisis is to recognize that it exists"

Thank you, Bob. There are profound systemic problems which must be addressed. We need jobs and health care. Instead we hear mumbo jumbo/psychobabbling about volunteering (killing whose few jobs which still exist) and spinach eating. This is not normal.

Recommended by 65 Readers

Steve

With the Madoff fraud and the stock market crash, there was panic earlier in the year by society's parasite class - the wealthy speculators. Now that the market has recovered some and the average taxpayer has bailed out their poor investment choices, they have no further concerns.

I can't say I blame them. For forty years now, Republican crooks and criminals have been assuring them that only the wealthy are of any consequence in America. They now have the right wing press to continue this assurance.

Recommended by 82 Readers

[Jul 28, 2009] Rosenberg (finally) sees green shoots by Stacy-Marie Ishmael

See Calculated Risk "The seasonal adjustment appears pretty good in the '90s, but it appears insufficient now. I expect that the index will show steeper declines, especially starting in October and November."
Jul 28, 2009 | FT Alphaville

Gluskin Sheff’s chief economist and David Rosenberg appeared to be delighted by the rise in the Case-Schiller index of US house prices on Tuesday:

CASE-SHILLER HOME PRICE INDEX RISES - NOW THIS IS A GREEN SHOOT!

One by one, the shocks that the U.S. economy endured are being worked through (though there is one lingering impediment).

The sharpest part of the mean reversion in credit is probably over, but the credit contraction still has a long way to go before household debt ratios head back to anything remotely close to pre-bubble historical norms. This in turn suggests that the trend towards frugality will persist.

Now we have the second shock - housing - subsiding. You couldn’t have written a better script, a day after unsold new housing inventory plunges from 10.2 months’ supply to a three-year low of 8.8 MS, we see the Case-Shiller home price index rise (0.45% sequentially) for the first time since the bubble burst in May 2006 (note that in seasonally adjusted terms, prices still dipped 0.2% MoM) and 14 of the 20 cities eked out an increase. Stabilizing residential real estate prices is absolutely an essential ingredient in transitioning out of the recession, though inventories are still far too high to warrant a sustained upturn. Bottoming is one thing, booming is quite another.

others would prefer that you be bearish to the very end, but by displaying restraint and balance in many of your posts, when you come out with a potentially controversial statement like this, well, we know that there must be a reason.

this summer will be quite the lull, and I would argue that the low end will actually move in a rather unsticky fashion (due to foreclosures and resales). the result is that CS will likely show a stronger rebound than usual in the summer (NSA) and will then pay the piper in the fall. perhaps just another way of saying what CR just said, but I do believe it bears repeating.

the 'recovery' in home prices is a long way off.

[Jul 28, 2009] Gary Shilling On The Economy And Market

Gary thinks the S&P 500 earnings will be ~ $40/share this year.  Assuming P/E 15 that gets us to fair value of 600, a 35% drop from today's level.
We had Gary Shilling on TechTicker this morning.  We'll post the video soon.

In the meantime, here's a quick overview of Gary's outlook on things, along with a gallery of exhibits from his recent monthly Insight.

[Jul 28, 2009] Off the Charts - Index of Leading Indicators Is Signaling the Recession’s End -  by Floyd Norris’s

Looks more like statistical gimmick: stock market is one of the leading indicators. And in turn is a side effect of stimulus package (plus possible GS or other manipulation). In this case such a report might be a sign of local top, not the bottom.  See The End Of The End Of The Recession
July 24, 2009 | NYTimes.com

The index of leading indicators, which signals turning points in the economy, is rising at a rate that has accurately indicated the end of every recession since the index began to be compiled in 1959.

The index was reported this week to have risen for the third consecutive month in June, and to have risen at a 12.8 percent annual rate over those three months.

... ... ...

An end to recession is not, of course, the same thing as the beginning of a boom. The indicator “has an unblemished record on calling the turning point,” said another economist, Robert J. Barbera of ITG, “but it is not a particularly good guide to the power of the upturn.”

Indeed, one of the strongest moves in the leading indicators came at the end of the brief 1980 recession, as credit controls were removed. But the economy soon fell into another, longer recession.

Mr. Bandholz thinks we may get a “W” recovery, in which early gains are followed by weaker figures. “We do not expect this recovery to be strong and self-sustaining,” he said. “What is lacking is support from consumer spending.”

During the most recent three months, the strongest indicators have been the financial ones. The Standard & Poor’s 500-stock index has risen while the gap has widened between long-term and short-term interest rates. The indicators index was also helped by an increase in consumer expectations and a slowing in deliveries by suppliers. (Slower deliveries are assumed to be caused by rising orders, although such a change could indicate the suppliers simply laid off too many workers.)

Two of the 10 indicators — the money supply and new orders for consumer goods — have shown declines.

Another measure compiled by the Conference Board, the index of coincident indicators, has fallen for eight consecutive months, and dropped in 17 of the last 19 months. That indicator is often used by the economic research bureau in dating decisions, and its failure to stabilize is a reason that Mr. Bandholz says he thinks the downturn is not yet over.

The index of coincident indicators has fallen 6.4 percent from the peak it reached in November 2007, making this the deepest recession since 1960. Before this cycle, its steepest decline was a 5.6 percent slide during the 1973-’75 downturn.

I saved this from Saturday’s Off the Charts column by Floyd Norris:

THE American recession appears to be nearing an end, but only after it has become the deepest downturn in more than half a century.

The index of leading indicators, which signals turning points in the economy, is rising at a rate that has accurately indicated the end of every recession since the index began to be compiled in 1959.

The index was reported this week to have risen for the third consecutive month in June, and to have risen at a 12.8 percent annual rate over those three months. Such a rise, pointed out Harm Bandholz, an economist with UniCredit Group, “has always marked the end of the contraction.” Mr. Bandholz said he expected that the National Bureau of Economic Research, the official arbiter of American economic cycles, would eventually conclude that the recession bottomed out in August or September of this year.

Why isn’t the Conference Board ready to declare the recession over? The index of coincident indicators — now down for eight consecutive months (down 17 of the last 19 months). That indicator is often used by the National Bureau of Economic Research in making dating decisions, and its failure to stabilize is likely why we haven’t seen any declaration that the downturn is officially over yet.

Source:
Leading Indicators Are Signaling the Recession’s End
Floyd Norris
NYT, July 24, 2009
http://www.nytimes.com/2009/07/25/business/economy/25charts.html

PERMALINK
Facebook 45 Responses to “Leading Indicators Say “The End is Near””

jc Says:

Not scientific but I just can’t imagine what will restore consumer discretionary spending while wages are being lost on such a scale and the consumer has been scared into saving. Is there anything about the stimuli that could be causing the leading indicators to send a false signal????

Super-Anon Says:

Too bad the consumer isn’t participating so far. It’s going to be interesting to see how long this “recovery” lasts without them.

Lugnut Says:

Just MHO

primordial_ooze Says:

Total BS. Tell me why the current uptick isn’t like the 1980-81 case? The index could plunge this fall.
Past performance is no predictor of future performance.

Mannwich Says:

I wonder - can we have a true recovery with so much unemployment and people in debt to their eyeballs? Maybe those who have good jobs will keep the economy afloat right now, but I doubt that will be sufficient for a true “recovery” and a climate back to growth. Maybe once enough of that debt is defaulted on and written off but not yet.

I think this is the new “normal” for quite a while. Not exactly Japan but a close knock-off to it.

Mike in Nola Says:

Just an illustation of Economists trying to pass themselves off as scientific by creating statistics and talking about them and making predictions about them Problem is that there is little correlation between these statistics and the real economy.

Best example is the increase in GDP that occurs during bubbles, including the most recent one. The activity being measured is not necessarily beneficial to the economy as a whole, but produces good numbers. Best summed up by John Mauldin’s use of the phrase “statistical recovery.” We will get some artificial numbers that will be touted as better, but things won’t really be any better.

hue Says:

we’ve heard “this time it’s different” on the way up in both recent bubbles. could this recession from two huge back to back bubbles be different too? where signs of past recoveries don’t work as tea leaves?

R. Timm Says:

Employment is a lagging indicator and it will lag more than usual in this recovery. The only LEI that I see as troublesome is the recent stock market performance. This rally is overbought and will retrace back to 800 S&P before heading higher again.

Mannwich Says:

@jc: Are flat panel tv’s a leading indicator or lagging? Me-thinks this level of economic activity is the new “normal”, which means retailers are still in for a world of hurt and some will be ripe for shorting activities. Unless many can simply pile on more debt to their crappy balance sheets (which is possible, I suppose), many retailers are going down in the coming years. We haven’t even begun to see that carnage.

cvienne Says:

I love it when, for example, last week a time chart was put on display showing the “timeline” of the 1929-1932 period…Some wanted to negate those comparisons by saying it was essentially USELESS to draw any type of correlation…

Do you suppose they say the same about this graph? Or does the mind just see what it wants to see?

Mannwich Says:

@cvienne: I think you know the answer to that question. Me-thinks it’s the latter.

globaleyes Says:

I’m bullish on interest rates, this recession and foreclosures which means I expect all three to continue into the indefinite future. I hope I’m wrong.

http://www.marketvane.net/bull2.jpg

ben22 Says:

I might be a little more compelled by this data comparison if this recession were anything like the others compared to here, or if the causes of the past recessions were the same but from where I sit neither applies.

Like some others above I haven’t noticed that since December 2007 we moved away from being a consumer based economy so how from here there will be a great expansion when it comes to spending, credit expansion, and job creation which in turn increases disposable income, not just for the currently employed, but also putting back to work the unemployed/underemployed, is not something I can see. I suppose it is possible that this happens, but it doesn’t seem probable. Not with the following:

- The U-6 unemployment rate in June, at 16.5% is more than half the rate at the bottom of the GD in 1933.
- Unemployment rates for workers 45 and older have soared to their highest level since at least 1948.
-Employed are working fewer hours, average of only 33.1/wk in May
-Part-time work is at a record high, overtime a record low.
-The loss of two million jobs in the first quarter of 2009 was the largest in any three-month period since at least 1939, when the data begin.

Certainly the market appears overbought right now but that doesn’t mean it can’t stay that way for a lot longer than anyone expects. In any event, things had better rebound quick or stocks like Macy’s, which has run from roughly $5, to almost $14 since the March lows, will have nowhere to go but down.

karen Says:

the presentation of the new home sales data was as hilarious as ever.. up 11%, biggest month over month increase since… the fact is that sales are down 22% or so from last june..

looks like a good number of california families will be going back to one earner households.. that is when the adult kids are pitching in to help the parents keep up with their mortgage payments.. that’ll do wonders for the real estate affordability index..

Mannwich Says:

@Mike in Nola: Boom times in debt-binging China maybe, where they are following our previous bubble path. It worked so well here, the Chinese thought they’d just emulate it. They’ll do OK with that strategy until their bubble eventually pops too.

DeDude Says:

As we all know it’s always different every time, but the question is how is it different, and what those differences do to the parameters we are looking at. So I am wondering how much the stimulus package (the thing that is different this time) is influencing these leading indicatiors.

dead hobo Says:

In the weekend papers, I saw autos were heavily advertised and heavily discounted, without regard to cash for clunkers. Either they are reflecting the new cost structure (doubtful because both foreign and domestic were begging for customers) or autos are not following the fantasy recovery plan.

I went to a Marshall’s. I was surprised to see the inventory thin and the racks spread out very obviously. Few customers and the parking lot was almost empty in front of the shopping areas. OK near a grocery store.

I don’t think the rumored inventory rebuild is going to happen as vigorously as claimed by the pundits. If so, companies like Marshall’s would be bursting at the seams and not trying to look full. Rather, I think we’re going to a new state of equilibrium where less of many things will be the new normal.

dead hobo Says:

Also, with oil on the rise again in spite of lowered demand … people aren’t stupid when it comes to managing the household budget while income is uncertain. They can be an infinity past the point of stupefying stupidity when times are good, but reality has been a rude visitor of late.

With oil on the rise again, people will hunker down more deeply. Excess cash will go into the bank and maybe to a dinner at an upscale chain restaurant.

In spite of the pundits, it’s looking more and more like a double dip is on the horizon. We’re falling to a new equilibrium and not going back to the former one in any reasonable time.

bdg123 Says:

This is bull-oney. These models work until they no longer work. If one breaks down the LEI, nothing based on fundamental capital creation in the economy has moved upward. The bullishness is all based on the credit and risk components in financial markets. It’s bullshit. It’s like ECRI and their WLI that is now at multi-year highs. ECRI is also too beholden to models that work until they no longer work. They were deer in the headlights when it came to anticipating the shocks that hit us. And both will again be deer in the headlights to future shocks.

Onlooker from Troy Says:

Yes, the LEI are being influenced by monetary and fiscal policy (i.e. the stimulus package). And it’s bumping things up with a little sugar high. But that won’t be sustainable for all the reasons outlined by others and that have been covered here ad nauseum. It’s apparently good for a stock market rally, as investors don’t seem to be able to see past their noses anymore, and the herd is riding the wave.

Once again, maybe the recession is drawing to a close on a technical basis, producing a positive GDP print. But it really doesn’t matter in any substantive way to most people. GDP is a rather crappy way to assess the economic health of the nation anyway. There are many ways that it is influenced that look good on paper but are really not healthy. One reason is the analogy I like that it’s like looking only at a company’s income statement while completing ignoring the balance sheet. That’s folly when the company is really limping along with huge debt and practically insolvent. They may be able to produce some current income due to one time circumstances, but the longer term prospects are terrible. Sounds like the banks, and our nation.

tradeking13 Says:

Why do we keep comparing this credit induced recession to past business cycle recessions?

Also, isn’t “stock market prices” one of the indicators in the LEI? I’d like to see what the relative impact the stock market is having on the LEI.

wally Says:

Have we ever come out of a recession loaded with the absolutely crushing levels of debt that we now carry as a result of our gifts to the big banks at the expense of Main Street? Have we ever come out of one with all the credit transactions shadowed by the implicit guarantees that are now in place?

Given that this is a first-time situation, I’d be cautious. Also, if I were Bernanke I would be cautious about playing the saviour role in front of the people he is robbing to ’save’.

Mike C Says:

July 27th, 2009 at 11:13 am
@ben 22

This is the kind of regulation we are going to get, hope people start to understand that soon. This sort of regulation does nothing to stop the already problematic conflict of interest in this industry which is that at these companies the rep does not get paid when the client is in cash.

Ben, there is a way around this. Why not just go independent and start your own separate RIA firm rather then work for a wirehouse. This is what I’ve done. Sure, you don’t have their back office support and marketing muscle, but you can do things your way and get paid if you decide sitting in cash is the right thing to do because you charge a flat percentage of assets and it doesn’t matter whether you are in stocks or cash as presumably you are actively deciding which is better at any given time.

Been awhile since I posted so a position update. I’m about 60-70% invested in equities and 30-40% cash. I got faked out on that bogus head and shoulders breakdown, and trimmed 10% of my equity exposure at SPX 870ish. Oh well, you can’t get them all right, and that is why I always move gradually, incrementally and don’t make ALL or NOTHING type changes.

The higher the market goes the more I will sell off. If and when SPX hits 1200, I expect to be very light in equity exposure. More then a few technicians have 1200 price targets even though that number makes ZERO sense to me from an fundamentals or valuation perspective. Incidentally, I’ve come more around to your credit deflation view, but I think one still cannot underestimate the impact that fiscal and monetary stimulus could have on the market in the short-term. Go back and reread Grantham’s quarterly letter.

http://www.tradersnarrative.com/how-high-can-this-market-go-2799.html

http://www.decisionpoint.com/ChartSpotliteFiles/090717_rr.html

”Bottom Line: The violation of the head and shoulders neckline has proven to be a bear trap, and my opinion is that the rally from the March lows is resuming. My upside price target is about 1200 on the S&P 500. I have to say that this doesn’t make any sense considering what I think I know about the economy, which is why I try to ignore fundamentals in favor of the charts.”

http://www.decisionpoint.com/ChartSpotliteFiles/090724_bt.html

”I think the weekly chart (below) does a good job of conveying the power in this rally. We can see the breakout above the long-term declining trend line, as well as the horizontal resistance, which is the neckline of a reverse head and shoulders pattern. The pattern has executed and the minimum upside price target is about 1200.”

Just curious, for those who have held and continue to hold a “buy and hold” short position in leveraged ETFs, what do you do here if you didn’t take any money off the table at SPX 666-700 when the market was the most technically oversold in a generation? Do you ride the position up to SPX 1200 if that is what is going to happen, or do just continue to hold with the view that at some point your fundamental valuation outlook will be proven right (SPX 450?)

DeDude Says:

And don’t forget that the economy is not reported in absolute numbers (i.e. 14.1 trillion per year) but as a second derivative, % annualized change. So numbers actually turns positive when the falling ends, not when we are back to “normal”.

Onlooker from Troy Says:

Indeed it does seem crazy that we have to cover this ground over and over again. But I guess it has to be restated continually because there are many who just don’t see the forest for the trees and continue to be sucked in by the noise, ignoring the larger signal. And people will get hurt falling for it. So we try. But it does get a bit old, doesn’t it?

The bottom line for me is that the argument that we are on the verge of real, sustainable recovery, and therefore a sustainable uptrend in the stock and housing markets, is based on thin evidence and a huge dollop of hope and confidence that we’re different and those bad outcomes just won’t happen to us (i.e. Japan’s lost decades, another depression, etc.) On the other hand there is huge, objective, overwhelming data stating otherwise. I won’t bet on the hope and hubris side myself.

alfred e Says:

@DeDude correct about stimulus influencing LEI as well as daily SLP pumps.

IMHO, the velocity of money is currently so low and will remain low for some time, that the LEI s are way too optimistic. The big dogs continue to pick the carcass clean.

mathman Says:

Nothing to see here, move along:

http://rawstory.com/08/news/2009/07/25/spitzer-federal-reserve-is-a-ponzi-scheme-an-inside-job/

constantnormal Says:

Yeah, the LEI says The End is Near, go check out David Rosenberg’s & Tyler Durden’s presentation over at ZeroHedge … The End of the End of the Recession, for the bigger picture.

Jdamon33 Says:

I’m in a leveraged 3X short ETF (FXP and FAZ). I use these to hedge a pretty large long position(s) in my IRA’s.

I will probably just ride it up to the 1,200 level (if that is where we are going). At that time, I will sell off all my Long IRA funds. At some point, I believe reality will hit the market square in the face and we will be back down to the 800 SPX range. I don’t think we will get back to the 700’s again, but I could be wrong.

Jdamon33 Says:

After reading Rosenbergs piece, I’m thinking FDIC backed CD’s for the next 3 - 4 years (at least). Dire situation we have here folks.

lakshman Says:

Hi Barry,

When I saw this in the NYT I thought you might pick up on it!

A few comments for consideration:

1. Current version of the LEI has issues, as Floyd points out, component estimations (using econometric models), etc., but it IS starting to fall in line behind earlier rise in ECRI’s leading indexes (LLI & WLI).

2. ECRI’s Weekly Coincident Index, while not yet positive, seems to be fairing better — see chart mid-page here: http://www.businesscycle.com/resources/ 

3. ECRI Leading Indexes in no way represent an econometric model that has been fitted to the data, but they are based on relationships that predate the Great Depression, so they have some validity in jungle variety recessions like the one that we believe is now ending.

4. both the U.S. in the 1930s and Japan in the 1990s had business cycle expansions despite big problems:
http://www.nber.org/cycles/
http://ecri-prod.s3.amazonaws.com/reports/samples/1/BC_0907.pdf

5. unlikely to get an NBER call on recession’s end until well into 2010 as they wait for jobs and GDP data revisions to settle down. The estimates of those data in the near-term, made by econometric models, systematically experience their largest errors in the vicinity of cycle turning points.

Kind regards,
Lakshman

fusionbaby Says:

Fiction is fact. White is black. Everything is actually the opposite of what it seems. Immorality, corruption and hidden agendas have worked their way so deeply into the system on a viral level that a once decent system with potential is now worthless. As regards material and financial survival, it has reached the point now where it is everyman for himself. We’d better have our economic solution in place for the very different future that we are speeding into like a locomotive. We’ve allowed ourselves to be had. All MSM, government or industry statistics are tripe. Go out, walk around, look around, talk to the people in the street… that is where the statistics and trends are. And they spell TROUBLE the likes of which America has not seen for a very very long time. And the global situation will mirror what happens here.

cvienne Says:

1930’s “business cycle expansion” = manufacturing for future European ally war effort

1990’s “business cycle expansion” = building out internet infrastructure

2010’s “business cycle expansion” = SHOW ME THE MONEY (and/or the credit to pay for such expansion)

Dr. Kenneth Noisewater Says:

When we get polywell-based fusion electric power that makes electricity too cheap to meter and makes electric or hydrogen cars feasible, and we stop spending money on home heating and transportation, _that_ should free up enough consumer spending to pay down debt and expand the consumer business cycle.

I’m not seeing much else being able to get over the _consumer_ debt hump.

What else out there is going to start getting 70% of the economy going again? Massive consumer defaults?

Steve Duncan Says:

July 27th, 2009 at 8:39 pm
Hey Lakshman,

Why don’t you talk about what the ECRI Long Leading Index (LLI) did versus the Coincident Index during the Great Depression? The ECRI Long Leading Index went positive in 1930 while the ECRI US Coincident Index continued to go negative for two more years until the middle of 1932. The ECRI Long Leading Index then went negative for a second time and followed the Coincident Index to a bottom in 1932.

So, the initial ECRI Long Leading Index (LLI) was predicting an end to the Great Depression in 1930 and it was wrong (and the ECRI LLI is going to be wrong again this time). Your current ECRI Long Leading Index (LLI) is jumping the gun due to being based on false indicators predicting the end of the Great Recession. You won’t tell us what the ECRI indicators are (proprietary) but they are probably made up of some of following one time or temporary increases due to Govt intervention: interest rate spreads, stock prices, money supply, commodities (oil spike), and inventory rebuilding.

Keep putting that positive spin on it baby.

http://www.thestreet.com/story/10039739/1/time-tested-tools-see-no-double-dip-ahead.html

Kind regards,
Steve Duncan

bdg123 Says:

If that truly is lakshman you are showing a large vlind spot by citing Japan post 1987 and the U.S. post 1933. The dynamics are completely different than today. And even though you are citing that some of your data points are not yet positive, you are citing on your web site that the economic recovery is at hand re the WLI

http://www.businesscycle.com/news/press/1500

I find it HIGHLY DUBIOUS that your use of some data points in your models pre-dates the Great Depression. Some of the granularity in statistics used are not available pre the Great Depression. And, your own research on your site shows a correlation well past the Great Depression. I can’t help but think you are taking a literal liberal liberty. And, the Conference Board LEI is just as adept as the WLI is. They are both wrong that all is clear ahead.

[Jul 28, 2009] Incredible Shrinking Boomer Economy

BusinessWeek has an interesting cover story this week about The Leaner Baby Boomer Economy.

Calling Mercedes the "the quintessential boomer brand", BusinessWeek estimates that Mercedes will sell a third fewer cars in America. The article also notes efforts by companies like Nordstrom (JWN), Starwood Hotels & Resorts (HOT), Outback Steakhouse, BMW and Target (TGT) to offer value shopping or "cheap chic" in an effort to reach out to generations X and Y.

By now most are familiar with this new wave of frugality. Thus the real story is not article itself but the easy to miss sidebar statistics as follows:


Those stats are from a McKinsey study, and there is nothing remotely inflationary about any of them.

In his Town Hall Meetings Bernanke said:

"It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that's not enough to bring down the unemployment rate."

Inquiring minds might be asking: Why does it take 2.5% growth to keep the jobless rate constant? The answer is the first 2.5%+- of GDP is based on hedonics and imputations. In plain English, the first 2.5%+- of GDP (if not much more) is fictional. When the economy is growing at 2% it feels like a recession because it probably is, even though no one will admit it.

Now consider the implications of a 2.4% GDP forecast for three decades.

If Bernanke is correct that it takes 2.5% GDP growth just to keep the unemployment rate constant, and McKinsey is also correct in its 2.4% forecast, we will be stuck with 10% unemployment for decades.

[Jul 28, 2009] Robert Reich's Blog The Wall Street Rally Watch Your Wallets

GS foxes wants your money poor 401K Pinocchio ;-)

Been Down So Long It Seems Like Up To Me, the precocious 1966 novel by the late Richard Farina, defined the late 1960s counterculture. The stock market rally that's pushed the Dow Jones Industrial Average back above 9000 for the first time since early January could be given the same title, and it might well come to define the much-wished-for financial recovery.

What's pushing the stock market upward? Mainly, unexpectedly positive second-quarter corporate profits. But those profits aren't being powered by consumers who have suddenly found themselves with a lot more money in their pockets. The profits are coming from dramatic cost-cutting -- including, most notably, payroll cuts. If a firm cuts its costs enough, it can show a profit even if its sales are still in the basement.

The problem here is twofold. First, such profits can't be maintained. There's a limit to how much can be cut without a business eventually disappearing -- becoming, in effect, a balance sheet in space. Secondly, when businesses slash payrolls to show profits, consumers end up with even less money in their pockets to buy the things businesses produce. Even if they hold on to their jobs, they're likely to fear that they won't have the jobs for long, which causes them to retreat even further from the malls.
 

Most companies that have reported earnings so far have surpassed analyst's estimates, but that only means that earnings have been less bad than analysts had feared. According to the chief investment officer at BNY Mellon Wealth Management, if the companies that haven't yet reported earnings show the same pattern a the companies that have reported so far, overall corporate earnings will have dropped 25 percent over the past year. That may not be as much of a drop as analysts had expected, but it's still awful. Operating income for companies in the S&P 500 that have reported so far has been almost 29 percent lower than last year, more than 80 percent lower than 2007, according to Standard and Poors. Ouch.
 

"Better-than-expected" is Wall Street's euphemism these days for "we're happier than we thought we'd be." But Wall Street is in the business of cheer leading, even when there's really nothing to cheer about. It wants investors to think positively, on the assumption that positive thinking can be a self-fulfilling prophesy: If investors begin putting more money into the market, then the market will automatically rise, leading more investors to put in more money -- until, that is, the rally ends because nothing has fundamentally changed in the real economy.

Keep your eye on the real economy, where unemployment and underemployment keep rising. It's not as much fun as cheering and investing right now, but it's far safer.

[Jul 28, 2009] Corporate Bonds - Someone Will Make a Lot of Money on This Market Anomaly

Traditionally, investment-grade bonds have paid out only 25% more interest than Treasury bonds. So, for example, if Treasury bonds are paying 4% interest, then investment-grade corporate bonds would typically pay out only 5% interest.

The difference between 4% and 5% isn't huge... Treasury bonds are thought of as the ultimate safe investment. But investment-grade bonds are not usually considered particularly risky either.

WHY YOUR MONEY SHOULD BE IN CANADA

More proof of how well the ABC theory of commodity investment works… the $2,400 difference.

If you had placed $10,000 into the benchmark U.S. exchange-traded fund (SPY) one year ago, you'd have lost about $1,100 by now. If you had placed that money into the benchmark Canadian ETF (EWC), you'd be up about $1,400.

Why has Canada done so well versus the U.S.? Easy. The Canadian stock market is heavily weighted toward base metals, precious metals, energy, crude oil, natural gas, and agriculture. These sectors have a tremendous tailwind behind them. The U.S. market has a lot of exposure to banking and consumer spending. These sectors face a tremendous headwind.

Canada is home to the world's safest large oil deposit. It's the world's largest uranium producer. It's the world's largest fertilizer producer. It's also a giant in gold, nickel, timber, and wheat production… and a safe ride on the rails gets it all to the world's top commodity consumer. As you can see, it's a steady uptrend for the "C" of the ABCs.

[Jul 28, 2009] David Rosenberg Corporate Bonds Better Bet Than Stocks for Recovery - MarketBeat - WSJ

Bearish market watcher David Rosenberg, chief economist and strategist at Gluskin Sheff, isn’t expecting a sharp rebound in the economy — the so-called V-shaped bounce back.

With that, and the recent run-up in share prices, in mind, Rosenberg thinks that corporate bonds are a better bet for investors than than stocks.

Unlike the stock market, which has de facto priced in a 40-50% earnings surge in 2010, there is no such hurdle or high-hope in the corporate bond market, which is still largely priced for a deep recession — a GDP contraction of 1-2% going forward and the unemployment rate heading towards 11-12%. Insofar as the economy does not relapse to such an extent, there is a significant cushion embedded in the pricing of the corporate bond market this time, even after the impressive rally — from Armageddon levels, mind you — earlier this year.

Rosenberg points to today’s Journal story on the possibilities for bonds. In it Kent Wosepka, chief investment officer at Standish Mellon Asset Management, had this to say. “If you believe in a V-shaped recovery, then you buy stocks. If you believe we’re going to bump along, then you have to go with credit.”

Readers, what kind of recovery do you think we’re going to see? V-shaped? The dreaded W-shaped double-dip? Or the anemic “L”?

[Jul 26, 2009] Bernanke Meets His Public The Big Picture#comments

  1. km4 Says:
    July 26th, 2009 at 9:50 pm

    Dismantling the Temple ( the Fed )
    http://www.thenation.com/doc/20090803/greider/single
    By William Greider
    July 15, 2009

    six key points

    1. It rewards failure. Like the largest banks that have been bailed out, the Fed was a co-author of the destruction. During the past twenty-five years, it failed to protect the country against reckless banking and finance adventures. It also failed in its most basic function–moderating the expansion of credit to keep it in balance with economic growth.

    2. Cumulatively, Fed policy was a central force in destabilizing the US economy. Its extreme swings in monetary policy, combined with utter disregard for timely regulatory enforcement, steadily shifted economic rewards away from the real economy of production, work and wages and toward the financial realm, where profits and incomes were wildly inflated by false valuations. Abandoning its role as neutral arbitrator, the Fed tilted in favor of capital over labor.

    3. The Fed cannot possibly examine “systemic risk” objectively because it helped to create the very structural flaws that led to breakdown. The Fed served as midwife to Citigroup, the failed conglomerate now on government life support. Greenspan unilaterally authorized this new financial/banking combine in the 1990s–even before Congress had repealed the Glass-Steagall Act, which prohibited such mergers.

    4. The Fed can’t be trusted to defend the public in its private deal-making with bank executives. The numerous revelations of collusion have shocked the public, and more scandals are certain if Congress conducts a thorough investigation.

    5. Instead of disowning the notorious policy of “too big to fail,” the Fed will be bound to embrace the doctrine more explicitly as “systemic risk” regulator. A new superclass of forty or fifty financial giants will emerge as the born-again “money trust” that citizens railed against 100 years ago. But this time, it will be armed with a permanent line of credit from Washington.

    6. This road leads to the corporate state–a fusion of private and public power, a privileged club that dominates everything else from the top down. This will likely foster even greater concentration of financial power, since any large company left out of the protected class will want to join by growing larger and acquiring the banking elements needed to qualify.

[Jul 26, 2009] The war being waged on the TARP watchdog's independence

Most significant of all, and obviously due to Barofsky's truly independent oversight efforts, the Obama administration is now attempting to induce the Justice Department to issue a ruling that Barofsky's office is not independent at all -- but rather, is subject to, and under the supervision of, the authority of Treasury Secretary Tim Geithner.  By design, such a ruling would completely gut Barofsky's ability to compel transparency and exercise real oversight over how Treasury is administering TARP, since it would make him subordinate to one of the very officials whose actions Congress wanted him to oversee:  the Treasury Secretary's.  Barofsky has, quite rightly, protested the administration's efforts to destroy his independence, and has done so with increasing assertiveness as the administration's war on his oversight activities has increased.  Why would an administration vowing a New Era of Transparency wage war on a watchdog whose only mission is to ensure transparency and accountability in these massive financial programs?

It should take little effort to explain the significance of these clashes.  The amount of taxpayer money transferred to the banking industry or otherwise put at risk for its benefit is astronomical.  Professor Nouriel Roubini argues in a New York Times Op-Ed today that actions by the Federal Reserve over the last nine months helped avert a Depression, while former Governor Eliot Spitzer said this week that the Fed has turned into a "Ponzi scheme" that relies on insider dealing and requires vastly increased scrutiny.  Those claims aren't mutually exclusive.  It's not surprising that transferring extraordinary sums of taxpayer money to a particular industry will help that industry avoid collapse, but it is still the case that the potential for extreme corruption and even theft in such transactions is enormous (indeed, even Roubini argues that Fed Chairman Ben Bernanke played an important role in enabling the crisis in the first place).  No matter one's views of the wisdom of the bailout and related programs, transparency, accountability and independent oversight are absolutely vital, and that is what Barosksy's office was created to ensure (though it's unlikely -- given how Washington works -- that Congress actually expected that the person in charge of that office would take those duties seriously and be willing to fight with senior administration officials to protect his independence).

[Jul 26, 2009] Raw Story » Spitzer Federal Reserve is ‘a Ponzi scheme, an inside job’

Spitzer recently told Bloomberg News that President Obama’s regulatory reforms of the financial sector are “irrelevant” because regulatory agencies have not been enforcing corporate laws to begin with.

“Regulatory agencies already had the power to do everything they needed to do,” he said. “They just affirmatively chose not to do it.”

[Jul 26, 2009] The Bernanke ReappointmentTour

Bernanke is a tool.  Like many neo-classical economists he uses an implicit assumption that what is good for wall street is good for the nation. An interesting  question is" Should the guy who missed housing bubble (and actually was instrumental in inflating it with low rates) be reappointed ?  But it is mute. From a broader perspective it doesn't matter who is (reappointed.

I believe the attacks on Bernanke's personal integrity were unfair and unjustified. But I'm not sure he should be reappointed.

Professor Thoma's analogy to a doctor who kept getting it wrong - but never gave up trying new possible cures - is pretty good. Is that the kind of doctor I'd want?

I'd like a doctor who never gave up trying for a cure, but I'd prefer someone with better diagnostic skills. I don't oppose Bernanke for a second term, but I think there are better choices.

(San Francisco Fed President Janet Yellen, as an example, recognized what was happening much earlier than Bernanke).

Rob Dawg

Two observations about Bernanke:

One, he missed the housing bubble. _He_ _missed_ _the_ _housing_ _bubble_. How do you give anyone a pass on that?

Two, credit for effective responses

GDD9000

Dawg - it's worse than just missing the housing bubble. The acts he sanctioned under Bernanke I interpreted as endorsing the housing bubble as a good thing, initially. So, his theory was wrong, and his knowledge base then was compromised, since he couldnt possibly understand the world of finance enough to know that what spawned it was a leviathan.

Juvenal Delinquent

A good many of you have had the chance to work in your fields of endeavor with workmates that are book smart, but have no idea how things really work in the world...

Exhibit A: Benjamin Bernanke

Shylockracy

For a 300 million-strong country, the talent pool from which to draw a FED chairman is minuscule. Of course, 'talent' here does not mean the same as outside the rarefied heights of High Finance. Talent here means a proven track record of absolute subservience, unscrupulousness and militancy in favor of the political and economic interests of the ruling bankocracy.

danm

The difference between the US and France is that probably half of the US has some trust
------------
The difference between the US and France is that France understands that it's a mature economy and the people do what they can to force government to redistribute.

The US still believes it is a growth country with a frontier attitude. Its people are convinced that everybody will get rich if there is no government and they let the invisible hand do its magic. But most still cling to the hope government will fix things. Hmmmm.

Which is worse - bankers or terrorists

"Ditch bernanke, and then who takes over? (must be politically viable.) "

I'm thinking a sock puppet could do a better job. It would also say less stupid things during the re-appointment tour.

GDD9000

Dawg - how much do you think he was part of the decision to keep GS at the top of the heap? Or do they just run the show so much that they could appoint themselves? It's just to me, so incredibly wrong that we are propping up the status quo, and rewarding the people that screwed everything up. And seeing as we are doing that, it makes sense to keep Bernanke.

I think that more than anything this shows you that there isn;t a chance in hell he isn't reappointed. Absolutely zero. I don't even know why we debate it. And Bernanke going out on the two debate the little people. Laughable. I wonder how many stooges will be trotted out to say, thank you, thank you BB for saving us from ourselves. 

bobn

One, he missed the housing bubble. _He_ _missed_ _the_ _housing_ _bubble_. How do you give anyone a pass on that?

Do you really think he missed it? How could he NOT have known? I think he lied about it for reasons bad or good. Imagine what would have happened had he said "The so-called sub-prime problem will lead to a major recession and, BTW, most of the huge banks are insolvent. Have a nice day."

Which is worse - bankers or terrorists

"The difference between the US and France is that France understands that it's a mature economy and the people do what they can to force government to redistribute."

Right, France is this way in part because of the tradition of protest brought about by 1789, the revolution of 1848, the founding of the Third Empire, 1968, etc. US is different, does not protest in the same manner for political change.

And the big difference is that we have, at least currently, the reserve currency that most the world's is purchased in. Until proven otherwise, sink this ship and the whole world drowns with us.

danm

Speaking of which, the post notes that Bernanke "failed to notice the patient is sick".
-----------
Maybe he saw everything just right, realizes he's stuck between a rock and a hard place so now is just positioning himslef for his own survival.

Over the last few decades, extreme failure has been grandly rewarded. What does he have to lose?

GDD9000

bobn - have you also not noticed that he suffers from Bushco syndrome? The utter inability or desire to say that he possibly did anything wrong or was responsible in any way? It's not a particularly endearing trait that more and more of our leaders seem to be in possession of.

ResistanceIsFeudal

Entry of the masses into the markets, directly or indirectly through retirement (another concept created by policy think tanks and marketed to us) savings, was the real breaking point. So many to fleece, so few to fleece them, so little incentive not to fleece them. Add in superiority and entitlement mentality fostered by elite educational institutions...

danm

And the big difference is that we have, at least currently, the reserve currency that most the world's is purchased in. Until proven otherwise, sink this ship and the whole world drowns with us.
----
You've had land to distribute, resources to exploit, forests to cut down, lakes to pollute... With 300M people, you're fast approaching the limit.

Which is worse - bankers or terrorists

If you are Bernanke, I wonder....why even bother with the stress of reappointment when you can get a job in the private sector working for the Goldman Sachs Financial Terrorism Crime Syndicate.

Oh yeah, that's right because everyone knows Benny has no skillz.

Juvenal Delinquent

Bernanke reminds me of most any NFL coach that has guided 7 teams over a span of 12 seasons to a combined win-loss record of 86-122.

Coaches like him get rehired because they have "experience"

Comrade Coinz

There is bias built in to the system -- the Fed is owned by banks -- that works against the interests of the country regardless of who is chairman.

That bias affects personalities to a greater or lesser extent. I still like Paul Volcker.

My feelings are mixed on Bernanke. He has some glaring flaws, and I don't think he is strong enough to stand up to the oligarchs when needed.

On the other hand, my sense is that he genuinely wants a good outcome for the country.

danm

On the other hand, my sense is that he genuinely wants a good outcome for the country
-----------
WW2 had a good outcome but millions of lives were lost.

MrM

Good morning, all

I would like to follow up on Basel Too's comment - If you do not re-appoint Bernanke, who do you appoint?
Can we really hope that this position will escape going to Summers? Yellen would be a much better choice, but it is rather unlikely she'll be able to win against Summers.

We already had "The Committee To Save The World". Are you ready for the sequel "The Unparalleled Genius To Save The World"?

Fair Economist

I agree with basically all of the criticisms of Bernanke, but his replacement would almost certainly be Summers, who didn't forsee this any better than Bernanke and who has numerous personal and financial connections to banksters and to foolish deregulation.

Bernanke still seems not to have grasped many importants aspects of the crisis, but neither has Summers, and at least Bernanke doesn't have Summers' potential integrity issues. So reappointing Bernanke is the lesser of two evils.

HomeGnome

Bomber Ben is going to be reappointed with praise for "strong leadership in these difficult times" from both Elephant and Asses.

The Congress Critters (R. Paul excepted) are pretty much clueless; which was evident if you caught any of Bomber Ben's testimony.

Hell, all "Dr. Evil" Paulson had to do to get 700 BILLION was threaten financial collapse and martial law; and the lapdogs rolled over like puppies.

patientrenter

Bernanke is more than just a messenger. He is constrained on many sides: Congress is most important, then the Treasury and WH, then the banking industry, then professional economists and other members of the financial community. But he does still play a leadership role. Any of us in leadership roles recognize that it's a grey area. Few heads of household have absolute authority! It's the same, but even greyer, in broader leadership roles like Bernanke's.

I read a 2009 overview speech by Bernanke, just to see his own story. It's at http://www.federalreserve.gov/newsevents/speech/bernanke20090414a.htm. He recognizes the role of imprudent lending, and the need for prompt action to cut off any resurgence of inflation. He also acknowledges there was a TBTF problem.

But I think he reveals his biases even in this speech. He discusses the pain of the credit collapse, and the measures he and others have undertaken to mitigate the pain, in vivid and detailed terms. He doesn't explain very well why allowing the imbalances to grow as much as they did was a problem in the first place. (Maybe because he doesn't believe it was such a big problem. The real problem was the collapse. Lesson learned: Allow bubbles. Prevent bubbles popping.

On the TBTF issue, it's clear that he doesn't see any need to bring more of our financial industry out of the TBTF category. Instead he advocates more regulation. That assumes the regulators (like Greenspan and him) will be better than the company CEOs (like Sandy Weill) at avoiding excessive risk. It's not clear to me that the regulators are any better. Sure, an ideal regulator would be better. But the regulators we actually get are not ideal, just as the CEOs are not. I think I'd like to see graduated capital requirements with real bite that are higher on institutions that pose more systemic risk (= are more likely to be backstopped by the taxpayers). I got the impression that he is very weak on any effective anti-TBTF measure. Perhaps that's because he has too much faith in the perfect regulator.

patientrenter

"I like honesty, but I prefer competence over honesty in the most important jobs."
Shifting $14T of toxic assets from the private to the public sectors balance sheet is competence?"

I am not saying that Bernanke is competent. His points of competence and incomepetence are what we're debating here (in between noisy and pointless global climate trench warfare salvos). I am just saying that I don't think it's purposeful to judge him based on how much he lies. Whether it's right or wrong, the political sphere he operates in takes lying (or dissembling, or miscommunicating, or whatever you would like to call it) as a job survival requirement. What matters most to us all is what he accomplishes, not what he says. That's why is points of policy competence and incompetence matter more than merely the extent of his public directness and honesty.

 

[Jul 26, 2009] Supply and Demand (in that order) Construction Workers Teaching Kindergarten

The stimulus bill reminds me of "Kindergarten Cop" -- Schwarzenegger's movie when he plays a cop who goes undercover as a kindergarten teacher, and ultimately quits his policeman job to teach kindergarten on a permanent basis.

This recession has brought employment down over six million. By industry, these losses are disproportionately in construction and manufacturing. By region, these losses are disproportionately in Nevada, California, Arizona, Florida, and other housing cycle states.

Although I do not agree with it, a reasonably coherent theory that says that the government can raise employment by hiring idle resources. So, in this recession, an effective way to raise employment would be to create jobs in those industries and regions with people without work (whether raising employment passes a cost-benefit analysis is another story).

The stimulus bill does not do that. Instead, it spends a lot in industries and regions with few if any employment losses.

Econbrowser now claims that the stimulus bill can be effective, because unemployment rates are high (whatever that means) in health care and education. Let's take a look at employment changes Dec 2007 - June 2009 (millions) by industry:

How exactly is fiscal policy going to create 3.5 million jobs by primarily hiring people in education and health? I see only two scenarios, both absurd and/or dishonest:

[Jul 26, 2009] Econbrowser Looking for an exit

Should that allay any inflationary concerns people may have about the doubling in the size of the Fed's balance sheet? In a narrow mechanical sense, perhaps. It is true that the new assets have not yet shown up as an increase in the money supply, and it is true that the Fed has the power to prevent them from doing so in the future. But my concerns about inflation are not that the Fed would lose the ability to target a particular level for the money supply, and certainly are not concerns about the next six months, where I still see deflation as a bigger worry than inflation. Instead, my concern is that the current fiscal trajectory is fundamentally inconsistent with the Federal Reserve choosing to keep inflation under control. Both devices, ballooning of the Treasury's account with the Fed and enabling the Fed in effect to borrow directly on its own, are indeed as much fiscal measures as they are monetary. But to someone worried about the increasing co-mingling of monetary and fiscal policy, that blurring of the lines is not a reassuring development.

My specific worry is that we will eventually face a crisis of confidence in the Treasury and the dollar itself. It is true, as Bernanke suggests, that raising the interest rate paid on reserves in such a setting would be a policy tool that could be used in response. But it would be an unattractive measure to the point of perhaps being impossible to use in practice, for the same reason other countries have dreaded raising interest rates in the face of collapsing real economic activity and a flight from their currency.

I fear that the United States government is mistakenly assuming that it can borrow essentially unlimited sums without undermining confidence in the dollar itself. The real question of a successful exit strategy, in my opinion, is how do we extricate ourselves from the joint fiscal commitments currently assumed by the Treasury, the Fed, the FDIC, the Medicare and Social Security trust funds, and various and sundry implicit and explicit federal guarantees?

The answer, in my opinion, is not to be found in the Treasury doing even more borrowing on behalf of the Fed or the Fed doing even more borrowing on behalf of itself.

[Jul 26, 2009] Shock and Audit The Hidden Defense Budget Mother Jones

The Office of Management and Budget calculates a total for defense spending throughout different parts of the government (it includes money allocated to the Pentagon, nuclear weapons activities at the Department of Energy and some security spending in the State Department and FBI). In the 2010 budget, that figure was $707 billion, more than half of the government's discretionary spending for the year. (Discretionary spending is the money that's appropriated every year by Congress, rather than entitlement programs like Medicare for which funding is mandatory).

But the real number is even higher, because, among other things, the OMB doesn't count supplemental spending on the wars in Iraq and Afghanistan.

[Jul 25, 2009] 5 rules for post-recovery investing - MSN Money by Jim Jubak

Jubak's Journal

The Federal Reserve, which I'd place among the optimists on this issue, says full-trend growth isn't going to be the 3% annually of the pre-crisis economy but more like 2.5% or even as low as 2%. Harvard University economist Dale Jorgenson, who taught Fed Chairman Ben Bernanke, projects just 1.6% annual growth through 2030.

If Jorgenson is anywhere near correct, the Great Recession would make the Great Depression seem like a picnic to many people. Is there any reason to think these projections might be right? Unfortunately, a lot of evidence argues in favor of a very slow and tepid recovery:

Why you won't like the recovery - MSN Money

The U.S. gross domestic product, the value of all the goods and services produced in the country, is expected to grow 1% before the end of the year. But that's not enough to change some of the most daunting problems of this recession: high unemployment, stagnant wages and depressed asset prices.

"The bottom line for the typical consumer is: Just because Wall Street is having a party doesn't mean you are going to get your job back," said Christian E. Weller, a senior fellow and economist with the Center for American Progress, a nonpartisan policy research institution.

My Latest Huffington Post Column: 'Wall Street's Gains Equal Main Street's Loss?'

Below is my latest column for the Huffington Post, entitled "Wall Street's Gains Equal Main Street's Loss?":

Stock prices have been on a tear lately, bolstered by quarterly earnings reports that have in many cases outpaced expectations and growing optimism that the worst of the crisis-cum-downturn is behind us.

The S&P 500 index, for instance, is up more than 40 percent since its early-March lows, while the technology-laden Nasdaq Composite has scored a 13 percent gain -- and, through yesterday, a 12-session winning streak -- in the last two weeks alone.

Ordinarily, a bull run like this would be cause for optimism, on the belief that savvy investors see a light at the end of the tunnel. But in the currrent environment, could the good news that is powering share prices be bad news for the economy?

Consider the following recent reports from a cross-section of corporate America:

In sum, while a growing number of investors seem to believe that Main Street is on the mend, many of corporate America's senior executives -- who are normally not prone towards pessimistic outlooks -- are maintaining that they see no real evidence of a revival where it counts -- on the ground.

In fact, amid an almost single-minded focus on reported earnings results, many of which only appear favorable in comparison to the low-ball, company managed estimates that clueless analysts have come up with, Wall Street hasn't been paying much attention to just how dicey things look at the top of the income statement.

Yet as Karl Denninger of The Market Ticker and others have noted, many of the companies that have "beaten" expectations so far this season -- including several of those listed above and others such as United Technologies, Halliburton, AT&T, and Amazon -- have reported flat or falling revenues, with year-over-year declines in some cases of 30 percent or more.

One reason why so many businesses are apparently benefitting amid softening sales comes down to aggressive cost-cutting. They are slashing jobs, paring wages and benefits, scaling back capital expenditures and valuable R&D, and putting constant pressure on suppliers to reduce prices, forcing each of those in turn to do the same.

While such measures can provide a short-term boost to profits, it is revenues -- money coming in the door -- that keeps businesses growing -- and the economy humming. Morever, even where firms are seeing notable improvements on the bottom line, odds are that few will be looking to boost hiring without seeing solid evidence that sales are also picking up.

Finally, racy bull markets often provide a shot of growth-stoking confidence, encouraging owners and managers to think and act expansively, and investors and lenders to pony up funds that can help turn big plans into profitable opportunities. Not this time, however. The U.S. economy, slammed by the biggest financial crises this century, remains in a vulnerable state, and it is still exposed to numerous potholes and shocks, many of which are just now unfolding.

Among other things, the commercial real estate market is starting to implode, lending conditions are worsening and many credit markets remain frozen, no small number of financial institutions, including commercial lender CIT Group, are close to failing or are utterly dependent on continued public largesse, and, as noted above, employers are shedding jobs, not adding them.

Unfortunately, because stock market investors have decided to ignore reality in favor of false hopes and quick fixes, the euphoria they've spawned may inhibit at least some Americans from taking the steps necessary to cope with the challenging environment that companies like General Electric, Microsoft, UPS, WPP, Texas Instruments, 3M, and others still see around them.

Given all that, you might say that Wall Street's gain is their loss.

Smart Investors Are Only Mostly Dumb By Paul Kedrosky

Why economic researchers are so dumb ?  Questionable approach, wasted paper...
July 24, 2009

Cute new paper out arguing that some of the stupid human tricks usually ascribed by behavioral finance sorts to self-destructive investor behaviors may not always and everywhere be so dumb. Maybe they’re just mostly dumb.

The recent behavioral literature has shown that individual investors hold concentrated portfolios, trade excessively, and exhibit a preference for local stocks.

These results are puzzling because in all three instances portfolio distortions could reflect either an informational advantage or psychological biases.

In this study, we propose a demographics-based proxy for smartness and show that the portfolio distortions of "smart" investors reflect an informational advantage that generate high risk-adjusted returns.

In contrast, the distortions of "dumb" investors arise from psychological biases because they experience low risk-adjusted performance. When we do not condition on the level of portfolio distortions, the average net performance of smart investors does not beat passive benchmarks, but smart investors outperform dumb investors by about 3 percent annually on a risk-adjusted basis.

Further, when portfolio distortions are large, smart investors outperform the passive benchmarks by about 2 percent and the smart-dumb performance differential is over 5 percent. We also show that a portfolio of stocks with smart investor clientele outperforms the dumb clientele portfolio by about 3.50 percent annually. Taken together, these results indicate that both behavioral and information-based explanations for observed portfolio distortions are appropriate, but they apply to groups of dumb and smart investors, respectively.

Source:

George M. Korniotis and Alok Kumar, “Do Portfolio Distortions Reflect Superior Information or Psychological Biases?,” SSRN eLibrary (July 16, 2009), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1018668.


 

Growth Forecasts after the Great Recession

nomorespendingplz

1st 100 days - There are 2.9 million more people unemployed in May than there were unemployed in January. The unemployment rate went from 7.6% to 9.4%. Since May 2008, we have lost 5.5 million jobs. The biggest losers were:
Manufacturing 1.5 million lost
Finance & Prof Serv 1.5 million lost
Construction 1.1 million lost
Retail & Leisure 1.3 million lost

good finance articles http://www.bit.ly/12NCJR

Rob Dawg

Consensus peak to trough real GDP decline of less than 4%? I don't need to read any further to know we are off this chart. Besides, all the "good recoveries" in the red circle are 30-50 years old.

Economists are strange people. I'd trust Conjure's dog bones and fetishes first.

Scrooge McDuck

Commercial mortgage delinquency up 585%

Delinquencies on commercial mortgage backed securities soared $10 billion in June, hitting a 12-month high of almost $29 billion, according to Realpoint Research.

California led the nation with the highest amount of delinquent loans, closely followed by Texas and Florida.

Late loans across the country are up an “astounding” 585 percent from a year ago when just $4 billion were delinquent, reported the Horsham, Pa.-based research firm. The low point for delinquency was March 2007 when $2 billion was delinquent.

Take a name asswipe

According to calculations by Martin Weale of the National Institute for Economic and Social Research the profile of the current recession is now almost identical to the decline in Britain's output between 1929 and 1931. The 5.6pc contraction over the past year almost matches the 5.8pc fall in the year preceding the second quarter of 1931, during which Credit Anstalt in Austria collapsed, triggering a second wave of economic seizure across Europe.

The recession is far deeper and more severe than those of the early 1980s and 1990s, Mr Weale added.

"Gordon Brown is now competing with Ramsay MacDonald – not a comparison he would much like," he said. "It looks as if we are pretty much tracking the 1930s,
http://www.telegraph.co.uk/finance/financetopics/recession/5901961/Briti...

Tim waiting for 2012

Fact Check

between 1946-1983 spending was 63% of GDP

1983-2007 spending was just over 70% of GDP

If savings rate goes to 7% or 10% that would eliminate 1-1.3 Trillion 07' dollars from GDP and thus a 7-10% decline in GDP.

Tim waiting for 2012

Black Dog

A lot of the stimulus package was tax cuts which I argue offer cheap short term thrills and more pain down the road. Companies large and small benefited greatly from the tax cuts. This will be temporary and is already factored in to forecasts

Broward

Most people who are comfortable as I am sure you are would choose not to spend esp if things look uncertain for the future. Also boomers have to think about their health, wear and tear.

... ... ...

You are right that consumption increases after 65 for some people but in the form of medical costs and you know that the gov't picks up most of that tab through Medicare.

So gov't will definitely have to increase spending from where we are know. Budget deficits will grow making Japan's balance sheet a thing of envy. We may be already there.

... ... ...

Scrooge 

Large companies like IBM are now accelerating "outsourcing" b/c their margins are coming under pressure

Quality matters less when you are talking about near term executive survival.

... ... ...

Lawyer Liz

63% was the average from 1946-1983. That was before teens had credit cards but the country was much younger then and wages steadily increased over that time

Now with the country aging and wages flat to down since 1983 I'd say it can go down to 58-60% easily. That is why I expect a 9-12% decline in US Gdp overall.

Liz I pitched this to CR and he says "no way" So I take it for what it is.

 

Fed Watch: The Debate Continues

Tim Duy looks at the shape of things to come:

The Debate Continues, by Tim Duy: The debate over the shape of the  recovery continues unabated.  Equities, at least this week, are voting in favor of the V-shaped recovery, with the Dow pushing past the 9,000 mark for the first time since January.  Never one to accept good news at face value, Nouriel Roubini predictably took the opposite position:

A “perfect storm” of fiscal deficits, rising bond yields, “soaring” oil prices, weak profits and a stagnant labor market could “blow the recovering world economy back into a double-dip recession,” he wrote in a research note today. “It is getting more likely unless a clear exit strategy from the massive monetary and fiscal stimulus is outlined even before it is implemented.”

Roubini, chairman of Roubini Global Economics and a professor at NYU’s Stern School of Business, predicted that the global economy will begin recovering near the end of 2009. The U.S. economy is likely to grow about 1 percent in the next two years, less than the 3 percent “trend,” he said.

Roubini based his short-term outlook on the worsening condition of the U.S. housing and labor markets, which he called “inextricably linked.” He said a “weak” job market will contribute to another 13 percent to 18 percent drop in house prices, bringing total declines nationally to as much as 45 percent from their peak.

I would add to Roubini's pessimism that  bond market investors as of yet do not share the optimism of their brethren in the equity side of the industry.  The run up in yields that brought a 4-handle to the 10 year Treasury appears to have been stopped dead in its tracks, and that maturity has pulled back to the mid threes.  If the run-up in yields foreshadowed a burst of optimism in equities, the pull back would suggest that this rally has nearly run its course.

 The challenge here is two-fold.  The first challenge is to determine how much of the recent equity run is attributable to the weight of evidence that indicates the worst of the downturn is behind us.  With the Armageddon trade off the table, some gains were inevitable, just as was the rise in Treasury yields.  The more difficult challenge is the strength and pattern of the subsequent recovery.  To be sure, one should not ignore the possibility of a blowout quarter here and there, as GDP data can bounce quickly to bounces in underlying data such as a stabilization in auto sales.  But will such a bounce reflect fundamental underlying strength?  A slow, jobless recovery - my dominant scenario - would most likely produce the seesaw trading we saw in the wake of the tech bubble crash, a pattern that held until the housing bubble gained full traction.  Such an outcome looks consistent with the sentiment of Federal Reserve Chairman Ben Bernanke in this weeks Congressional testimony:

Despite these positive signs, the rate of job loss remains high and the unemployment rate has continued its steep rise. Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.

Later, during questioning, Bernanke reiterated:

What will the recovery look like?  Slow. “The American consumer is not going to be the source of a global boom by any means,” Bernanke says.

Sounds like he tends toward the low end of the FOMC's range of forecasts, and suggests, talk of withdrawal of various monetary accommodation aside,  this looks like a reasonable forecast:

BlackRock Inc., the biggest publicly traded U.S. money manager, recommends buying Treasuries maturing in two to five years on expectations the Federal Reserve won’t raise interest rates this year.

“They still see potential downside risks to growth,” Stuart Spodek, co-head of U.S. bonds in New York at BlackRock, said in a Bloomberg Television interview. “The Fed is not going to tighten. It has referenced keeping rates low for an extended period of time.”

With unemployment rates still headed north, it is tough to see the Fed tightening within the next twelve months, if not longer.  But will the job market surprise us?  No clear indications can be gained from initial unemployment claims data which, although battered by unusual seasonal patterns, overall remains consistent with further drops in nonfarm payrolls.  Indeed, this would be consistent with recent patterns of recession.  David Altig declares:

...I'm quite sympathetic to DeLong's theme that the dynamics of U.S. labor markets coming out of recessions appear to have changed starting with the 1990–91 economic contraction. And it might be hard for many people to argue with DeLong's point that the U.S. economy is likely headed toward another so-called "jobless recovery." But until more facts are in and we're able to look back on what transpired, I think we still, at this point, must reasonably count the current run-up in the unemployment rate as a puzzle.

In the comments from my last piece, reader spencer takes a different perspective, noting that forecasters have tended to underestimate the strength of recoveries, and further notes that recent moderate recoveries have followed atypical mild recessions.  The current recession, however, is more typical of the pre-1990 variety, and, as such could be expected to yield a rapid recovery.  A logical analysis from a long-time observer of business cycles; as always, one should have such an outcome on their continuum of possible events, but I tend not to be particularly sympathetic to the mild recession, mild recovery, big recession, big recovery analogy.  It seems to be that a cursory look at the data suggests something very different is happening in the labor market and thus the strength of recoveries since the early 1980s.  Look, for example at the pattern of durable goods manufacturing payrolls:

FW0724093

Previous to 1990, durable good jobs snapped back quickly, but that began changing after the 1980 recession, first with a muted rebound, than a slow return after the 1990 recession, and then with no return after the 2000 recession.  That lack of rebound alone cost the recovery roughly 2 million jobs - and it seems that if the downturn was only mild, we should have expected these jobs to return.  We will lose another 2 million at least by the time the current downturn is complete.  Does anyone think these jobs are coming back?  Anyone?
 

Likewise, nondurable goods manufacturing tells an even worse story:

FW0724092

In previous cycles, a rapid bounce, but simply an outright cliff dive since the mid 1990s.  Again, do we think this trend will be reversed in the upcoming recovery?  Another, albeit smaller sector:

FW0724091

To be sure, information services was coming off a bubble, but stability in the sector remained elusive even at the peak of the recent cycle.  

These patterns suggest to me that the last fifteen years has seen intense structural change such that even mild recessions result in permanent dislocations.  I have trouble that in the midst of such ongoing structural change a deeper recession will result in a less permanent dislocation.  No, I suspect many of these jobs are gone for good, placing an additional weight on the job market during the recovery.  Simply put, the danger is that in even a moderate recovery, the remaining expanding sectors will lack sufficient strength to compensate for these permanent losses. 

Anticipating the comments, another way some might describe the patterns in the labor markets during recent recessions is that a variety of economic policy decisions by both Democratic and Republican administrations have had the impact of dismembering the industrial base of the US without encouraging the growth of sufficient replacement jobs, thereby throwing the American middle class under the train.  That, however, is such a dark interpretation, as opposed to say, cheering the efforts of policymakers to lessen the burden of work on Americans by encouraging foreign nations to forsake their own consumption to provide goods for our citizens.  

Bottom Line:

Recommended Links

AndyfromTucson says...

I personally think looking at what happened in past recessions is not very helpful for predicting the future. To paraphrase Tolstoy, happy economies are all alike, every unhappy economy is unhappy in its own way.

What I prefer to look at is what are the prospects for increasing consumer demand in the next few years, because in an economy that is two thirds consumer demand that is where any recovery is going to come from. And when I look at US consumers I see households with the worst balance sheets in a very long time (if not ever), who had a zero savings rate for the last few years and so can only go down in consumption as a percentage of income, who own more cars than there are licensed drivers, who live in houses much bigger than their parents lived in, and who have stuffed storage units with the all the stuff they bought that they didn't really need. Do we really expect to see a surge in new consumption from these households? Is the next boom going to be fueled by a fashion for 4,000 sq. ft. homes instead of 2,500 sq. ft. homes? Or a fashion for drivers having a different vehicle for every day of the week? Or a fad for buying goods and putting them directly into storage units instead of the previously traditional 6 month stay in the home before they are put into storage? What exactly are we expecting the US consumer to surge out to buy, and where are they going to get the money to buy it?

ken melvin says...

Andy, i like the cut of your thinking. History is always overrated and, in times when the underlyings are so changed, it's mostly meaningless. There is no reason that any recovery will look like the one of the 30ss, the 70s' or even the 80s and nineties. Our economy has been based on spending our savings of whatever form for the past 30 years to buy stuff we don't need that was more and more made offshore - nothing to buy the stuff with and even it there was it would come from China and do our only do our economy more harm.

Beezer says...

I think structural change isn't quite the right way to describe what's happened.

We've destructed our economy: Taken it apart one piece at a time over the past three decades and now find ourselves with nowhere to go to work.

The "trigger" for getting out of all this is constructive change. So where is that going to happen, pray tell?

Energy transformation will be one trigger. The innovation unleashed from this will boost one of our already growing export segments. Environmental preservation technology will be a trigger boosting yet another growing export industry.

Health care reform will be trigger in that it will reduce government deficits and free money up for productive investment elsewhere.

Transportation reform will be a trigger as we segue from a car/truck dominated economy to one more balanced by trains and mass transit.

There's plenty to do. We're going through the initial phase where jobs are lost, but haven't yet entered into the replacement phase where new jobs, new opportunities, are forthcoming.

RN says...

One thing you miss is the effects of the overly strong dollar/pegged Yuan. I think it's a huge mistake to look at the US in isolation.

I'm increasingly optimistic because the number of problems a devaluation of the dollar would help with seems to be growing. Helping the US export sectors and lowering the debt burden are the two big obvious ones, but there are many others, like moving to alternative energy solutions as the price of oil would rise.

It now seems that the world we're looking at is the remnants of the results of an excessively strong dollar: excess consumption, a hollowed out manufacturing sector, debt levels, deflation, etc. And that many of those problems could be alleviated concurrently by going in reverse: by some sort of controlled devaluation.

The world would kick and scream, especially China. But they'd be wrong to do so.

China needs the US to be a healthy consumer. But the US consumption will not go up while people are scared to death under huge debt levels, restrictive credit, and with 400k+ jobs bleeding away every month. If the export sector can rebound, the employment numbers stabilize and improve, the US will begin to consume again. China would be smart to take some capital losses now in order to allow the building of a sustainable market for its goods later.

Confidence is a huge component in the willingness to take risk. As long as all these imbalances persist, fear will reign. But growth comes only with risk-taking. And we all desperately need a return to growth.

It's time for all parties to realize that these imbalances unwinding is in everyone's interest.

I think over time this will become an increasingly clear and politically palatable solution to policymakers.

 

[Jul 24, 2009] FT Alphaville » Blog Archive » Goldman sheds bail-out legacy

Selected comments

tom a taxpayer

The taxpayers

1) give Goldman Sachs $12.9 billion free thru AIG, and

2) provide Goldman Sachs a $10 billion TARP loan: total $22.9 billion.

Goldman Sachs repays $11.4 billion for the loan. Taxpayers suffer a 50% loss ($11.5 billion).

Goldman Sachs prefers to think of it as a 23% return to taxpayers, record quarterly earnings of $3.4 billion for Goldman Sachs, and setting aside $6.65 billion for record bonuses and benefits for Goldman Sachs.

But this does not even begin to account for the hundreds of billions in $ and benefits that the feds (and unwitting taxpayers) have given Goldman Sachs over past few decades. Here's just a few recent examples mentioned in the opening prayer at a recent GS board meeting:

"Thank Hank Paulson, the Godfather, for killing our competitors Bear Stearns and Lehman, for knee capping Merrill Lynch, for saving our behinds from billions of $ of counterparty risk at Fannie, Freddie, and AIG. Thank Hank for colluding with the Fed to allow us to become a bank holding company, giving us access to vast pools of money when we were about to go bankrupt. Thank Hank, truly a family man, for allowing the Goldman Sachs family to control key positions at the U.S. Treasury and to advise him on how best to fleece the taxpayers."

For Goldman Sachs to brag about a "profit" of $1.1 billion to taxpayers when GS is the ringleader in the mob that raped and pillaged the mortgage industry, ruined the housing market, destroyed the credit system, endangered federal/state/municipal financing, pension funds, and the banking system, sent the economy into a downward spiral, endangered the world financial system, extorted the U.S. and the world to pay them billions in ransom or face the destruction of the world financial system and economy, and now are costing taxpayers hundreds of billions, even trillions of $ is beyond chutzpah...it is despicable.

[Jul 24, 2009]FT Alphaville » Blog Archive » Re-Remic-ing the Talf

Re-Remic-ing the Talf

Commercial real estate has, rather suddenly, become the new doom-spot for the US economy.

Fed chairman Ben Bernanke is worried about it, Morgan Stanley and Wells Fargo posted losses because of it, and S&P is confusing everyone about it.

The ratings agency’s sudden about-face on downgrades for certain triple A-rated CMBS, in particular, caused a bit of a furore on Wednesday. S&P had previously warned that it might downgrade billions worth of CMBS because of proposed changes to its ratings-methodology for the securities. That sent ripples through the CMBS market, especially since only AAA-rated CMBS is eligible for the Federal Reserve’s Talf programme, aimed at supporting ABS issuance.

... ... ...

Structured finance to the rescue!*

*(Because it worked so well the last time).

Welcome to Economic Hell -- Seeking Alpha by Karl Denninger

The last week or two I had noticed that the /DX (dollar index) had a somewhat-odd correlation to the stock market - one that had not been present to the same degree, if present at all, before.

Specifically, it would move just before the /ES - S&P futures - moved, and the correlation between the two was almost lock-step.

I had mentally blocked out the worst of the possibilities until last night, when it was said right up front by a user who had lunch with a banker in Australia: The dollar has become a carry-trade funding currency; he was executing an increasing number of these trades with the dollar.

We are following Japan's script almost exactly, but our trip down this road will be far worse than it was for them, because as a nation we are monstrous net importers and in tremendous debt, both as consumers and as a government, where Japan is a net exporter and their population is full of savers.

Tuesday I wrote about the dollar decline powering this latest ramp job in equities, but this development, if it has become widespread, is a major problem for The United States, and opens the yawning maw of a trap that we will find it tremendously difficult to escape from.

Japan has been essentially trapped at zero interest rates and moribund economic growth - essentially zero - for more than a decade. The Carry is a big part of that, as it depresses the currency, since the carry is essentially a short on the funding currency. As traders press those bets the currency comes under increasing pressure, which increases import prices (but makes exports more attractive), draining resources from the "host" country that has become the funding currency.

Putting a stop to it means raising interest rates even if the consequence would be a severe economic recession or worse, and the longer it goes on, the worse the damage in the form of structural distortions in the economy is. But refusing to raise interest rates means that not only does the distortion continue but the damage from ZIRP continues as well - borrowing no longer becomes a function of interest cost .vs. marginal utility but rather simply a matter of whether you can find someone that will let you borrow at all.

Carry trades can also unwind due to exogenous (not interest-rate) pressures - should there be a sharp upward spike in the dollar these trades suddenly (and very painfully) go "underwater" as the currency translation is an integral part of the profit (or loss) in the transaction. This "unwind" feeds on itself as to liquidate the carry you must buy dollars, which in turn adds yet more upward pressure on the currency, which makes the spiral tighten even more. This is what happened to Japan over the last year as the crisis deepened, and it decimated their exporters (and stock market) last year.

The paradox is that you'd think this would create tremendous inflationary pressures. But that's not what has happened in Japan - they wound up with incredible deflationary pressures instead, because consumption became much less desirable than export! As such the policy "prescription" becomes yet more easing, but with interest rates at zero the policy folks are left scrambling for yet another knob to turn of some sort.

In the United States this will be ugly, because we're not an exporting nation. Instead of being able to "prefer" export we are instead likely to find quite-crazy ramps in certain import prices, specifically oil. That in turn makes economic recovery nearly impossible, as it sets up even more structural dollar flows out of the country.

Nor is this supportive of asset prices in the intermediate term. Sure, it looks good when you get a 7% stock market rally when this begins, but have a look at the Nikkei - their market topped at 40,000 and has never been anywhere near there since. Real estate prices have not recovered their previous highs and remain moribund, and the former "never get laid off" Japanese economic model has been laid waste, with generations-long policies abandoned as simply unworkable.

This is something we should not have allowed to happen but we now have, and it is now incumbent on The Administration and The Fed to put a stop to it before it becomes pervasive. Determining exactly how much "carry" is out there is difficult; if The Fed has a handle on this they sure aren't going to divulge it, just as Japan's Central Bank never has, but the impact, especially when you get forced unwinds, are vicious and impossible to ignore.

For those who said "we won't make the mistakes Japan did" let me point out that we have indeed made all of the same mistakes and now we're getting the same results.

Why is it that Einstein's exhortation continues to echo in my head?

Insanity is doing the same thing over and over but expecting a different result.

[Jul 23, 2009] Who Rules America Pension Fund Capitalism

Any lingering thought that many public pension funds were not much more than happy hunting grounds for Wall Street sharks came crashing down in 2008-2009 as it became clear that public officials, pension fund managers, and political operatives had been for all intents and purposes bribed by rich financiers who wanted the opportunity to take big risks, and make huge profits, with government employees' money. With 40% of all public pension funds investing some of their money in hedge funds in 2008, a cool $78 billion overall, they were a huge source of investment funds for hedge fund managers (Wayne, 2009b),

In addition to large losses for some pension funds due to the risks taken with their money, there were legal problems and scandals for Wall Street bankers and their political go-betweens as it was discovered that criminal activities were part of the picture. For example, in April, 2009, a hedge fund executive pleaded guilty to securities fraud after admitting that he had been paid a stunning $5 million for helping to make it possible for the politically well connected Carlyle Group (an "equity fund" that invests large sums of money for wealthy people) to invest $500 million of New York state pension funds in an energy investment fund managed jointly by Carlyle and another private equity firm (Hakim, 2009; Wayne, 2009a). There are several other such scandals that could be recounted here, and many more that will have surfaced after this document has been completed and on this site for a year or two. It is like a re-run of what happened with "other people's money" in the first ten years of the twentieth century and then again in the 1920s.

As of 2007, institutional investors owned 76.4% of the stock in the 1,000 largest U.S. corporations, an all-time high, up from 46.6% in 1986 when the institutional investor movement began. The list of institutional investors now includes investment companies, mutual funds, hedge funds, insurance companies, banks, and foundations and endowments as well as pension funds. Strikingly, public pension funds only control 10% of these assets, double the percentage they had in 1985, but not much more than the 8% they held in 1994 (Brancato & Rabimov, 2008). Even if public pension funds had the political independence and will power to try to influence corporate boards, they don't have enough assets to make a push without allies. As for their best allies, the union pension funds, they have been decimated for the most part by downsizing, off shoring, and corporate failures in major manufacturing industries.

Conclusion

No one can be 100% sure, but it seems highly unlikely that institutional investors from public employee and union pension funds ever will be able to create a coalition of institutional investors that could do anything more than chide, chastise, or confer with directors and executives from the large corporations in which they invest. They are not a threat to the current power relations in the corporate community. They actually play their largest role when rival private investors vie for their voting support in takeover battles, or when they agree to take part in the profit-making schemes hatched by billionaire financial firms. However, in spite of all their defeats, the Council of Institutional Investors and the Corporate Library still soldier on, hosting meetings concerning "good corporate governance," providing hopeful interviews to newspapers and magazines about the likelihood that things are going to change soon, and selling their advisory services to institutional investors. They are gadflies who do well while doing good.

Looking back at the most vigorous days of the movement, from roughly 1988 to 1993, very little was accomplished. It is now possible for small stockholders to communicate with each other more easily, thanks to a ruling by the Securities and Exchange Commission in 1992, and corporate executives more readily meet with institutional investors. However, no stockholder resolutions relating to corporate governance came close to passing during or after the heyday of the movement. Even the most positive assessments of this activism conclude that it had "negligible" effects on the major issues that ostensibly motivated it, higher earnings and higher share prices (Karpoff, 2006)

[Jul 22, 2009] Jamie Dimon v. Larry Summers

  1. Michael Brenner

    The administration’s response to the financial crisis has been irresponsible in two respects. One, it has taken the well-being of the biggest institutions as its principal point of reference. Two, its ramshackle approach does little if anything to resolve the structural flaws in the system and their deleterious effects on the general economy (even when it functions on its own distorted terms).

    The blame should be placed squarely where it belongs: in the Oval Office. Let’s summarize the record.

    1. Obama knowingly appointed as his senior officials people who were intimately connected to the old system – professionally and intellectually. That is one.
    2. He exiled Paul Volcker because Volcker had convictions and ideas that ran against the grain of Obama’s own thinking. That’s two.
    3. Obama gave no support to promoters of bankruptcy law reform or a workable program to aid home debtors in risk of foreclosure. That’s three.
    4. Obama has curried favor with the big boys on Wall Street while savaging the managers of GE and Chrysler. The latter were poor executives but neither dishonest nor calculated schemers at the expense of the public interest. He clearly identifies with the former socially and intellectually. That’s four.

    The sad conclusion is that Obama, for all the razzmatazz, is a conventional thinker, instinctively deferential to the powers that be, and uncomfortable with those who have both his level of intelligence and convictions about dedication to the commonweal that are totally foreign to him.

    cheers,
    Michael Brenner

  2. OregonGuy

    Not sure about the “vs” in the title. The more likely scenario is Summers and Dimon laughing together over the need to placate the sheeple with a “reform”. They agree on a toothless Consumer Protection Agency as the least bad (for bank interests) of the available options. As agreed, Dimon strenuously objects in public that the CPA will “destroy banking as we know it” as a smokescreen.

    Business goes on as usual. Summers collects millions in “consulting” fees from Wall Street when he leaves Government. Dimon buys a bigger yacht and gets that G5 he’s always wanted.

  3. paul94611

    Whatever Diamon or Blankfein want, they get. It is these two bankers who run America, not the president or anyone else. If these two do not want consumer protections, true regulation of derivatives or an audit of the Fed then these thing will not happen. Or, not happen in any way that will actually accomplish anything but to transfer risk from the banks to the government for failures to act in the future. Everyone already knows that Larry Summers is just another Washington water boy so why listen to, or print anything he has to say?
     

  4. bayardwaterbury

    You know, there has been much rhetoric justifying the continuation of “business as usual” in Financial America (e.g. profits, bonuses, etc.). When Larry pretends to talk tough, we all get the idea. He has to feign concern. He has to defuse criticism (from all sides) relating to the result of such massive government intervention. I, of course, don’t buy any of it, UNLESS he puts some teeth in it: make the banks offer top dollar for the now valuable warrants, and, if the old practices continue, threaten to pull all government guarantees (since the industry is now riding on the good faith of the American government to profitability — although recent analysis makes those profits look like a one-time financial sleight of hand).

    Tough talk to the Plutocrats seems such a waste of breath. But the tragic ballet is entertaining!!

  5. Katharine

    vilify – 1. To make vile; debase; degrade….
    (Webster’s 2nd International)

    No, bankers should not be vilified, yet they have done this to themselves for a long time now and show no sign of stopping, hence the need for external restraints.

[Jul 22, 2009] Is Obama Gorbachev - Clusterfuck Nation

An interesting jeremiad ;-) One quote: "The way I see it, Mr. Obama just doesn't have much time before his authority and legitimacy slough off and he is left with only his genial smile."

As president, Barack Obama is faced with the essential fraudulence and unreality of the US economy.  Notice that, as ominous as they are, the wars in iraq and Afghanistan have generated only minimal protest so far in the early Obama period, despite the fact that they are not operationally different from their conduct under Bush. There is no protest because, for now, a consensus exists that our troops are in these places for perceived reasons -- to keep Mideast oil supply lines open... to keep Islamic maniacs busy in their own backyard instead of on US territory... to keep Iran in a vise... to maintain the American "empire" (take your pick). There's something there to appeal to a broad majority of US voters. Unlike Vietnam, Iraq and Afstan are not perceived as out-and-out frauds.

But the economy is.  Since September of 2008, when Hank Paulson began shoveling bail-outs to the very banks who screwed the world on fraudulent and unreal securities, and left American society comprehensively bankrupt, the consensus has only deepened on the perception of an historic swindle. And so far, President Obama has positioned himself as chief enabler to further swindling. One need look no further than the rulings this past spring of the Financial Accounting Standards Board (FASB) as authorized by the Securities and Exchange Commission (SEC, an official government agency, created 1934), which have allowed the biggest banks to pretend that the fraudulent paper in their vaults does not have to be recorded as a loss on their books.

The US economy is now dying a slow and painful death because it had become based on activities that had nothing to do with producing real wealth. Instead, it became dependent on rackets, that is, behavior geared to getting something for nothing.  These rackets are often summarized under the acronym FIRE (for finance, insurance and real estate), a system set up to strip-mine profits from the wish commonly labeled "the American Dream" -- itself largely a product of televised advertising and propaganda.  The end product of all that was the doomed economy of suburban sprawl, an infrastructure for daily life with no future in a world defined by fossil fuel scarcity. The unraveling of debt at every level now is directly related to the mis-investments made in that way of life.

By now, it's self-evident that the "change" voted for in November's election was too horrifying to articulate.  It still is.  The suburban sprawl economy was all we had left.  Now it's gone and we're stuck with all its deleveraging after-effects -- the worst case of "buyer's remorse" since the fall of Nazi Germany. Thus, the only "change" that President Obama can really work for is the health care system, which is a life-and-death matter. The sordid rackets so ostentatiously infecting the system boil down vividly to lives ruined and bankrupted, and a system more frightful to deal with than disease itself. Probably the baseline truth is that health care will end up being rationed one way or another. It's another prime symptom of population overshoot, and a reminder that life is tragic.

As another blogger put it so nicely last week on the web (sorry, but I forget who or where), this isn't a "recession," it's a collapse. The excellent Dmitry Orlov has outlined the process very nicely in his book "Reinventing Collapse" about the parallels between the demise of the Soviet Union and the prospects for demise of the US as currently constituted.  Mikhail Gorbachev presided over the Soviet collapse. He must have been a leader of very subtle abilities.  Not only did he survive to enjoy a busy second act of life with a Nobel Prize in his pocket, but he accomplished a nearly bloodless transition in a society long-conditioned to bloodletting as the primary political act.

Here in the USA, where we have had over two hundred years experience with peaceful power transitions -- even during the convulsions of 1860-65 -- the outcome this time might not be so appetizing. It would be one of the supreme ironies of history if it turned out that the US was incapable of ending its most self-destructive rackets peacefully and bloodlessly, while the Russians shucked off its Soviet racket like an old sweater. 

The way I see it, Mr. Obama just doesn't have much time before his authority and legitimacy slough off and he is left with only his genial smile. The "hope" vested in him will end up in a Museum of Lost Hopes, along with the integrity of TV news and the rectitude of the medical profession. And funding for that museum will be cut by President Sarah Palin, representing Naziism US style -- i.e. Naziism without the brains

Selected comments

TedC

Reading the comments here for the last few weeks has really impressed, and depressed me about the number of people who really want a free lunch.

All this negativity about taxes, government, etc.. WTF? How about, when your house is on fire, you just STFU and put it out yourself? Fire engines aren't free, you know. How about we go back to nothing but dirt road cart tracks? who needs pavement?

I think most people are angry about feeling ripped off. The greatest joke, though, is that the people ripping us off have convinced everybody that it's the other guys fault. Nice to own all the media, isn't it?

Good luck, everybody. I think the bottom line is that this planet is good for about 1 billion people, max. Lotsa fun ahead getting to that number, for sure!

Randall Flagg

"This is analogous to the position Barack Obama now finds himself in. He was elected as the politician most trusted in America to change the fraudulent and unreal operations of the US government."

'Fraid not, Pal. Barak Obama was SELECTED by the filthy rich of this world to dupe the Murikan sheeple into believing that things would change for the better if they went to the polls and pushed the Diebold button for BO.

Hope is a waste of time, man. Nothing will change. Everthing and everyone is totally fucked. The horror is coming. If your not part of the filthy rich, equiped with your own SOG, Xe or special ops boys, you're going to be part of the hell on earth.

aszasz

"...it will be so bad by the next election cycle that palin will come through as the shining star..."

If Palin is on record having criticized Obama's policies that led to shit stew, why should she not be seen as "the shinning star"?

Obama currently holds office because he was the anti-Bush. Everything Bush was for Obama was against. Except he wasn't. He only said he was. Enough people believed him to elevate him to "shining star" status. Shit stew tends to dull the shine of the reigning star and add sparkle to the coming anti-Obama.

Cognitive Dissident

JHK, it is strange that you can be so perceptive about the pending US collapse but too simplistic about the USSR "transition". Of course the "Communist Party" is no longer in charge, but there is perhaps as much continuity as change - look at the lack of free elections or free speech, (geographically limited) imperial ambitions, power of the (ex-)KGB class, etc, etc.

In addition, unlike the unfolding US problems, the USSR collapse was NOT due to a lack of oil - if anything, a global excess which led to a reduction in oil revenues for a debt-laden Soviet state.

Finally, Gorbachev focussed on political "reform" while neglecting to fix the problems in the "real economy". Here, Obama is making the problems in the financial economy worse by bailing out the crooks, while the political reforms are quite cosmetic.

So - while I agree with your analysis of the situation in general - it seems that Obama is like Gorbachev only in terms of (a) "change" rhetoric and (b) leading the country to collapse by completely misunderstanding/ignoring/etc the fundamental problems, while being unlike in all other ways.

It all begs the question as to what extent either of them were/are doing this deliberately as part of a wider intention to allow the "Power Elite" to profit from a crisis as they have *always* done historically.

JHK, will you come off the fence on this one as it relates to Obama?

cowswithguns

If Obama is actually able to transition us peacefully like Gorbie did in the Soviet Union's twilight, I think that would be telling -- in a very bad way -- of what our country has become.

The looting of the treasury that has been going on since Bush -- and continues under Obama -- is so blatant and is going to have so many negative, real world ramifications (and all just to make some rich robber barons whole) that it would be surprising if at least a few banksters weren't tarred and feathered by a gang of unemployed carpenters during the transition.

Unfortunately, though, the masses don't understand blind credit default swaps, collateralized debt oblgiations, etc., and the victims of a collapse-induced riot are probably more likely to be akin to a poor immigrant family than some Bangkok-hooker-banging, old-lady-pension-stealing, worthless-401k-hocking well-dressed Wall Street thug.

Bullshit.

And speaking of Nazis, don't you think Germany would be recalled in a much more favorable light if its people actually rose up and killed Hitler, thus stopping the war? But they didn't, and woe be upon them for all of history.

Posterity, I fear, will judge us the same way. The masses are so tightly clinging to their soon-to-be-zeroed-out 401ks and their dreams of one day being a rich asshole that they don't want to do what's right -- stop the looting, starting with protests in all major cities.

But, nowadays, we're like cows -- to the slaughter. Or are we -- http://www.youtube.com/watch?v=FQMbXvn2RNI&feature=related

Also, regarding those who don't think Elliot Spitzer would make a good AG just because of his penis -- So what Spitzer was paying for some action? Illegal sure, but if he could have kept a muzzle on the Wall Street crooks and thereby salvage what's left of our republic, I would have gladly looked the other way. An overactive penis doesn't take away your legitimacy as a political leader, so long as you're a good one. And if Spitzer wasn't good, do you think he would have been taken down by the people who truly run this country (Wall Street)?

[Jun 22, 2009]  Why Jim Rogers Has Covered All His Short Positions

He said he would rather short bonds then stocks in the current situation....
CommodityBullMarket.com

"Because they are printing money," he says...and believes that stocks could go to very high nominal levels, while the currency becomes worthless.  

I was just catching up on Rogers latest media appearances, and found this video on CNBC from a couple of weeks back.

Jim's still pounding the table that we've got a currency crisis on the way...while giving a long, hard glare at the dollar as the prime culprit.

And of course, he still loves commodities.

Enjoy the video!

[Jun 22, 2009] Feldstein: Risk of Double Dip

Feldstein strikes me as probably the only more or less credible Reaganine (he was . Analyses provided by Feldstein is rather weak, but the conclusion is interesting and intuitively appealing as there is no forces that can sustain recovery after the effect of the stimulus disappear... 
Jun 21, 2009 | CalculatedRisk

From Bloomberg: Harvard’s Feldstein Sees Risk of ‘Double-Dip’ Recession in U.S.

... “There is a real danger this is going to be a double dip and that after six months or so we’ll have some more bad news,” [Martin] Feldstein, the former head of the National Bureau of Economic Research and Reagan administration adviser, said today in an interview on Bloomberg Television. “We could slide down again in the fourth quarter.”

The economy could “flatten out” or “even be positive” in the third quarter, and then it’s likely to contract again in the last three months of the year as the effects of the federal stimulus program wear off and companies finish rebuilding inventories, he said.

“There isn’t going to be enough to sustain a really solid recovery,” he said, even though recent data has provided some “good news” on the economy.

This was the key point of the Texas Instruments post yesterday (with conference call comments on inventory). There is a possibility of short term growth as companies rebuild inventories, but then an extended period of sluggishness since end demand is flat.

Selected comments

splat

DOUBLE DIP ?? The first DIP hasn't finished yet... talking about green shoots and putting on rose tinted goggles doesn't make things better.

We are seeing structural employment changes here, basically for the next few years there simply won't be the jobs, they'll have been offshored, outsourced and the existing employees expected to re-double their efforts just to stay in a job. In that environment even the middle class will have huge problems.

I'm just waiting to hear the talk of the a "triple dip" recessions from the usual economic nimrods.

- splat

Bob Dobbs

 "Step 3: Unanticipated, ongoing, revenue declines cause the budget crisis problem to get even worse... "

Absolutely agreed. The budget "agreement" itself is a success to the pols in that it buys time -- whether or not it ultimately works. "Pretend and extend" isn't just for banks.

nova

Stair steps are kind of a dip I guess.

MS

I think depression is too nice. As the Kunstler article points out (Obama=Gorbachev) it's not a recession or even a depression....it's a collapse.

Albeit in slow-motion.

Credit-

I hear ya! many other people did as well- I happened to get lucky and unloaded my SPY puts for almost a 90% gain the day before the whoosh up last week....don't get me wrong..it was luck pure and simple. Whenever you hear about technical patterns in the MSM you know it's a set-up.

Ciao
MS

Expected Returns

MS,

expected returns-

I think depression is too nice. As the Kunstler article points out (Obama=Gorbachev) it's not a recession or even a depression....it's a collapse.

I totally agree. The demise of the dollar is coming, which would be the event that precipitates any collapse.

[Jul 22, 2009] Goldman and JPMorgan -- The Two Winners When The Rest of America is Losing

July 16, 2009, 11:32AM
 

Besides Goldman Sachs, the Street's other surviving behemoth is JPMorgan. Today it posted second-quarter earnings up a stunning 36 percent from the first quarter, to $2.7 billion.

The resurgence of JPMorgan and Goldman Sachs gives both banks more financial clout than any other players on the Street -- allowing both firms to lure talent from everywhere else on the Street with multi-million pay packages, giving both firms enough economic power to charge clients whopping fees, and bestowing on both firms even more political heft in Washington.

Where are the antitrusters when we need them? Alternatively, why isn't the government charging Goldman and JPMorgan a large insurance fee for classifying both firms as "too big to fail" and therefore automatically bailed out if the risks they take turn sour? Instead, we've ended up with two giants that now have most of the casino to themselves, are playing with poker chips backed by taxpayers, and have a big say in what the rules of the game are to be.

When JP Morgan repaid its federal bailout of $25 billion last month it was, like Goldman, freed from stricter government oversight. The freedom has also allowed JP, like Goldman, to take tougher and more vocal stands in Washington against proposed financial regulations they dislike.

JP is mounting a furious lobbying campaign against regulations that would funnel derivatives trading through exchanges where regulators can monitor them, and thereby crimp JP's profits. Now the Street's biggest derivatives player, JP has generated billions helping clients navigate these contracts and assuming counter-party risk in such transactions. Its derivatives contracts were valued at roughly $81 trillion at the end of the first quarter, representing 40 percent of the derivatives held by all banks, according to the Office of the Comptroller of the Currency. JP has played down its potential risk exposure from these derivatives contracts, of course, but anyone who's been paying attention over the last ten months knows that unregulated derivatives have been at the center of the storm.

The tumult on the Street has also given both firms extraordinary market power. That's where much of the current profits are coming from. JP used the crisis to snap up Bear Stearns in March and Washington Mutual last fall, with the amiable assistance of the FDIC. The deals have boosted JP's dominance in retail banking and prime brokerage, enabling it to charge its corporate clients heftier fees for lending and other financial services, and to corner more of the market in fixed-income and equities. JP also bolstered its earnings by helping other financial companies raise capital following the stress test results in May.

Antitrust law was designed to prevent just this sort of market power and political heft. The Justice Department or the Federal Trade Commission should investigate the new-found dominance of Goldman and JP -- and, if warranted, break them up. Alternatively, Congress should impose a surtax on the newly-exclusive group of Wall Street firms, most notably Goldman and JPMorgan, which are now backed by implicit government bailout insurance guaranteeing that, should they get into trouble, taxpayers will keep them afloat. The surtax would approximate the economic benefit to these firms of such government largesse, which I'd estimate to be at least 50 percent of their profits from here on.

[Jul 22, 2009] Daily Kos Details Emerge of Atrocious CA Budget Deal

Jul 20, 2009

 It is important to bear in mind what voters actually want to see in the state budget:

The vast majority of voters surveyed said the state should balance both spending cuts and tax increases to address the state budget shortfall. Revenue options supported by a strong majority of voters include:

Increasing taxes on alcoholic beverages (75% support)

Increasing taxes on tobacco (74% support)

Imposing an oil extraction tax on oil companies just like every other oil producing state (73% support)

Closing the loophole that allows corporations to avoid reassessment of the value of new property they purchase (63% support)

Increasing the top bracket of the state income tax from nine point three percent to 10 percent for families with taxable income over $272,000 a year and to eleven percent for families with taxable incomes over $544,000 a year (63% support)

Prohibiting corporations from using tax credits to offset more than fifty percent of the taxes they owe (59% support)

While voters strongly support these options to help California increase its revenue, voters are strongly against specific spending cuts proposed by Governor Schwarzenegger:

76% oppose cutting public school spending by $5.3 billion

73% oppose cutting funding for state colleges and universities by $1.2 billion

68% oppose cutting the state's funding for health care services by $1.1 billion

62% oppose cutting the state’s funding for homecare services by $494 million

[Jul 21, 2009] Fed's Game is Delay and Pretend

MyCountryIsDestroyed says:

Please consider this at the most basic level.

The real measure of a nation's economic strength is its ability to produce goods and services. On that count, the US is completely destroyed. Even worse, TPTB have convinced a portion of the population that we don't need to produce anything.

Instead, the US is reduced to smoke-and-mirrors, TARP, bailouts, PPIP, $24 trillion in the hole, deception, speculation, Ponzi schemes, scams, food stamps.........

None of the smoke-and-mirrors will really work. We all know it. Now we are stuck with one scam after another. Please consider looking at Paul Craig Roberts' columns that suggest that we don't really have an economy. We replaced our economy with schemes and deception.

When are the American people going to scream "NO MORE" and do something about it?

The Emperor has no clothes. Time to stop pretending.

[Jul 21, 2009] Another Nail in Buy-and-Hold's Coffin

Good post, must read !
Selected comments

lainvestorgirl says:

Don't worry, it will all be okay once we drink the koolaid... 

black swan says:

“sigmonster says: 
 
"@black swan 
 
In this video, Paulson indicates that his family is not invested in Goldman........." 
 
Sigmonster, who are you going to believe, me or that liar, Hank "the crank" Paulson? 
 
From the Video: 
 
Rep. Kaptur: "Have you or your FAMILY had any financial ties or investments related to Goldman Sachs, in any way what so ever?" 
 
PAULSON: "No." 
 
REP. KAPTUR: "What about Bank of America?" 
 
PAULSON: "Not that I know of." 
 
Obviously Paulson, like Geithner, doesn't pay attention to his tax returns. Here is the truth: 
 
When Paulson took the Treasury job in 2006, he sold $500 million of his Goldman Sachs holdings and put them into to Treasuries, tax free, and sold another $100 million in Goldman Stock, from which he realized a $40 million dollar profit, tax free, and put them into a family trust, the Bobolink Foundation. Then he resigned as President, leaving his son and wife in charge of over $106 million. Here were some of the foundation's holdings when Paulson was Treasury Secretary: 
 
$53 million Goldman Sachs 
$397,000 Bank of America 
$250,000 Countrywide (taken over with BAC bailout money) 
$8.5 million Freddie and Fanny 
$650,000 Hartford Insurance Group 
$730,000 HSBC 
$798,000 JPM 
$730,000 Morgan Stanley 
$830,000 PNC 
$772,000 Regions Bank 
$962,000 Wells Fargo 
$500,000 Whacovia (which Wells Fargo acquired using TARP money that Paulson gave them) 
$500,000 Sovereign Bank 
$243,000 WaMu (which JPM acquired using TARP money that Paulson gave them) 
 
What do all these financial institutions have in common? They were holding Paulson family trust assets and he bailed them out with taxpayers' money. 
 
Paulson's Bobolink Foundation was set up to donate money for environmental causes. In 2006, the Bobolink Foundation gave over $1.5 million to the First Church of Christ Scientists, $453,000 to Wellsley College, and $50,000 to Harvard Business School. I wonder if they got any bumper stickers that said, "Save the Harvard Banksters". I can only hope that they are an endangered species. 
 
To prove that I am telling the truth and that Paulson is lying, Here is a link to the Bobolink Foundation's 2006 tax returns. 
 
http://dynamodata.fdncenter.org/990pf_pdf_archive/942/942988627/942988627_200703_990PF.pdf

Social Vandal says:

“In a book I am reading about the First Depression, it states production in the US (from 1929 to 1931) declined 40%. I wondered why so much then and so little now. 
 
Well, having gone to a Dairy Queen Gril and Chill with my two youngest, I noticed the photos on the walls all depicting 1940-1950 Dairy Queen events. As the kids sat there giving themselves sugar-induced diabetic comas, I thought about what life must have been like back then. 
 
We made all of our own TVs, Radios, Cars, Planes, Type-writers, machine tools, steel, telephones, office equipement & supplies, hardware, fixtures, etc. And we did so in 1929. 
 
We had a manufacturing economy to be decreased. Today, where can we get a 40% decline in any industry since I believe most of what we sell we import? So, Japan takes the 40% decline in production. 
 
We are getting a slow stangulation of retail/service jobs being masked by fiat printing and government welfare handouts? Down from over-time a few years ago to 33 hours per week? That does appear to be what is happening? 
 
Are we just holding on? Are we stretching the rubber band and will something snap? Are we all to become wards of the state living on extended unemployment and food stamps? 
 
Help me here folks.

[Jul 21, 2009] Resist The Urge To Punish Success by Mark Gimein

Money can't buy love but they can buy WaPo authors. For proof, look no further than Mark Gimein ;-)

Money can't buy love? For proof, look no further than Goldman Sachs.

Selected comments

davideconnollyjr wrote:

Mark Gimein, you must not understand what Goldman does.

Yes, there are those that berate Goldman because they are jealous, and there are those that berate Goldman because they don't like the white establishment, but there are those that berate Goldman for the right reasons, because of what Goldman does. Goldman makes much of its money essentially betting on whether things like oil, various crops, and timber will go up, or down in the future.

Some of this doesn't take an overly bright person -- we all know that gas prices rise during the summer, and oil prices rise during the winter, but you still get paid for betting on these things, though the predictability of such events lowers the odds, and you are tying up money that could be wagered on a higher paying bet. Who pays for all these payouts? The answer is, we do. We all pay higher prices for fuel, home heating oil, corn, timber for building, you name it. All of Goldman's profits ultimately come out of our wallets. Artificially stimulating demand for products to exacerbate price fluctuations is how Goldman makes money. It introduces volatility into the market, and creates artificial forces that help drive markets. It should be illegal. People that make a living manipulating other people's money are parasites that drive up the cost of everything. Companies that make a living artificially inducing stimulus into the markets, and then taking it away contribute to market volatility, and magnify price spikes via automatic, parameter set trading programs, that execute trades before individual consumers can bail, ensuring the margins are at least better than the people that actually front the capital. If Mark knows what Goldman does, and still supports it, then he is part of a big problem we have in America, of parasitic middle men looking for big, easy paydays, at the expense of everyone else.

maxtor0 wrote:

When you eat too far down the food chain, you disrupt the entire sysytem.

When profits at the top are derived from removing as much as possible from those at the bottom, eventually the system collapses.

The folks at the bottom, the ones buying merchandise from stores, cars from dealers, houses from realtors and gasoline to fuel their way to work, are a finite resourse.

When gas started to rise, people started cutting back, when interest rates started to rise people cut back on spending. Eventually soo much money was being bled from those at the bottom, that many could no longer buy discretionary items, and pretty soon, necessary items.

As they stopped buying, the need for people to sell them stuff, to manufacture stuff and transport stuff, dropped.

As these people no longer had an income they stopped buying as well. Result: as the bottom collapsed, the top of the econommic food chain crashed.

And it will again. Soon.

Gas prices again are exploding, creditcards and banks are rasing interest rates, fees penalties and payment percentages.

The stress this puts on the food(the folks at the bottom of the economic pyramid)insures that a crash is inevitable just like in a food chain - when you over harvest a food source, like oysters, crabs, bison, it collapses and you have to find a new source of food -or starve.

Already there are ominous signs in the retail sector as spending by consumers is once again falling, and stores are stll failing.

That's not success - that type of profit built on the system above is merely exploitation of your resources insuring large scale failure.

pelican4 wrote:

Goldman Sachs is not a "success"; it is a corporation driven by total self-interest, greed and questionable ethics. It has made billions of dollars on the backs of ordinary Americans by speculating with our federal funds for free while doing nothing to help the nation get back on its feet. Successful corporations are ones that stimulate job creation for the 10% of Americans who are unemployed. Successful investment firms are ones doing something to help individuals get something in return other than 0% yields for their hard-earned savings (as opposed to Goldman's speculative trading that is turning our investment markets into volatile casinos). We do not want to punish success, we want to punish and stop selfish greed that is achieved at the expense of the rest of the nation.

JEAtkinsonUSNavyret wrote:

As has happened throughout the recession, the banks, investment companies, brokers, and those who support them have missed the entire point about why people are so enraged about the huge profits they claim.

The point that is missed entirely by Mr. Gimein and others who support the system as it is now, is that people are not upset by, nor do they want to punish success. Rather, people are upset by and want to punish a system that is so flawed that it only rewards a small number of already wealthy players while leaving 90 percent of the population in increasingly worse financial straits.

Between 1946 and 1970, the percentage of people sharing in the total wealth of the county (what is called the Gini Coefficient or distribution of wealth coefficient), was close to 46 percent. What that means is that 46 percent of the U.S. population shared 90 percent of the wealth.

Starting with the pushing of Reagonomics in the 1980s and accelerating in the beginning of the 2000s at a pace unheard of since financial records were kept until the financial crisis starting in 2007, the percentage of people sharing in the wealth of the country dropped to the point that now, as of 2008, 1 percent of the people in the U.S. control 90 percent of the wealth. In fact, as shown by Bureau of Labor Statistics data, 10 percent of the population now controls 98.7 percent of the wealth in the United States.

Along with the concentration of wealth in the hands of fewer and fewer people, the middle class income has shrunk and the lower income levels have all ballooned as the other 90 percent of the people vie for the remaining 1.3 percent of the money available to them.

What that means is, like the increasingly poor and hungry in 1789 France watching the royals dining on delicacies and living the high life while the average person was starving and dying, the huge profits earned by companies like Goldman Sachs and J.P. Morgan Chase do not mean anything to the normal citizen. They do not mean anything to the normal person, because, while the banks were getting billions in loans, the average citizens have been losing jobs, lost the equity in their homes, lost billions in savings, and have been pushed closer to the brink of total financial failure.

Or, in other words, the so-called “success” of those at the top of the finance heap is seen as an affront by the average citizen, because that success for 10 percent of the people with wealth was built on manipulations of the system that caused nothing but pain and suffering for the other 90 percent of the people.

What is worse, that “success” is built on false pretenses.

Normal people are required to be responsible for their own finances. If they overspend or break the law by running up huge debts they know they cannot pay off, the government does not step in and give them money. Instead, normal people lose their homes and everything they have, and, in many cases even end up in jail for such things.

The banking and finance industry on the other hand was not, and has not been held responsible for their actions. Instead, even though the banking and finance industries caused the problems that drove the system to the brink of failure, governments bailed them out. And, instead of being grateful for the bailout, the banking and finance industry has raised interest rates and fees, frozen access to money, and gone out of their way to squeeze as much as they can out of the average person.

Then, after making things absolutely miserable for the average person while continuing to live wealthy lives built on the backs of the average people, to have companies like Goldman Sachs and J.P. Morgan Chase come along and say, hey look at me, we made a ton of money for our already wealthy clients”; well, that is about like the inaccurate but famous saying of “let them eat cake” attributed to Marie Antoinette shortly before the peasants revolted.

When long term unemployment is increasing, more and more people are struggling to make ends meet, more and more people are doing without health coverage, and 90 percent of the people are seeing less value in their homes, losing savings, and seeing no rise in income, to have the wealthy come along and say “we earned $385,000 above and beyond the salaries and benefits they already enjoy for each of our employees is doing nothing but add insult to injury.

It is an insult, because those who caused the current financial crisis get to enjoy profits and wealth rather than jail and punishment while those who were victimized continue to be punished.

$3.5 billion being obscene? No, not obscene, criminal, and since that profit was made possible by bailouts using tax payer monies, it should be given to the tax payers, not the ones who caused the problems in the first place.

drs James E. Atkinson, US Navy (ret)
MScIM, MBA, MScCIS, doctoral candidate (econometrics)

tyrell_corp wrote:

complete and total bullsh--. Goldman, as Matt Taibbi pointed out, is "successful" in the way the any mafia is successful. Goldman was not an engine for wealth creation, it produced nothing of value for society, it didn't even invest money wisely in other successful business (the supposed purpose of an investment bank). It Don Corleon, it used it's political connections to rig a wealth destructing game in it's favor. In the end there is nothing particularly clever about it - pure gangsterism. Goldman is not about capitalism - even robber baron capitalism, there is nothing there. They are societies parasites pure and simple. It is a shameful portrait of America that these people are held up as the best and brightest we have to the rest of the world. "see how bright and clever we are at stealing money" !!!! That game won't last long.

dgblues wrote:

It takes a peculiarly twisted money worshipper to accuse anyone of "punishing success" in this matter. That's a mammonist Frank Luntzian focus-grouped sound byte of distilled bullpucky.

First off, WE THE TAXPAYERS LENT THESE CRIMINALS HUNDRED OF BILLIONS OF DOLLARS, you twit. If that's punishment, please, God, punish the living crap out of me. Please.

The fact that Taibbi points out the obvious, that these financial institutions bleed all of us dry with speculation -- that they in fact create the bubbles from which they profit, and then rely on us to bail them out if they don't get out soon enough, just outrages you, doesn't it, Mr. Gimein? Oh my. Well, of course! The last thing you want is for Americans to be informed that they're being scammed.

May I remind you that most of us, who had no investment interest in the financial sector, saw our portfolios reduced significantly by their actions. And THEY are the ones being punished? You make me laugh.

Of course, you call our being scammed their "success." That says everything we need to know about your credibility relative to Mr. Taibbi's.

scone wrote:

Goldman Sachs (aka "Government" Sachs) are scum -- financial terrorist that belong at the dock in the Hague. Who but scum would turn be shorting the very products they have pushed on their customers?

Dilberta10 wrote:

It's not success, it's excess.

The only "sucess" GS has had is manipulating everything and everyone to their advantage.
Driving out their competition (think Lehman Brothers)and dipping in the Fed bailout funds given to GS and in defacto Fed funds given to AIG. Nice little ploy there.
Words cannot express my contemp for the gentleman who wrote this "editorial" and for GS.

[Jul 21, 2009] CRE Losses Piling Up

From Lingling Wei and Maurice Tamman at the WSJ: Commercial Loans Failing at Rapid Pace

Many regional and community banks had excessive loan concentrations in Construction & Development (C&D) and CRE loans. The FDIC identified this as an emerging risk in 2006 - so it is no surprise. These smaller banks have been slow to recognize the related losses - possibly because many of the deals had interest reserves that mask the performance of the commercial building until the reserve runs dry. Then there is just more work for the FDIC ...

Scrooge McDuck

US National Debt Clock: http://www.usdebtclock.org/

11T national debt
2T spending to date
57T unfunded liabilities
7T private debt

[Jul 21, 2009] “Extrapolating is dangerous” by Stacy-Marie Ishmael

So say Dresdner’s credit analysts in a note published on Friday. From the report:

On the temptation to extrapolate from Goldman’s results, they note (emphasis FT Alphaville’s):
One important point is that not all financial institutions are like GS or JP Morgan Chase. This week’s earnings were dominated by banks with very strong trading operations that benefited from wide bid/offers, as well as strong fee income from advisory and primary market activity. We fear that the commercial and retail banks that report in coming weeks will be relatively much more exposed to rising provisioning on their C&I, mortgage and consumer loan books. Therefore, we may have had the best news first, and the bad news may still follow.

And on data:

Macro indicators for the US consumer recently paused in their upward trend, and all of this suggests investors should not extrapolate too far, too early. Of course, for credit investors, the manufacturing outlook is probably even more important.

One of the most cautious notes came from SKF in Thursday’s FT. The company said the outlook is ‘incredibly uncertain’. Many expect restocking to lift earnings growth, but SKF stated that most of its businesses are seeing a slowing of (or an end to) the de-stocking rather than outright re-stocking. Margins are another critical point: so far, several companies have managed to hit earnings estimates but disappointed on the sales front. It seems corporates have aggressively cut costs, but further gains on that front may slow. The crucial issue going forward is whether corporate feel demand is strong enough to allow for increasing pricing power.

[Jul 21, 2009] Fed's Lockhart sees Weak Recovery, Exit Strategy not needed for "some time"

2009-07-20 | CalculatedRisk

From Atlanta Fed President Dennis Lockhart: On the Economic Outlook and the Commitment to Price Stability . Here is Lockhart's economic outlook:

Often a deep recession is followed by a sharp rebound in business and overall economic activity. Unfortunately, as I look ahead, I do not foresee this trajectory. I expect real growth to resume in the second half and progress at a modest pace. I do not see a strong recovery in the medium term.

There are risks to even this rather subdued forecast. The risk I'm watching most closely is commercial real estate. There is a heavy schedule of commercial real estate financings coming due in 2009, 2010, and 2011. The CMBS (commercial real estate mortgage-backed securities) market is very weak, and banks generally have no appetite to roll over loans on properties that have lost value in the recession. Refinancing problems will not directly affect GDP—it's commercial construction that factors into GDP—but I'm concerned problems in commercial real estate finance could adversely affect the otherwise improving banking and insurance sectors.

... the healing of the banking system will take time. Working off excess housing inventory will take time. The reallocation of labor to productive and growing sectors of the economy will take time. It will take time to complete the deleveraging of American households and the restoration of consumer balance sheets.

In short, I believe the economy must undergo significant structural adjustments. We're coming out of a severe recession, and it's not too much an exaggeration to say the economy is undergoing a makeover. We must build a more solid foundation for our economy than consumer spending fueled by excessive credit—excessive household leverage—built on a house price bubble.

The surviving financial system must find a new posture of risk taking. The balance of consumption and investment must adjust, with investment being financed by greater domestic saving. The distribution of employment must adjust to match worker skills, including newly acquired skills, with jobs in growth markets. Some industrial plant and equipment must be taken offline to remove excess and higher-cost capacity.

As I said, these adjustments will take time and will suppress growth prospects in the process. I believe the economy will underperform its long-term potential for a while because of the obstacles to growth that must be removed, adjustments it must undergo.
...
Let me summarize my argument here today. The economy is stabilizing and recovery will begin in the second half. The recovery will be weak compared with historic recoveries from recession. The recovery will be weak because the economy must make structural adjustments before the healthiest possible rate of growth can be achieved. While this adjustment process is going on in the medium term, I believe inflation and deflation are roughly equal risks and require careful monitoring. Slack in the economy will suppress inflation. And inflation is unlikely to result—by direct causation—from the recent growth of the Fed's balance sheet. In any event, the Fed has a number of tools being readied to unwind the policies used to fight the recession, and it will be some time before their use is appropriate.

[Jul 20, 2009] Roach: Financial Crisis Isn’t Over

July 17, 2009 | Moneynews

"Sorry to break to the news, but the financial crisis is not over, à la CIT. You’ve got plenty more write-offs of bad paper to come," Roach told CNBC.

Developed economies haven’t broken out of recession yet, he said.

"Seventy-five percent of the world’s economies today are still contracting, and the biggest piece on the demand side of the global economy is the American consumer, who is dead in the water," Roach said.

Stock markets, along with many bonds, have rallied sharply in recent weeks. But Roach said markets have overdone it, given the "anemic character of the recovery."

The rally largely reflects the excess of liquidity poured into the financial system by central banks, he said.

"Liquidity is seeking return, and right now these markets are priced for a recovery that’s going to end up disappointing," he said.

Some experts are excited by recent news of better-than-expected corporate earnings. But those anticipating high profits "are going to be in for a rude awakening," Roach said.

Economist Gary Shilling agreed with Roach. “I expect the recession to run into the early part of next year,” he told Bloomberg.  Excess home inventories and retrenchment in consumer spending will restrain the economy, he said.

[Jul 20, 2009] Marc Faber sees a total collapse coming

The Mess That Greenspan Made

Faber:

"We had a crisis and nothing has been solved

... usually, a major crisis like we had should clean the system but nothing has been cleaned.

It's gotten worse politically - this linkage between politicians in America and the Federal Reserve, Treasury Department, and Wall Street.

The big crisis is yet to come. It will be huge. it will be a total collapse."

[Jul 20, 2009] Commercial Paper Outstanding July 16 2009

Paper Economy

The Federal Reserve calculates and published the total amount of CP outstanding every week and as of the latest published period, commercial paper outstanding is contracting at the fastest rate on record, registering a whopping 37.33% decline year-over-year.

Selected comments

motgagepayer

Oil prices are soaring, putting pressure on the consumer.

22. Tax revenues are down 28% in April.
23. Bernanke (the beagle) is having trouble rolling 1.2 trillion in debt in 2009.
24. Social Security and Medicare are underfunded by 50 Trillion.
25. 200 trillion in derivatives exposure in US, 500 trillion worldwide.

need I go on? good articles: http://www.iamned.com 

[Jul 20, 2009] 7 Reasons Why Housing Isn’t Bottoming Yet The Big Picture By Barry Ritholtz

July 19, 2009  | The Big Picture

Yesterday, I posted this chart and wondered why “Some people were calling for a housing bottom.” That generated a ton of emails asking about for further clarification.

The people I referred to were the usual happy talk TV suspects (and Cramer) who have been perpetually wrong about Housing for nigh about 3 years. I not only disagree with them, but don’t respect their opinion — essentially headline reading gut instinct big-money-losers. No thanks.

Then there were the slew of MSM who insist each month on reporting that 3% (+/- 11%) is a positive integer. We disposed of that silliness on Friday.

But the crux of the email was over this post. There are a handful of people whom I disagree wi and process. Over the past year, these have included Doug Kass and Lakshman Achuthan and Bill of Calculated Risk. We may reach different conclusions about a given issue, or disagree on timing, but these are the folks whose opinions force me to sharpen my own.

When I tossed up that chart yesterday,  I had not yet seen Bill’s comments on the subject — but he is one of those people I can respectfully disagree with. We simply have reached different conclusions about the timing and shape of the eventual Housing lows.

There are a plethora of reasons why I believe we are nowhere near a bottom in Housing prices or activity. Here are a few:

There are more reasons I expect the Real Estate market to remain punk for many years, but these are a good place to start when considering the question.

The Housing Boom & Bust, and the 2002-07 credit bubble created massive excesses. More than anything, it is going to take time to resolve them.

[Jul 20, 2009] CIT Watch

nova

I was hearing ad's for factoring on the radio about a year ago. This is from the top of the search on Google

What Is Factoring?

Factoring is a way to get immediate cash. You send your invoices to us, we advance you up to 90% of the invoice amount, we collect the invoice and send you the remaining balance, less our fee.

Factoring is quick and convenient: a must for all growing companies in need of capital.

We purchase creditworthy accounts receivable at a small discount and fund you with immediate cash.

MaxedOutMama

If CIT were another type of company, government infusions or DIP financing would make more sense. But realistically, we are in a massive consumer retail contraction, and the receivables don't have much value.

However CIT also got into home loans and student loans. This shows the breakdown of CIT's business as of September, 2007.
14% home loans
14% student loans
13% manufacturing
9% retail, etc.

It's not viable because there isn't enough left. They've burned through their loss reserves and the losses are still coming, and will mount in the year to come. The truly secured lenders can pick over the best, and the semi-okay lenders can go for DIP, but the risks of the loans in this type of environment would dictate a rate of interest which will double the risk of many of these loans. They haven't got a continuing business with a cash flow on most of their loans that justifies anything but liquidation.

Being able to borrow money cheaply from the Fed does nothing to lower effective interest rates when the loss risk is so high. What kind of discount would anyone on this board require on a portfolio of student loans these days? Small retail? Gurgle. That stuff is 20-30 cents on the dollar.

nova

The Cost Of The Factor's Money

So, what is your cost of money? (Here's where it gets interesting and where the major misunderstanding lies.)

So they end up with 30% return? Or not? Factoring is a pawnshop for business

Let's set up an example. You're selling $100,000 worth of widgets to General Motors every month. You ship them, then invoice GM for the parts. Let's say you've arranged 30 day terms. You also have terms of 2.5% for 30 days with your factor, with an advance of 85%.

You send the factor a copy of the invoice at the same time you invoice GM. The factor checks with GM to ensure the widgets were delivered in good condition. He then transfers $85,000 to your account by check or wire transfer. This is usually within two days of receiving the invoice. You've got operating money!

Thirty days later, GM pays the factor $100,000. The factor deducts $2500, then pays you $12,500. You do this 12 months out of the year.

What's your cost of money?

In almost all cases, my prospective clients, thinking in terms of loans, multiply the 2.5% by a factor of 12 and say, "Thirty percent! That's too expensive."

The correct answer is, of course, 2.5% if each invoice is paid within the first 30 days. (This percentage will go up incrementally with any invoices which are paid over 30 days, generally 1/30 per day, but it's still FAR BELOW the current cost of borrowing from banks or getting lines of credit.)

To prove my statement, multiply your monthly sales to GM by 12. That answer is $1.2 million. Now multiply the amount you paid for each invoice by 12. That answer is $30,000. And $30,000 is 2.5% of $1.2 million.

Please tell me where, in the banking system, you can get money at 2.5%? That is, if you can get a bank loan at all in today's uncertain times.
 

OregonGuy

A business with negative EBIT is going to have a very difficult time changing lenders right now, even if cash flow is positive. In manufacturing it is tough not to have negative EBIT over the last 6 months. Just ask Alcoa (they need to hire GE-trained accountants),

MrM

...significant part of the problems we have encountered are a result of relentless optimization, to the point of eliminating virtually any redundancy or slack with the resultant brittle and tightly coupled system.

This is very true. I would also say thaquence is that when tightly coupled systems fail, one either has to fix the whole system or take a hands-off approach and let the system find a new equilibrium. Politically driven decisions which elements of the system to save and which ones can be let fail only de-stabilizes the system further.

What an interesting PR issue for the Administration:

km4

Defanging the Fed: Why It Needs Less Power, Not More

William Greider gives six reasons why handing the Fed more power is a bad idea:

  1. It would reward failure. Like the largest banks that have been bailed out, the Fed was a co-author of the destruction.
  2. Cumulatively, Fed policy was a central force in destabilizing the US economy.
  3. The Fed cannot possibly examine "systemic risk" objectively because it helped to create the very structural flaws that led to breakdown.
  4. The Fed can't be trusted to defend the public in its private deal-making with bank executives.
  5. Instead of disowning the notorious policy of "too big to fail," the Fed will be bound to embrace the doctrine more explicitly as "systemic risk" regulator.
  6. This road leads to the corporate state--a fusion of private and public power, a privileged club that dominates everything else from the top down.

http://paul.kedrosky.com/archives/2009/07/defanging_the_f.html

[Jul 20, 2009] Financial Armageddon Signs of the Times

You'll find the following relevant and intriguing if you're not yet familiar with it. Of course, the informal economy is anathema to the Corporate-Owned shill Economists representing the formal economy, but it doesn't mean it doesn't exist, and it won't become highly influential in the years to come, even for the U.S.

"Researchers began to notice that there was no economic
explanation for how the majority of the population survived. They
didn't own land. They didn't seem to have any assets. According to
conventional economics they should have died of hunger long ago,
but they survived. To understand this, researchers looked at how
these people actually lived, rather than at economic models.

[The peasant's] way of life was completely the opposite of how a
human being in an industrial society survives. They didn't have a
job, pension, steady place to work or regular flow of income...
Their aim was survival rather than the maximisation of profit.

[In the former S.U.] there are no signs of mass hunger and the
services by and large have not collapsed. Considering the chaos of
the formal economy, this is remarkable. Teachers still go to teach
and scientists go to their laboratories even though they may not
have been paid for six months. Under normal economic rules, there
is no explanation for this. Why would they go? The answer is that
their 'jobs' help maintain social and family networks that allow
them to survive outside the collapsed formal economy. They might
grow vegetables in the institute gardens, use laboratory equipment
or run their own small businesses, run taxi services with company
cars or just trade in skills and goods among their fellow workers.
Sociologists can understand this, economists cannot.

We find in the former Soviet economies that while officials are
trying to privatise the economy, most people are living in the
informal economy that is neither communist nor capitalist... [T]he
peasants survived not through socialism, but through the informal
economy."

http://www.mail-archive.com/futurework@scribe.uwaterloo.ca/msg04564.html

[Jul 20, 2009] Jamie Dimon v. Larry Summers «

The Baseline Scenario

Selected Comments

anne

WHEN DID THE SHADOW BANKING SYSTEM BECOME “THE ECONOMY”?

That’s my question for the experts. The shadow banking system is what our policies have supported. That’s who we rescued last fall. That’s the sector seeing the profits today. (Fab profits for them – really crappy return for the investors who saved the sector, however.)

And if you look closely, the profits they’re reporting come from the shadows, not from the regulated banking sector.

What happened to all that toxic debt on their books? Has it vanished? How can profits be declared when the books sag with toxicity?

We can continue to bleed out money to wealthy bankers and let unemployment rise and consumer spending decrease – or we can initiate real reform that truly answers the needs of the real economy – in ways that get people back to work.

We seem to favor bleeding over building these days.

Kirk Tofte

I’ve said it before and I’ll say it again–the stock market went up 700 points within an HOUR after word leaked that Obama would name Geithner as his secretary of the treasury. Do you think Wall Street might have been on to something that day?
Summers will never be appointed as chairman of the Fed because sector.

Wall Street has something over or “on” Obama. Half of his campaign contributions came from corporate interests who didn’t want deal with tougher players like either Hillary or McCain would have been…and they’re REALLY getting what they paid for in ways that are hard to believe.

OregonGuy
Not sure about the “vs” in the title. The more likely scenario is Summers and Dimon laughing together over the need to placate the sheeple with a “reform”. They agree on a toothless Consumer Protection Agency as the least bad (for bank interests) of the available options. As agreed, Dimon strenuously objects in public that the CPA will “destroy banking as we know it” as a smokescreen.

Business goes on as usual. Summers collects millions in “consulting” fees from Wall Street when he leaves Government. Dimon buys a bigger yacht and gets that G5 he’s always wanted.

ifaforo

Don’t see the point of the “vs” either. Summers view has always been that financial deregulation isn’t just good for banks but is good for the country. Summers has done or said nothing that suggests a material change to that point of view (ask Joe Stiglitz about that and why he has no voice in this administration).

Tippy Golden

I haven’t had time to read through the comments yet. But it seems to me the problem is within the state of American economy itself.

Power and wealth has been captured by an oligarchy.

The very tough battle ahead is “rebalancing” the power structure through a political process.

[Jul 20, 2009] The US-China Ponzi scheme - MSN Money

If can count correctly 3% on one trillion is 30 billions. So interest payments alone are substantial. 

China is thus frozen in place, damned if it does and damned if it doesn't. It's a classic Catch-22. China's cache of U.S. bonds isn't worth anything unless the bonds are sold. But selling them on any kind of scale will gut their value.

"People need to realize that China doesn't actually have any real U.S. money," Das says. "Unless they can turn in their bonds and exchange them for something else, they're only paper assets. Yet if they try to exit the position, they'll destabilize the dollar, and the value of the rest of their assets will plunge. And that's not even their biggest problem. It's that they also need to keep buying Treasurys, or interest rates will go up and their capital losses will be terrible."

In short, Das says, Beijing thought it had discovered the perfect scheme for establishing independence from the West, yet it has instead made its dependence worse than ever. And he observes that one unspoken reason that China has gone whole-hog on its massive, $650 billion fiscal stimulus program -- creating more factory capacity in a country that is already reeling from overcapacity -- is that the effort gives it cover to stockpile copper, oil, iron ore and other hard assets that it considers to be better stores of value than dollars.

[Jul 20, 2009] Report: Record Drop in State Tax Revenues

See also State Tax Revenues Chart
Jul 18, 2009 | CalculatedRisk

No surprise ...

From the NY Times: State Tax Revenues at Record Low, Rockefeller Institute Finds (ht Ann)

The anemic economy decimated state tax collections during the first three months of the year ... The drop in revenues was the steepest in the 46 years that quarterly data has been available.

Over all, the report found that state tax collections dropped 11.7 percent in the first three months of 2009, compared with the same period last year.
...
All the major sources of state tax revenue — sales taxes, personal income taxes and corporate income taxes — took serious blows ...

Here is the report: State Tax Decline in Early 2009 Was the Sharpest on Record

And it looks much worse in Q2:

Early figures for April and May of 2009 show an overall decline of nearly 20 percent for total taxes, a further dramatic worsening of fiscal conditions nationwide.
Note: an earlier report was on state pesonal income taxes - this is all state taxes.

Selected Comments

curious

Slightly OT

I was looking through the new releases to Netflix instant play and noticed the documentary "IOUSA". I saw it when it was in theaters and highly recommend it to everyone who reads CR.

yossarian

Is this broken down state by state? I recall Arizona's revenue's were falling off a cliff months ago. And yet, there are still police and fire services. So 'collapse' is more like, 'letting the air out of a blow up toy.. '

I'd normally think this drop in revenue really means something,... some big changes, some social movements.

But hell, Goldman is still getting rich, no one is burning them in effigy... so the collapse of the welfare state .. if it happens.... is gonna be really quiet.

broward

 Unions need a reset like everything else or we still keep going down. Shared burden.
----------
True but the "investor" side of the equation like to rant about how unions destroyed GM by demanding more return than could be sustained, but we never hear about how investors demanded more return than could be sustained, too. The real economy grows around 3-4%. That's ALL you get and all this mickey mousing around of outsourcing WILL NOT CHANGE THAT.

But you guys just dont' get it it and so you must suffer long grievious pain until you shout out, ENOUGH, ENOUGH, I will accept a 3% return!".

gonna be a long time, though.

Nuke

 I suspect that before this crisis is over the opposite will result. I'm pretty sure GD I resulted in the New Deal.

Blackhalo:

That was a different time. FDR had demographics on his side. For better or worse, demographics no longer support the welfare state model. Demographics did in the auto industry (retiree costs), and will soon start taking down governments.

South EU (Greece, Portugal, Spain) will be ground zero due to VERY generous pensions, VERY low birthrates and an unproductive economy. My family tells me it is already happening in Greece. But who knows, maybe I'm wrong.

Blackhalo

 "Demographics did in the auto industry (retiree costs), and will soon start taking down governments."

No demographics take OVER governments. Get ready for 3 wolves and a sheep voting on what is for dinner.

energyecon

More than 60 companies sold bonds this year to repay commercial paper, including Consolidated Edison, Verizon Communications Inc. in New York and Kellogg, the 103-year-old maker of Keebler cookies and Rice Krispies cereal, according to data compiled by Bloomberg. Non-financial companies have sold $306 billion of investment-grade bonds this year, a record pace.

“Treasurers aren’t sleeping at night because they don’t know if they can roll over commercial paper,” said Anthony J. Carfang, a partner at Treasury Strategies Inc, a Chicago consulting firm. “They’d rather lock in money for five years and pay a little more.”

Commercial paper outstanding fell $39.7 billion, or 3.5 percent, during the week ended yesterday, its 14th straight decline, the Fed said today. At $1.097 trillion, the CP market is less than half its peak of $2.22 trillion in July 2007, with about 10 percent of it owned by the Fed, central bank data show.

welcome to the party...

Angry Renter

 China actually has a severe demographic problem as well. The One Child Policy is inverting the pyramid.

However, they don't have significant state obligations to them like our entitlement programs, and they save.

In just 30 years, people aged 65 or older are projected to make up 22 percent of China’s population. With the reduction of some, and elimination of other state-provided social services, these older adults will have to count on their children to provide for their retirement, since children are expected to be the primary providers of support and care for their retired parents, grandparents and parents-in-law. However, in what has come to be known as the “4:2:1 problem,” every child born under the one-child policy will have to care for two parents and four grandparents. With largely one-child families and no national social security plan, this responsibility will likely fall on a younger Chinese generation that is unable to fulfill it.

http://www.umich.edu/~ipolicy/china/6)%20Demographic%20Consequences%20of%20China%27s%20One-Child%20Policy.pdf 
 

[Jul 20, 2009] Slip Sliding Sideways

Jul 18, 2009 | Calculated Risk
... GDP can still turn slightly positive.

Here is a speech from San Francisco Fed President Janet Yellen in March: The Uncertain Economic Outlook and the Policy Responses.

[I]t takes less than many people think for real GDP growth rates to turn positive. Just the elimination of drags on growth can do it. For example, residential construction has been declining for several years, subtracting about 1 percentage point from real GDP growth. Even if this spending were only to stabilize at today’s very low levels—not a robust performance at all—a 1 percentage point subtraction from growth would convert into a zero, boosting overall growth by 1 percentage point. A decline in the pace of inventory liquidation is another factor that could contribute to a pickup in growth. Inventory liquidation over the last few months has been unusually severe, especially in motor vehicles—a typical recession pattern. All it would take is a reduction in the pace of liquidation—not outright inventory building—to raise the GDP growth rate.
emphasis added
This is a very important point for forecasters - to distinguish between growth rates and levels. Even if the economy has bottomed, it is at a very low level compared to the last few years, and the recovery will probably be very sluggish.

[Jul 20, 2009] Housing Starts- A Little Bit of Good News

Calculated Risk

This increase in starts means that the drag from Residential Investment will slow or stop, and also that residential construction employment is close to the bottom. Residential investment has been a drag on the economy for 14 straight quarters, and just removing that drag will seem like a positive.

And residential construction has lost jobs for several years, and even though construction employment will probably not increase significantly, not losing jobs will also seem like a positive.

This removes drags from the economy - and that is the little bit of good news.

To be clear, this is not great news for the homebuilders. It will take some time to work off all the excess inventory, so new home sales and single family housing starts will probably stay low for some time. And it is possible that new home sales and housing starts could still fall further.

[Jul 26, 2009] The war being waged on the TARP watchdog's independence

Most significant of all, and obviously due to Barofsky's truly independent oversight efforts, the Obama administration is now attempting to induce the Justice Department to issue a ruling that Barofsky's office is not independent at all -- but rather, is subject to, and under the supervision of, the authority of Treasury Secretary Tim Geithner.  By design, such a ruling would completely gut Barofsky's ability to compel transparency and exercise real oversight over how Treasury is administering TARP, since it would make him subordinate to one of the very officials whose actions Congress wanted him to oversee:  the Treasury Secretary's.  Barofsky has, quite rightly, protested the administration's efforts to destroy his independence, and has done so with increasing assertiveness as the administration's war on his oversight activities has increased.  Why would an administration vowing a New Era of Transparency wage war on a watchdog whose only mission is to ensure transparency and accountability in these massive financial programs?

It should take little effort to explain the significance of these clashes.  The amount of taxpayer money transferred to the banking industry or otherwise put at risk for its benefit is astronomical.  Professor Nouriel Roubini argues in a New York Times Op-Ed today that actions by the Federal Reserve over the last nine months helped avert a Depression, while former Governor Eliot Spitzer said this week that the Fed has turned into a "Ponzi scheme" that relies on insider dealing and requires vastly increased scrutiny.  Those claims aren't mutually exclusive.  It's not surprising that transferring extraordinary sums of taxpayer money to a particular industry will help that industry avoid collapse, but it is still the case that the potential for extreme corruption and even theft in such transactions is enormous (indeed, even Roubini argues that Fed Chairman Ben Bernanke played an important role in enabling the crisis in the first place).  No matter one's views of the wisdom of the bailout and related programs, transparency, accountability and independent oversight are absolutely vital, and that is what Barosksy's office was created to ensure (though it's unlikely -- given how Washington works -- that Congress actually expected that the person in charge of that office would take those duties seriously and be willing to fight with senior administration officials to protect his independence).

[Jul 26, 2009] Raw Story » Spitzer Federal Reserve is ‘a Ponzi scheme, an inside job’

Spitzer recently told Bloomberg News that President Obama’s regulatory reforms of the financial sector are “irrelevant” because regulatory agencies have not been enforcing corporate laws to begin with.

“Regulatory agencies already had the power to do everything they needed to do,” he said. “They just affirmatively chose not to do it.”

[Jul 26, 2009] The Bernanke ReappointmentTour

Bernanke is a tool.  Like many neo-classical economists he uses an implicit assumption that what is good for wall street is good for the nation. An interesting  question is" Should the guy who missed housing bubble (and actually was instrumental in inflating it with low rates) be reappointed ?  But it is mute. From a broader perspective it doesn't matter who is (reappointed.

I believe the attacks on Bernanke's personal integrity were unfair and unjustified. But I'm not sure he should be reappointed.

Professor Thoma's analogy to a doctor who kept getting it wrong - but never gave up trying new possible cures - is pretty good. Is that the kind of doctor I'd want?

I'd like a doctor who never gave up trying for a cure, but I'd prefer someone with better diagnostic skills. I don't oppose Bernanke for a second term, but I think there are better choices.

(San Francisco Fed President Janet Yellen, as an example, recognized what was happening much earlier than Bernanke).

Rob Dawg

Two observations about Bernanke:

One, he missed the housing bubble. _He_ _missed_ _the_ _housing_ _bubble_. How do you give anyone a pass on that?

Two, credit for effective responses

GDD9000

Dawg - it's worse than just missing the housing bubble. The acts he sanctioned under Bernanke I interpreted as endorsing the housing bubble as a good thing, initially. So, his theory was wrong, and his knowledge base then was compromised, since he couldnt possibly understand the world of finance enough to know that what spawned it was a leviathan.

Juvenal Delinquent

A good many of you have had the chance to work in your fields of endeavor with workmates that are book smart, but have no idea how things really work in the world...

Exhibit A: Benjamin Bernanke

Shylockracy

For a 300 million-strong country, the talent pool from which to draw a FED chairman is minuscule. Of course, 'talent' here does not mean the same as outside the rarefied heights of High Finance. Talent here means a proven track record of absolute subservience, unscrupulousness and militancy in favor of the political and economic interests of the ruling bankocracy.

danm

The difference between the US and France is that probably half of the US has some trust
------------
The difference between the US and France is that France understands that it's a mature economy and the people do what they can to force government to redistribute.

The US still believes it is a growth country with a frontier attitude. Its people are convinced that everybody will get rich if there is no government and they let the invisible hand do its magic. But most still cling to the hope government will fix things. Hmmmm.

Which is worse - bankers or terrorists

"Ditch bernanke, and then who takes over? (must be politically viable.) "

I'm thinking a sock puppet could do a better job. It would also say less stupid things during the re-appointment tour.

GDD9000

Dawg - how much do you think he was part of the decision to keep GS at the top of the heap? Or do they just run the show so much that they could appoint themselves? It's just to me, so incredibly wrong that we are propping up the status quo, and rewarding the people that screwed everything up. And seeing as we are doing that, it makes sense to keep Bernanke.

I think that more than anything this shows you that there isn;t a chance in hell he isn't reappointed. Absolutely zero. I don't even know why we debate it. And Bernanke going out on the two debate the little people. Laughable. I wonder how many stooges will be trotted out to say, thank you, thank you BB for saving us from ourselves. 

bobn

One, he missed the housing bubble. _He_ _missed_ _the_ _housing_ _bubble_. How do you give anyone a pass on that?

Do you really think he missed it? How could he NOT have known? I think he lied about it for reasons bad or good. Imagine what would have happened had he said "The so-called sub-prime problem will lead to a major recession and, BTW, most of the huge banks are insolvent. Have a nice day."

Which is worse - bankers or terrorists

"The difference between the US and France is that France understands that it's a mature economy and the people do what they can to force government to redistribute."

Right, France is this way in part because of the tradition of protest brought about by 1789, the revolution of 1848, the founding of the Third Empire, 1968, etc. US is different, does not protest in the same manner for political change.

And the big difference is that we have, at least currently, the reserve currency that most the world's is purchased in. Until proven otherwise, sink this ship and the whole world drowns with us.

danm

Speaking of which, the post notes that Bernanke "failed to notice the patient is sick".
-----------
Maybe he saw everything just right, realizes he's stuck between a rock and a hard place so now is just positioning himslef for his own survival.

Over the last few decades, extreme failure has been grandly rewarded. What does he have to lose?

GDD9000

bobn - have you also not noticed that he suffers from Bushco syndrome? The utter inability or desire to say that he possibly did anything wrong or was responsible in any way? It's not a particularly endearing trait that more and more of our leaders seem to be in possession of.

ResistanceIsFeudal

Entry of the masses into the markets, directly or indirectly through retirement (another concept created by policy think tanks and marketed to us) savings, was the real breaking point. So many to fleece, so few to fleece them, so little incentive not to fleece them. Add in superiority and entitlement mentality fostered by elite educational institutions...

danm

And the big difference is that we have, at least currently, the reserve currency that most the world's is purchased in. Until proven otherwise, sink this ship and the whole world drowns with us.
----
You've had land to distribute, resources to exploit, forests to cut down, lakes to pollute... With 300M people, you're fast approaching the limit.

Which is worse - bankers or terrorists

If you are Bernanke, I wonder....why even bother with the stress of reappointment when you can get a job in the private sector working for the Goldman Sachs Financial Terrorism Crime Syndicate.

Oh yeah, that's right because everyone knows Benny has no skillz.

Juvenal Delinquent

Bernanke reminds me of most any NFL coach that has guided 7 teams over a span of 12 seasons to a combined win-loss record of 86-122.

Coaches like him get rehired because they have "experience"

Comrade Coinz

There is bias built in to the system -- the Fed is owned by banks -- that works against the interests of the country regardless of who is chairman.

That bias affects personalities to a greater or lesser extent. I still like Paul Volcker.

My feelings are mixed on Bernanke. He has some glaring flaws, and I don't think he is strong enough to stand up to the oligarchs when needed.

On the other hand, my sense is that he genuinely wants a good outcome for the country.

danm

On the other hand, my sense is that he genuinely wants a good outcome for the country
-----------
WW2 had a good outcome but millions of lives were lost.

MrM

Good morning, all

I would like to follow up on Basel Too's comment - If you do not re-appoint Bernanke, who do you appoint?
Can we really hope that this position will escape going to Summers? Yellen would be a much better choice, but it is rather unlikely she'll be able to win against Summers.

We already had "The Committee To Save The World". Are you ready for the sequel "The Unparalleled Genius To Save The World"?

Fair Economist

I agree with basically all of the criticisms of Bernanke, but his replacement would almost certainly be Summers, who didn't forsee this any better than Bernanke and who has numerous personal and financial connections to banksters and to foolish deregulation.

Bernanke still seems not to have grasped many importants aspects of the crisis, but neither has Summers, and at least Bernanke doesn't have Summers' potential integrity issues. So reappointing Bernanke is the lesser of two evils.

HomeGnome

Bomber Ben is going to be reappointed with praise for "strong leadership in these difficult times" from both Elephant and Asses.

The Congress Critters (R. Paul excepted) are pretty much clueless; which was evident if you caught any of Bomber Ben's testimony.

Hell, all "Dr. Evil" Paulson had to do to get 700 BILLION was threaten financial collapse and martial law; and the lapdogs rolled over like puppies.

patientrenter

Bernanke is more than just a messenger. He is constrained on many sides: Congress is most important, then the Treasury and WH, then the banking industry, then professional economists and other members of the financial community. But he does still play a leadership role. Any of us in leadership roles recognize that it's a grey area. Few heads of household have absolute authority! It's the same, but even greyer, in broader leadership roles like Bernanke's.

I read a 2009 overview speech by Bernanke, just to see his own story. It's at http://www.federalreserve.gov/newsevents/speech/bernanke20090414a.htm. He recognizes the role of imprudent lending, and the need for prompt action to cut off any resurgence of inflation. He also acknowledges there was a TBTF problem.

But I think he reveals his biases even in this speech. He discusses the pain of the credit collapse, and the measures he and others have undertaken to mitigate the pain, in vivid and detailed terms. He doesn't explain very well why allowing the imbalances to grow as much as they did was a problem in the first place. (Maybe because he doesn't believe it was such a big problem. The real problem was the collapse. Lesson learned: Allow bubbles. Prevent bubbles popping.

On the TBTF issue, it's clear that he doesn't see any need to bring more of our financial industry out of the TBTF category. Instead he advocates more regulation. That assumes the regulators (like Greenspan and him) will be better than the company CEOs (like Sandy Weill) at avoiding excessive risk. It's not clear to me that the regulators are any better. Sure, an ideal regulator would be better. But the regulators we actually get are not ideal, just as the CEOs are not. I think I'd like to see graduated capital requirements with real bite that are higher on institutions that pose more systemic risk (= are more likely to be backstopped by the taxpayers). I got the impression that he is very weak on any effective anti-TBTF measure. Perhaps that's because he has too much faith in the perfect regulator.

patientrenter

"I like honesty, but I prefer competence over honesty in the most important jobs."
Shifting $14T of toxic assets from the private to the public sectors balance sheet is competence?"

I am not saying that Bernanke is competent. His points of competence and incomepetence are what we're debating here (in between noisy and pointless global climate trench warfare salvos). I am just saying that I don't think it's purposeful to judge him based on how much he lies. Whether it's right or wrong, the political sphere he operates in takes lying (or dissembling, or miscommunicating, or whatever you would like to call it) as a job survival requirement. What matters most to us all is what he accomplishes, not what he says. That's why is points of policy competence and incompetence matter more than merely the extent of his public directness and honesty.

 

[Jul 26, 2009] Supply and Demand (in that order) Construction Workers Teaching Kindergarten

The stimulus bill reminds me of "Kindergarten Cop" -- Schwarzenegger's movie when he plays a cop who goes undercover as a kindergarten teacher, and ultimately quits his policeman job to teach kindergarten on a permanent basis.

This recession has brought employment down over six million. By industry, these losses are disproportionately in construction and manufacturing. By region, these losses are disproportionately in Nevada, California, Arizona, Florida, and other housing cycle states.

Although I do not agree with it, a reasonably coherent theory that says that the government can raise employment by hiring idle resources. So, in this recession, an effective way to raise employment would be to create jobs in those industries and regions with people without work (whether raising employment passes a cost-benefit analysis is another story).

The stimulus bill does not do that. Instead, it spends a lot in industries and regions with few if any employment losses.

Econbrowser now claims that the stimulus bill can be effective, because unemployment rates are high (whatever that means) in health care and education. Let's take a look at employment changes Dec 2007 - June 2009 (millions) by industry:

How exactly is fiscal policy going to create 3.5 million jobs by primarily hiring people in education and health? I see only two scenarios, both absurd and/or dishonest:

[Jul 26, 2009] Econbrowser Looking for an exit

Should that allay any inflationary concerns people may have about the doubling in the size of the Fed's balance sheet? In a narrow mechanical sense, perhaps. It is true that the new assets have not yet shown up as an increase in the money supply, and it is true that the Fed has the power to prevent them from doing so in the future. But my concerns about inflation are not that the Fed would lose the ability to target a particular level for the money supply, and certainly are not concerns about the next six months, where I still see deflation as a bigger worry than inflation. Instead, my concern is that the current fiscal trajectory is fundamentally inconsistent with the Federal Reserve choosing to keep inflation under control. Both devices, ballooning of the Treasury's account with the Fed and enabling the Fed in effect to borrow directly on its own, are indeed as much fiscal measures as they are monetary. But to someone worried about the increasing co-mingling of monetary and fiscal policy, that blurring of the lines is not a reassuring development.

My specific worry is that we will eventually face a crisis of confidence in the Treasury and the dollar itself. It is true, as Bernanke suggests, that raising the interest rate paid on reserves in such a setting would be a policy tool that could be used in response. But it would be an unattractive measure to the point of perhaps being impossible to use in practice, for the same reason other countries have dreaded raising interest rates in the face of collapsing real economic activity and a flight from their currency.

I fear that the United States government is mistakenly assuming that it can borrow essentially unlimited sums without undermining confidence in the dollar itself. The real question of a successful exit strategy, in my opinion, is how do we extricate ourselves from the joint fiscal commitments currently assumed by the Treasury, the Fed, the FDIC, the Medicare and Social Security trust funds, and various and sundry implicit and explicit federal guarantees?

The answer, in my opinion, is not to be found in the Treasury doing even more borrowing on behalf of the Fed or the Fed doing even more borrowing on behalf of itself.

[Jul 26, 2009] Shock and Audit The Hidden Defense Budget Mother Jones

The Office of Management and Budget calculates a total for defense spending throughout different parts of the government (it includes money allocated to the Pentagon, nuclear weapons activities at the Department of Energy and some security spending in the State Department and FBI). In the 2010 budget, that figure was $707 billion, more than half of the government's discretionary spending for the year. (Discretionary spending is the money that's appropriated every year by Congress, rather than entitlement programs like Medicare for which funding is mandatory).

But the real number is even higher, because, among other things, the OMB doesn't count supplemental spending on the wars in Iraq and Afghanistan.

[Jul 25, 2009] 5 rules for post-recovery investing - MSN Money by Jim Jubak

Jubak's Journal

The Federal Reserve, which I'd place among the optimists on this issue, says full-trend growth isn't going to be the 3% annually of the pre-crisis economy but more like 2.5% or even as low as 2%. Harvard University economist Dale Jorgenson, who taught Fed Chairman Ben Bernanke, projects just 1.6% annual growth through 2030.

If Jorgenson is anywhere near correct, the Great Recession would make the Great Depression seem like a picnic to many people. Is there any reason to think these projections might be right? Unfortunately, a lot of evidence argues in favor of a very slow and tepid recovery:

Why you won't like the recovery - MSN Money

The U.S. gross domestic product, the value of all the goods and services produced in the country, is expected to grow 1% before the end of the year. But that's not enough to change some of the most daunting problems of this recession: high unemployment, stagnant wages and depressed asset prices.

"The bottom line for the typical consumer is: Just because Wall Street is having a party doesn't mean you are going to get your job back," said Christian E. Weller, a senior fellow and economist with the Center for American Progress, a nonpartisan policy research institution.

My Latest Huffington Post Column: 'Wall Street's Gains Equal Main Street's Loss?'

Below is my latest column for the Huffington Post, entitled "Wall Street's Gains Equal Main Street's Loss?":

Stock prices have been on a tear lately, bolstered by quarterly earnings reports that have in many cases outpaced expectations and growing optimism that the worst of the crisis-cum-downturn is behind us.

The S&P 500 index, for instance, is up more than 40 percent since its early-March lows, while the technology-laden Nasdaq Composite has scored a 13 percent gain -- and, through yesterday, a 12-session winning streak -- in the last two weeks alone.

Ordinarily, a bull run like this would be cause for optimism, on the belief that savvy investors see a light at the end of the tunnel. But in the currrent environment, could the good news that is powering share prices be bad news for the economy?

Consider the following recent reports from a cross-section of corporate America:

In sum, while a growing number of investors seem to believe that Main Street is on the mend, many of corporate America's senior executives -- who are normally not prone towards pessimistic outlooks -- are maintaining that they see no real evidence of a revival where it counts -- on the ground.

In fact, amid an almost single-minded focus on reported earnings results, many of which only appear favorable in comparison to the low-ball, company managed estimates that clueless analysts have come up with, Wall Street hasn't been paying much attention to just how dicey things look at the top of the income statement.

Yet as Karl Denninger of The Market Ticker and others have noted, many of the companies that have "beaten" expectations so far this season -- including several of those listed above and others such as United Technologies, Halliburton, AT&T, and Amazon -- have reported flat or falling revenues, with year-over-year declines in some cases of 30 percent or more.

One reason why so many businesses are apparently benefitting amid softening sales comes down to aggressive cost-cutting. They are slashing jobs, paring wages and benefits, scaling back capital expenditures and valuable R&D, and putting constant pressure on suppliers to reduce prices, forcing each of those in turn to do the same.

While such measures can provide a short-term boost to profits, it is revenues -- money coming in the door -- that keeps businesses growing -- and the economy humming. Morever, even where firms are seeing notable improvements on the bottom line, odds are that few will be looking to boost hiring without seeing solid evidence that sales are also picking up.

Finally, racy bull markets often provide a shot of growth-stoking confidence, encouraging owners and managers to think and act expansively, and investors and lenders to pony up funds that can help turn big plans into profitable opportunities. Not this time, however. The U.S. economy, slammed by the biggest financial crises this century, remains in a vulnerable state, and it is still exposed to numerous potholes and shocks, many of which are just now unfolding.

Among other things, the commercial real estate market is starting to implode, lending conditions are worsening and many credit markets remain frozen, no small number of financial institutions, including commercial lender CIT Group, are close to failing or are utterly dependent on continued public largesse, and, as noted above, employers are shedding jobs, not adding them.

Unfortunately, because stock market investors have decided to ignore reality in favor of false hopes and quick fixes, the euphoria they've spawned may inhibit at least some Americans from taking the steps necessary to cope with the challenging environment that companies like General Electric, Microsoft, UPS, WPP, Texas Instruments, 3M, and others still see around them.

Given all that, you might say that Wall Street's gain is their loss.

Smart Investors Are Only Mostly Dumb By Paul Kedrosky

Why economic researchers are so dumb ?  Questionable approach, wasted paper...
July 24, 2009

Cute new paper out arguing that some of the stupid human tricks usually ascribed by behavioral finance sorts to self-destructive investor behaviors may not always and everywhere be so dumb. Maybe they’re just mostly dumb.

The recent behavioral literature has shown that individual investors hold concentrated portfolios, trade excessively, and exhibit a preference for local stocks.

These results are puzzling because in all three instances portfolio distortions could reflect either an informational advantage or psychological biases.

In this study, we propose a demographics-based proxy for smartness and show that the portfolio distortions of "smart" investors reflect an informational advantage that generate high risk-adjusted returns.

In contrast, the distortions of "dumb" investors arise from psychological biases because they experience low risk-adjusted performance. When we do not condition on the level of portfolio distortions, the average net performance of smart investors does not beat passive benchmarks, but smart investors outperform dumb investors by about 3 percent annually on a risk-adjusted basis.

Further, when portfolio distortions are large, smart investors outperform the passive benchmarks by about 2 percent and the smart-dumb performance differential is over 5 percent. We also show that a portfolio of stocks with smart investor clientele outperforms the dumb clientele portfolio by about 3.50 percent annually. Taken together, these results indicate that both behavioral and information-based explanations for observed portfolio distortions are appropriate, but they apply to groups of dumb and smart investors, respectively.

Source:

George M. Korniotis and Alok Kumar, “Do Portfolio Distortions Reflect Superior Information or Psychological Biases?,” SSRN eLibrary (July 16, 2009), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1018668.


 

Growth Forecasts after the Great Recession

nomorespendingplz

1st 100 days - There are 2.9 million more people unemployed in May than there were unemployed in January. The unemployment rate went from 7.6% to 9.4%. Since May 2008, we have lost 5.5 million jobs. The biggest losers were:
Manufacturing 1.5 million lost
Finance & Prof Serv 1.5 million lost
Construction 1.1 million lost
Retail & Leisure 1.3 million lost

good finance articles http://www.bit.ly/12NCJR

Rob Dawg

Consensus peak to trough real GDP decline of less than 4%? I don't need to read any further to know we are off this chart. Besides, all the "good recoveries" in the red circle are 30-50 years old.

Economists are strange people. I'd trust Conjure's dog bones and fetishes first.

Scrooge McDuck

Commercial mortgage delinquency up 585%

Delinquencies on commercial mortgage backed securities soared $10 billion in June, hitting a 12-month high of almost $29 billion, according to Realpoint Research.

California led the nation with the highest amount of delinquent loans, closely followed by Texas and Florida.

Late loans across the country are up an “astounding” 585 percent from a year ago when just $4 billion were delinquent, reported the Horsham, Pa.-based research firm. The low point for delinquency was March 2007 when $2 billion was delinquent.

Take a name asswipe

According to calculations by Martin Weale of the National Institute for Economic and Social Research the profile of the current recession is now almost identical to the decline in Britain's output between 1929 and 1931. The 5.6pc contraction over the past year almost matches the 5.8pc fall in the year preceding the second quarter of 1931, during which Credit Anstalt in Austria collapsed, triggering a second wave of economic seizure across Europe.

The recession is far deeper and more severe than those of the early 1980s and 1990s, Mr Weale added.

"Gordon Brown is now competing with Ramsay MacDonald – not a comparison he would much like," he said. "It looks as if we are pretty much tracking the 1930s,
http://www.telegraph.co.uk/finance/financetopics/recession/5901961/Briti...

Tim waiting for 2012

Fact Check

between 1946-1983 spending was 63% of GDP

1983-2007 spending was just over 70% of GDP

If savings rate goes to 7% or 10% that would eliminate 1-1.3 Trillion 07' dollars from GDP and thus a 7-10% decline in GDP.

Tim waiting for 2012

Black Dog

A lot of the stimulus package was tax cuts which I argue offer cheap short term thrills and more pain down the road. Companies large and small benefited greatly from the tax cuts. This will be temporary and is already factored in to forecasts

Broward

Most people who are comfortable as I am sure you are would choose not to spend esp if things look uncertain for the future. Also boomers have to think about their health, wear and tear.

... ... ...

You are right that consumption increases after 65 for some people but in the form of medical costs and you know that the gov't picks up most of that tab through Medicare.

So gov't will definitely have to increase spending from where we are know. Budget deficits will grow making Japan's balance sheet a thing of envy. We may be already there.

... ... ...

Scrooge 

Large companies like IBM are now accelerating "outsourcing" b/c their margins are coming under pressure

Quality matters less when you are talking about near term executive survival.

... ... ...

Lawyer Liz

63% was the average from 1946-1983. That was before teens had credit cards but the country was much younger then and wages steadily increased over that time

Now with the country aging and wages flat to down since 1983 I'd say it can go down to 58-60% easily. That is why I expect a 9-12% decline in US Gdp overall.

Liz I pitched this to CR and he says "no way" So I take it for what it is.

 

Fed Watch: The Debate Continues

Tim Duy looks at the shape of things to come:

The Debate Continues, by Tim Duy: The debate over the shape of the  recovery continues unabated.  Equities, at least this week, are voting in favor of the V-shaped recovery, with the Dow pushing past the 9,000 mark for the first time since January.  Never one to accept good news at face value, Nouriel Roubini predictably took the opposite position:

A “perfect storm” of fiscal deficits, rising bond yields, “soaring” oil prices, weak profits and a stagnant labor market could “blow the recovering world economy back into a double-dip recession,” he wrote in a research note today. “It is getting more likely unless a clear exit strategy from the massive monetary and fiscal stimulus is outlined even before it is implemented.”

Roubini, chairman of Roubini Global Economics and a professor at NYU’s Stern School of Business, predicted that the global economy will begin recovering near the end of 2009. The U.S. economy is likely to grow about 1 percent in the next two years, less than the 3 percent “trend,” he said.

Roubini based his short-term outlook on the worsening condition of the U.S. housing and labor markets, which he called “inextricably linked.” He said a “weak” job market will contribute to another 13 percent to 18 percent drop in house prices, bringing total declines nationally to as much as 45 percent from their peak.

I would add to Roubini's pessimism that  bond market investors as of yet do not share the optimism of their brethren in the equity side of the industry.  The run up in yields that brought a 4-handle to the 10 year Treasury appears to have been stopped dead in its tracks, and that maturity has pulled back to the mid threes.  If the run-up in yields foreshadowed a burst of optimism in equities, the pull back would suggest that this rally has nearly run its course.

 The challenge here is two-fold.  The first challenge is to determine how much of the recent equity run is attributable to the weight of evidence that indicates the worst of the downturn is behind us.  With the Armageddon trade off the table, some gains were inevitable, just as was the rise in Treasury yields.  The more difficult challenge is the strength and pattern of the subsequent recovery.  To be sure, one should not ignore the possibility of a blowout quarter here and there, as GDP data can bounce quickly to bounces in underlying data such as a stabilization in auto sales.  But will such a bounce reflect fundamental underlying strength?  A slow, jobless recovery - my dominant scenario - would most likely produce the seesaw trading we saw in the wake of the tech bubble crash, a pattern that held until the housing bubble gained full traction.  Such an outcome looks consistent with the sentiment of Federal Reserve Chairman Ben Bernanke in this weeks Congressional testimony:

Despite these positive signs, the rate of job loss remains high and the unemployment rate has continued its steep rise. Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.

Later, during questioning, Bernanke reiterated:

What will the recovery look like?  Slow. “The American consumer is not going to be the source of a global boom by any means,” Bernanke says.

Sounds like he tends toward the low end of the FOMC's range of forecasts, and suggests, talk of withdrawal of various monetary accommodation aside,  this looks like a reasonable forecast:

BlackRock Inc., the biggest publicly traded U.S. money manager, recommends buying Treasuries maturing in two to five years on expectations the Federal Reserve won’t raise interest rates this year.

“They still see potential downside risks to growth,” Stuart Spodek, co-head of U.S. bonds in New York at BlackRock, said in a Bloomberg Television interview. “The Fed is not going to tighten. It has referenced keeping rates low for an extended period of time.”

With unemployment rates still headed north, it is tough to see the Fed tightening within the next twelve months, if not longer.  But will the job market surprise us?  No clear indications can be gained from initial unemployment claims data which, although battered by unusual seasonal patterns, overall remains consistent with further drops in nonfarm payrolls.  Indeed, this would be consistent with recent patterns of recession.  David Altig declares:

...I'm quite sympathetic to DeLong's theme that the dynamics of U.S. labor markets coming out of recessions appear to have changed starting with the 1990–91 economic contraction. And it might be hard for many people to argue with DeLong's point that the U.S. economy is likely headed toward another so-called "jobless recovery." But until more facts are in and we're able to look back on what transpired, I think we still, at this point, must reasonably count the current run-up in the unemployment rate as a puzzle.

In the comments from my last piece, reader spencer takes a different perspective, noting that forecasters have tended to underestimate the strength of recoveries, and further notes that recent moderate recoveries have followed atypical mild recessions.  The current recession, however, is more typical of the pre-1990 variety, and, as such could be expected to yield a rapid recovery.  A logical analysis from a long-time observer of business cycles; as always, one should have such an outcome on their continuum of possible events, but I tend not to be particularly sympathetic to the mild recession, mild recovery, big recession, big recovery analogy.  It seems to be that a cursory look at the data suggests something very different is happening in the labor market and thus the strength of recoveries since the early 1980s.  Look, for example at the pattern of durable goods manufacturing payrolls:

FW0724093

Previous to 1990, durable good jobs snapped back quickly, but that began changing after the 1980 recession, first with a muted rebound, than a slow return after the 1990 recession, and then with no return after the 2000 recession.  That lack of rebound alone cost the recovery roughly 2 million jobs - and it seems that if the downturn was only mild, we should have expected these jobs to return.  We will lose another 2 million at least by the time the current downturn is complete.  Does anyone think these jobs are coming back?  Anyone?
 

Likewise, nondurable goods manufacturing tells an even worse story:

FW0724092

In previous cycles, a rapid bounce, but simply an outright cliff dive since the mid 1990s.  Again, do we think this trend will be reversed in the upcoming recovery?  Another, albeit smaller sector:

FW0724091

To be sure, information services was coming off a bubble, but stability in the sector remained elusive even at the peak of the recent cycle.  

These patterns suggest to me that the last fifteen years has seen intense structural change such that even mild recessions result in permanent dislocations.  I have trouble that in the midst of such ongoing structural change a deeper recession will result in a less permanent dislocation.  No, I suspect many of these jobs are gone for good, placing an additional weight on the job market during the recovery.  Simply put, the danger is that in even a moderate recovery, the remaining expanding sectors will lack sufficient strength to compensate for these permanent losses. 

Anticipating the comments, another way some might describe the patterns in the labor markets during recent recessions is that a variety of economic policy decisions by both Democratic and Republican administrations have had the impact of dismembering the industrial base of the US without encouraging the growth of sufficient replacement jobs, thereby throwing the American middle class under the train.  That, however, is such a dark interpretation, as opposed to say, cheering the efforts of policymakers to lessen the burden of work on Americans by encouraging foreign nations to forsake their own consumption to provide goods for our citizens.  

Bottom Line:

Recommended Links

AndyfromTucson says...

I personally think looking at what happened in past recessions is not very helpful for predicting the future. To paraphrase Tolstoy, happy economies are all alike, every unhappy economy is unhappy in its own way.

What I prefer to look at is what are the prospects for increasing consumer demand in the next few years, because in an economy that is two thirds consumer demand that is where any recovery is going to come from. And when I look at US consumers I see households with the worst balance sheets in a very long time (if not ever), who had a zero savings rate for the last few years and so can only go down in consumption as a percentage of income, who own more cars than there are licensed drivers, who live in houses much bigger than their parents lived in, and who have stuffed storage units with the all the stuff they bought that they didn't really need. Do we really expect to see a surge in new consumption from these households? Is the next boom going to be fueled by a fashion for 4,000 sq. ft. homes instead of 2,500 sq. ft. homes? Or a fashion for drivers having a different vehicle for every day of the week? Or a fad for buying goods and putting them directly into storage units instead of the previously traditional 6 month stay in the home before they are put into storage? What exactly are we expecting the US consumer to surge out to buy, and where are they going to get the money to buy it?

ken melvin says...

Andy, i like the cut of your thinking. History is always overrated and, in times when the underlyings are so changed, it's mostly meaningless. There is no reason that any recovery will look like the one of the 30ss, the 70s' or even the 80s and nineties. Our economy has been based on spending our savings of whatever form for the past 30 years to buy stuff we don't need that was more and more made offshore - nothing to buy the stuff with and even it there was it would come from China and do our only do our economy more harm.

Beezer says...

I think structural change isn't quite the right way to describe what's happened.

We've destructed our economy: Taken it apart one piece at a time over the past three decades and now find ourselves with nowhere to go to work.

The "trigger" for getting out of all this is constructive change. So where is that going to happen, pray tell?

Energy transformation will be one trigger. The innovation unleashed from this will boost one of our already growing export segments. Environmental preservation technology will be a trigger boosting yet another growing export industry.

Health care reform will be trigger in that it will reduce government deficits and free money up for productive investment elsewhere.

Transportation reform will be a trigger as we segue from a car/truck dominated economy to one more balanced by trains and mass transit.

There's plenty to do. We're going through the initial phase where jobs are lost, but haven't yet entered into the replacement phase where new jobs, new opportunities, are forthcoming.

RN says...

One thing you miss is the effects of the overly strong dollar/pegged Yuan. I think it's a huge mistake to look at the US in isolation.

I'm increasingly optimistic because the number of problems a devaluation of the dollar would help with seems to be growing. Helping the US export sectors and lowering the debt burden are the two big obvious ones, but there are many others, like moving to alternative energy solutions as the price of oil would rise.

It now seems that the world we're looking at is the remnants of the results of an excessively strong dollar: excess consumption, a hollowed out manufacturing sector, debt levels, deflation, etc. And that many of those problems could be alleviated concurrently by going in reverse: by some sort of controlled devaluation.

The world would kick and scream, especially China. But they'd be wrong to do so.

China needs the US to be a healthy consumer. But the US consumption will not go up while people are scared to death under huge debt levels, restrictive credit, and with 400k+ jobs bleeding away every month. If the export sector can rebound, the employment numbers stabilize and improve, the US will begin to consume again. China would be smart to take some capital losses now in order to allow the building of a sustainable market for its goods later.

Confidence is a huge component in the willingness to take risk. As long as all these imbalances persist, fear will reign. But growth comes only with risk-taking. And we all desperately need a return to growth.

It's time for all parties to realize that these imbalances unwinding is in everyone's interest.

I think over time this will become an increasingly clear and politically palatable solution to policymakers.

 

[Jul 24, 2009] FT Alphaville » Blog Archive » Goldman sheds bail-out legacy

Selected comments

tom a taxpayer

The taxpayers

1) give Goldman Sachs $12.9 billion free thru AIG, and

2) provide Goldman Sachs a $10 billion TARP loan: total $22.9 billion.

Goldman Sachs repays $11.4 billion for the loan. Taxpayers suffer a 50% loss ($11.5 billion).

Goldman Sachs prefers to think of it as a 23% return to taxpayers, record quarterly earnings of $3.4 billion for Goldman Sachs, and setting aside $6.65 billion for record bonuses and benefits for Goldman Sachs.

But this does not even begin to account for the hundreds of billions in $ and benefits that the feds (and unwitting taxpayers) have given Goldman Sachs over past few decades. Here's just a few recent examples mentioned in the opening prayer at a recent GS board meeting:

"Thank Hank Paulson, the Godfather, for killing our competitors Bear Stearns and Lehman, for knee capping Merrill Lynch, for saving our behinds from billions of $ of counterparty risk at Fannie, Freddie, and AIG. Thank Hank for colluding with the Fed to allow us to become a bank holding company, giving us access to vast pools of money when we were about to go bankrupt. Thank Hank, truly a family man, for allowing the Goldman Sachs family to control key positions at the U.S. Treasury and to advise him on how best to fleece the taxpayers."

For Goldman Sachs to brag about a "profit" of $1.1 billion to taxpayers when GS is the ringleader in the mob that raped and pillaged the mortgage industry, ruined the housing market, destroyed the credit system, endangered federal/state/municipal financing, pension funds, and the banking system, sent the economy into a downward spiral, endangered the world financial system, extorted the U.S. and the world to pay them billions in ransom or face the destruction of the world financial system and economy, and now are costing taxpayers hundreds of billions, even trillions of $ is beyond chutzpah...it is despicable.

[Jul 24, 2009]FT Alphaville » Blog Archive » Re-Remic-ing the Talf

Re-Remic-ing the Talf

Commercial real estate has, rather suddenly, become the new doom-spot for the US economy.

Fed chairman Ben Bernanke is worried about it, Morgan Stanley and Wells Fargo posted losses because of it, and S&P is confusing everyone about it.

The ratings agency’s sudden about-face on downgrades for certain triple A-rated CMBS, in particular, caused a bit of a furore on Wednesday. S&P had previously warned that it might downgrade billions worth of CMBS because of proposed changes to its ratings-methodology for the securities. That sent ripples through the CMBS market, especially since only AAA-rated CMBS is eligible for the Federal Reserve’s Talf programme, aimed at supporting ABS issuance.

... ... ...

Structured finance to the rescue!*

*(Because it worked so well the last time).

Welcome to Economic Hell -- Seeking Alpha by Karl Denninger

The last week or two I had noticed that the /DX (dollar index) had a somewhat-odd correlation to the stock market - one that had not been present to the same degree, if present at all, before.

Specifically, it would move just before the /ES - S&P futures - moved, and the correlation between the two was almost lock-step.

I had mentally blocked out the worst of the possibilities until last night, when it was said right up front by a user who had lunch with a banker in Australia: The dollar has become a carry-trade funding currency; he was executing an increasing number of these trades with the dollar.

We are following Japan's script almost exactly, but our trip down this road will be far worse than it was for them, because as a nation we are monstrous net importers and in tremendous debt, both as consumers and as a government, where Japan is a net exporter and their population is full of savers.

Tuesday I wrote about the dollar decline powering this latest ramp job in equities, but this development, if it has become widespread, is a major problem for The United States, and opens the yawning maw of a trap that we will find it tremendously difficult to escape from.

Japan has been essentially trapped at zero interest rates and moribund economic growth - essentially zero - for more than a decade. The Carry is a big part of that, as it depresses the currency, since the carry is essentially a short on the funding currency. As traders press those bets the currency comes under increasing pressure, which increases import prices (but makes exports more attractive), draining resources from the "host" country that has become the funding currency.

Putting a stop to it means raising interest rates even if the consequence would be a severe economic recession or worse, and the longer it goes on, the worse the damage in the form of structural distortions in the economy is. But refusing to raise interest rates means that not only does the distortion continue but the damage from ZIRP continues as well - borrowing no longer becomes a function of interest cost .vs. marginal utility but rather simply a matter of whether you can find someone that will let you borrow at all.

Carry trades can also unwind due to exogenous (not interest-rate) pressures - should there be a sharp upward spike in the dollar these trades suddenly (and very painfully) go "underwater" as the currency translation is an integral part of the profit (or loss) in the transaction. This "unwind" feeds on itself as to liquidate the carry you must buy dollars, which in turn adds yet more upward pressure on the currency, which makes the spiral tighten even more. This is what happened to Japan over the last year as the crisis deepened, and it decimated their exporters (and stock market) last year.

The paradox is that you'd think this would create tremendous inflationary pressures. But that's not what has happened in Japan - they wound up with incredible deflationary pressures instead, because consumption became much less desirable than export! As such the policy "prescription" becomes yet more easing, but with interest rates at zero the policy folks are left scrambling for yet another knob to turn of some sort.

In the United States this will be ugly, because we're not an exporting nation. Instead of being able to "prefer" export we are instead likely to find quite-crazy ramps in certain import prices, specifically oil. That in turn makes economic recovery nearly impossible, as it sets up even more structural dollar flows out of the country.

Nor is this supportive of asset prices in the intermediate term. Sure, it looks good when you get a 7% stock market rally when this begins, but have a look at the Nikkei - their market topped at 40,000 and has never been anywhere near there since. Real estate prices have not recovered their previous highs and remain moribund, and the former "never get laid off" Japanese economic model has been laid waste, with generations-long policies abandoned as simply unworkable.

This is something we should not have allowed to happen but we now have, and it is now incumbent on The Administration and The Fed to put a stop to it before it becomes pervasive. Determining exactly how much "carry" is out there is difficult; if The Fed has a handle on this they sure aren't going to divulge it, just as Japan's Central Bank never has, but the impact, especially when you get forced unwinds, are vicious and impossible to ignore.

For those who said "we won't make the mistakes Japan did" let me point out that we have indeed made all of the same mistakes and now we're getting the same results.

Why is it that Einstein's exhortation continues to echo in my head?

Insanity is doing the same thing over and over but expecting a different result.

[Jul 23, 2009] Who Rules America Pension Fund Capitalism

Any lingering thought that many public pension funds were not much more than happy hunting grounds for Wall Street sharks came crashing down in 2008-2009 as it became clear that public officials, pension fund managers, and political operatives had been for all intents and purposes bribed by rich financiers who wanted the opportunity to take big risks, and make huge profits, with government employees' money. With 40% of all public pension funds investing some of their money in hedge funds in 2008, a cool $78 billion overall, they were a huge source of investment funds for hedge fund managers (Wayne, 2009b),

In addition to large losses for some pension funds due to the risks taken with their money, there were legal problems and scandals for Wall Street bankers and their political go-betweens as it was discovered that criminal activities were part of the picture. For example, in April, 2009, a hedge fund executive pleaded guilty to securities fraud after admitting that he had been paid a stunning $5 million for helping to make it possible for the politically well connected Carlyle Group (an "equity fund" that invests large sums of money for wealthy people) to invest $500 million of New York state pension funds in an energy investment fund managed jointly by Carlyle and another private equity firm (Hakim, 2009; Wayne, 2009a). There are several other such scandals that could be recounted here, and many more that will have surfaced after this document has been completed and on this site for a year or two. It is like a re-run of what happened with "other people's money" in the first ten years of the twentieth century and then again in the 1920s.

As of 2007, institutional investors owned 76.4% of the stock in the 1,000 largest U.S. corporations, an all-time high, up from 46.6% in 1986 when the institutional investor movement began. The list of institutional investors now includes investment companies, mutual funds, hedge funds, insurance companies, banks, and foundations and endowments as well as pension funds. Strikingly, public pension funds only control 10% of these assets, double the percentage they had in 1985, but not much more than the 8% they held in 1994 (Brancato & Rabimov, 2008). Even if public pension funds had the political independence and will power to try to influence corporate boards, they don't have enough assets to make a push without allies. As for their best allies, the union pension funds, they have been decimated for the most part by downsizing, off shoring, and corporate failures in major manufacturing industries.

Conclusion

No one can be 100% sure, but it seems highly unlikely that institutional investors from public employee and union pension funds ever will be able to create a coalition of institutional investors that could do anything more than chide, chastise, or confer with directors and executives from the large corporations in which they invest. They are not a threat to the current power relations in the corporate community. They actually play their largest role when rival private investors vie for their voting support in takeover battles, or when they agree to take part in the profit-making schemes hatched by billionaire financial firms. However, in spite of all their defeats, the Council of Institutional Investors and the Corporate Library still soldier on, hosting meetings concerning "good corporate governance," providing hopeful interviews to newspapers and magazines about the likelihood that things are going to change soon, and selling their advisory services to institutional investors. They are gadflies who do well while doing good.

Looking back at the most vigorous days of the movement, from roughly 1988 to 1993, very little was accomplished. It is now possible for small stockholders to communicate with each other more easily, thanks to a ruling by the Securities and Exchange Commission in 1992, and corporate executives more readily meet with institutional investors. However, no stockholder resolutions relating to corporate governance came close to passing during or after the heyday of the movement. Even the most positive assessments of this activism conclude that it had "negligible" effects on the major issues that ostensibly motivated it, higher earnings and higher share prices (Karpoff, 2006)

[Jul 22, 2009] Jamie Dimon v. Larry Summers

  1. Michael Brenner

    The administration’s response to the financial crisis has been irresponsible in two respects. One, it has taken the well-being of the biggest institutions as its principal point of reference. Two, its ramshackle approach does little if anything to resolve the structural flaws in the system and their deleterious effects on the general economy (even when it functions on its own distorted terms).

    The blame should be placed squarely where it belongs: in the Oval Office. Let’s summarize the record.

    1. Obama knowingly appointed as his senior officials people who were intimately connected to the old system – professionally and intellectually. That is one.
    2. He exiled Paul Volcker because Volcker had convictions and ideas that ran against the grain of Obama’s own thinking. That’s two.
    3. Obama gave no support to promoters of bankruptcy law reform or a workable program to aid home debtors in risk of foreclosure. That’s three.
    4. Obama has curried favor with the big boys on Wall Street while savaging the managers of GE and Chrysler. The latter were poor executives but neither dishonest nor calculated schemers at the expense of the public interest. He clearly identifies with the former socially and intellectually. That’s four.

    The sad conclusion is that Obama, for all the razzmatazz, is a conventional thinker, instinctively deferential to the powers that be, and uncomfortable with those who have both his level of intelligence and convictions about dedication to the commonweal that are totally foreign to him.

    cheers,
    Michael Brenner

  2. OregonGuy

    Not sure about the “vs” in the title. The more likely scenario is Summers and Dimon laughing together over the need to placate the sheeple with a “reform”. They agree on a toothless Consumer Protection Agency as the least bad (for bank interests) of the available options. As agreed, Dimon strenuously objects in public that the CPA will “destroy banking as we know it” as a smokescreen.

    Business goes on as usual. Summers collects millions in “consulting” fees from Wall Street when he leaves Government. Dimon buys a bigger yacht and gets that G5 he’s always wanted.

  3. paul94611

    Whatever Diamon or Blankfein want, they get. It is these two bankers who run America, not the president or anyone else. If these two do not want consumer protections, true regulation of derivatives or an audit of the Fed then these thing will not happen. Or, not happen in any way that will actually accomplish anything but to transfer risk from the banks to the government for failures to act in the future. Everyone already knows that Larry Summers is just another Washington water boy so why listen to, or print anything he has to say?
     

  4. bayardwaterbury

    You know, there has been much rhetoric justifying the continuation of “business as usual” in Financial America (e.g. profits, bonuses, etc.). When Larry pretends to talk tough, we all get the idea. He has to feign concern. He has to defuse criticism (from all sides) relating to the result of such massive government intervention. I, of course, don’t buy any of it, UNLESS he puts some teeth in it: make the banks offer top dollar for the now valuable warrants, and, if the old practices continue, threaten to pull all government guarantees (since the industry is now riding on the good faith of the American government to profitability — although recent analysis makes those profits look like a one-time financial sleight of hand).

    Tough talk to the Plutocrats seems such a waste of breath. But the tragic ballet is entertaining!!

  5. Katharine

    vilify – 1. To make vile; debase; degrade….
    (Webster’s 2nd International)

    No, bankers should not be vilified, yet they have done this to themselves for a long time now and show no sign of stopping, hence the need for external restraints.

[Jul 22, 2009] Is Obama Gorbachev - Clusterfuck Nation

An interesting jeremiad ;-) One quote: "The way I see it, Mr. Obama just doesn't have much time before his authority and legitimacy slough off and he is left with only his genial smile."

As president, Barack Obama is faced with the essential fraudulence and unreality of the US economy.  Notice that, as ominous as they are, the wars in iraq and Afghanistan have generated only minimal protest so far in the early Obama period, despite the fact that they are not operationally different from their conduct under Bush. There is no protest because, for now, a consensus exists that our troops are in these places for perceived reasons -- to keep Mideast oil supply lines open... to keep Islamic maniacs busy in their own backyard instead of on US territory... to keep Iran in a vise... to maintain the American "empire" (take your pick). There's something there to appeal to a broad majority of US voters. Unlike Vietnam, Iraq and Afstan are not perceived as out-and-out frauds.

But the economy is.  Since September of 2008, when Hank Paulson began shoveling bail-outs to the very banks who screwed the world on fraudulent and unreal securities, and left American society comprehensively bankrupt, the consensus has only deepened on the perception of an historic swindle. And so far, President Obama has positioned himself as chief enabler to further swindling. One need look no further than the rulings this past spring of the Financial Accounting Standards Board (FASB) as authorized by the Securities and Exchange Commission (SEC, an official government agency, created 1934), which have allowed the biggest banks to pretend that the fraudulent paper in their vaults does not have to be recorded as a loss on their books.

The US economy is now dying a slow and painful death because it had become based on activities that had nothing to do with producing real wealth. Instead, it became dependent on rackets, that is, behavior geared to getting something for nothing.  These rackets are often summarized under the acronym FIRE (for finance, insurance and real estate), a system set up to strip-mine profits from the wish commonly labeled "the American Dream" -- itself largely a product of televised advertising and propaganda.  The end product of all that was the doomed economy of suburban sprawl, an infrastructure for daily life with no future in a world defined by fossil fuel scarcity. The unraveling of debt at every level now is directly related to the mis-investments made in that way of life.

By now, it's self-evident that the "change" voted for in November's election was too horrifying to articulate.  It still is.  The suburban sprawl economy was all we had left.  Now it's gone and we're stuck with all its deleveraging after-effects -- the worst case of "buyer's remorse" since the fall of Nazi Germany. Thus, the only "change" that President Obama can really work for is the health care system, which is a life-and-death matter. The sordid rackets so ostentatiously infecting the system boil down vividly to lives ruined and bankrupted, and a system more frightful to deal with than disease itself. Probably the baseline truth is that health care will end up being rationed one way or another. It's another prime symptom of population overshoot, and a reminder that life is tragic.

As another blogger put it so nicely last week on the web (sorry, but I forget who or where), this isn't a "recession," it's a collapse. The excellent Dmitry Orlov has outlined the process very nicely in his book "Reinventing Collapse" about the parallels between the demise of the Soviet Union and the prospects for demise of the US as currently constituted.  Mikhail Gorbachev presided over the Soviet collapse. He must have been a leader of very subtle abilities.  Not only did he survive to enjoy a busy second act of life with a Nobel Prize in his pocket, but he accomplished a nearly bloodless transition in a society long-conditioned to bloodletting as the primary political act.

Here in the USA, where we have had over two hundred years experience with peaceful power transitions -- even during the convulsions of 1860-65 -- the outcome this time might not be so appetizing. It would be one of the supreme ironies of history if it turned out that the US was incapable of ending its most self-destructive rackets peacefully and bloodlessly, while the Russians shucked off its Soviet racket like an old sweater. 

The way I see it, Mr. Obama just doesn't have much time before his authority and legitimacy slough off and he is left with only his genial smile. The "hope" vested in him will end up in a Museum of Lost Hopes, along with the integrity of TV news and the rectitude of the medical profession. And funding for that museum will be cut by President Sarah Palin, representing Naziism US style -- i.e. Naziism without the brains

Selected comments

TedC

Reading the comments here for the last few weeks has really impressed, and depressed me about the number of people who really want a free lunch.

All this negativity about taxes, government, etc.. WTF? How about, when your house is on fire, you just STFU and put it out yourself? Fire engines aren't free, you know. How about we go back to nothing but dirt road cart tracks? who needs pavement?

I think most people are angry about feeling ripped off. The greatest joke, though, is that the people ripping us off have convinced everybody that it's the other guys fault. Nice to own all the media, isn't it?

Good luck, everybody. I think the bottom line is that this planet is good for about 1 billion people, max. Lotsa fun ahead getting to that number, for sure!

Randall Flagg

"This is analogous to the position Barack Obama now finds himself in. He was elected as the politician most trusted in America to change the fraudulent and unreal operations of the US government."

'Fraid not, Pal. Barak Obama was SELECTED by the filthy rich of this world to dupe the Murikan sheeple into believing that things would change for the better if they went to the polls and pushed the Diebold button for BO.

Hope is a waste of time, man. Nothing will change. Everthing and everyone is totally fucked. The horror is coming. If your not part of the filthy rich, equiped with your own SOG, Xe or special ops boys, you're going to be part of the hell on earth.

aszasz

"...it will be so bad by the next election cycle that palin will come through as the shining star..."

If Palin is on record having criticized Obama's policies that led to shit stew, why should she not be seen as "the shinning star"?

Obama currently holds office because he was the anti-Bush. Everything Bush was for Obama was against. Except he wasn't. He only said he was. Enough people believed him to elevate him to "shining star" status. Shit stew tends to dull the shine of the reigning star and add sparkle to the coming anti-Obama.

Cognitive Dissident

JHK, it is strange that you can be so perceptive about the pending US collapse but too simplistic about the USSR "transition". Of course the "Communist Party" is no longer in charge, but there is perhaps as much continuity as change - look at the lack of free elections or free speech, (geographically limited) imperial ambitions, power of the (ex-)KGB class, etc, etc.

In addition, unlike the unfolding US problems, the USSR collapse was NOT due to a lack of oil - if anything, a global excess which led to a reduction in oil revenues for a debt-laden Soviet state.

Finally, Gorbachev focussed on political "reform" while neglecting to fix the problems in the "real economy". Here, Obama is making the problems in the financial economy worse by bailing out the crooks, while the political reforms are quite cosmetic.

So - while I agree with your analysis of the situation in general - it seems that Obama is like Gorbachev only in terms of (a) "change" rhetoric and (b) leading the country to collapse by completely misunderstanding/ignoring/etc the fundamental problems, while being unlike in all other ways.

It all begs the question as to what extent either of them were/are doing this deliberately as part of a wider intention to allow the "Power Elite" to profit from a crisis as they have *always* done historically.

JHK, will you come off the fence on this one as it relates to Obama?

cowswithguns

If Obama is actually able to transition us peacefully like Gorbie did in the Soviet Union's twilight, I think that would be telling -- in a very bad way -- of what our country has become.

The looting of the treasury that has been going on since Bush -- and continues under Obama -- is so blatant and is going to have so many negative, real world ramifications (and all just to make some rich robber barons whole) that it would be surprising if at least a few banksters weren't tarred and feathered by a gang of unemployed carpenters during the transition.

Unfortunately, though, the masses don't understand blind credit default swaps, collateralized debt oblgiations, etc., and the victims of a collapse-induced riot are probably more likely to be akin to a poor immigrant family than some Bangkok-hooker-banging, old-lady-pension-stealing, worthless-401k-hocking well-dressed Wall Street thug.

Bullshit.

And speaking of Nazis, don't you think Germany would be recalled in a much more favorable light if its people actually rose up and killed Hitler, thus stopping the war? But they didn't, and woe be upon them for all of history.

Posterity, I fear, will judge us the same way. The masses are so tightly clinging to their soon-to-be-zeroed-out 401ks and their dreams of one day being a rich asshole that they don't want to do what's right -- stop the looting, starting with protests in all major cities.

But, nowadays, we're like cows -- to the slaughter. Or are we -- http://www.youtube.com/watch?v=FQMbXvn2RNI&feature=related

Also, regarding those who don't think Elliot Spitzer would make a good AG just because of his penis -- So what Spitzer was paying for some action? Illegal sure, but if he could have kept a muzzle on the Wall Street crooks and thereby salvage what's left of our republic, I would have gladly looked the other way. An overactive penis doesn't take away your legitimacy as a political leader, so long as you're a good one. And if Spitzer wasn't good, do you think he would have been taken down by the people who truly run this country (Wall Street)?

[Jun 22, 2009]  Why Jim Rogers Has Covered All His Short Positions

He said he would rather short bonds then stocks in the current situation....
CommodityBullMarket.com

"Because they are printing money," he says...and believes that stocks could go to very high nominal levels, while the currency becomes worthless.  

I was just catching up on Rogers latest media appearances, and found this video on CNBC from a couple of weeks back.

Jim's still pounding the table that we've got a currency crisis on the way...while giving a long, hard glare at the dollar as the prime culprit.

And of course, he still loves commodities.

Enjoy the video!

[Jun 22, 2009] Feldstein: Risk of Double Dip

Feldstein strikes me as probably the only more or less credible Reaganine (he was . Analyses provided by Feldstein is rather weak, but the conclusion is interesting and intuitively appealing as there is no forces that can sustain recovery after the effect of the stimulus disappear... 
Jun 21, 2009 | CalculatedRisk

From Bloomberg: Harvard’s Feldstein Sees Risk of ‘Double-Dip’ Recession in U.S.

... “There is a real danger this is going to be a double dip and that after six months or so we’ll have some more bad news,” [Martin] Feldstein, the former head of the National Bureau of Economic Research and Reagan administration adviser, said today in an interview on Bloomberg Television. “We could slide down again in the fourth quarter.”

The economy could “flatten out” or “even be positive” in the third quarter, and then it’s likely to contract again in the last three months of the year as the effects of the federal stimulus program wear off and companies finish rebuilding inventories, he said.

“There isn’t going to be enough to sustain a really solid recovery,” he said, even though recent data has provided some “good news” on the economy.

This was the key point of the Texas Instruments post yesterday (with conference call comments on inventory). There is a possibility of short term growth as companies rebuild inventories, but then an extended period of sluggishness since end demand is flat.

Selected comments

splat

DOUBLE DIP ?? The first DIP hasn't finished yet... talking about green shoots and putting on rose tinted goggles doesn't make things better.

We are seeing structural employment changes here, basically for the next few years there simply won't be the jobs, they'll have been offshored, outsourced and the existing employees expected to re-double their efforts just to stay in a job. In that environment even the middle class will have huge problems.

I'm just waiting to hear the talk of the a "triple dip" recessions from the usual economic nimrods.

- splat

Bob Dobbs

 "Step 3: Unanticipated, ongoing, revenue declines cause the budget crisis problem to get even worse... "

Absolutely agreed. The budget "agreement" itself is a success to the pols in that it buys time -- whether or not it ultimately works. "Pretend and extend" isn't just for banks.

nova

Stair steps are kind of a dip I guess.

MS

I think depression is too nice. As the Kunstler article points out (Obama=Gorbachev) it's not a recession or even a depression....it's a collapse.

Albeit in slow-motion.

Credit-

I hear ya! many other people did as well- I happened to get lucky and unloaded my SPY puts for almost a 90% gain the day before the whoosh up last week....don't get me wrong..it was luck pure and simple. Whenever you hear about technical patterns in the MSM you know it's a set-up.

Ciao
MS

Expected Returns

MS,

expected returns-

I think depression is too nice. As the Kunstler article points out (Obama=Gorbachev) it's not a recession or even a depression....it's a collapse.

I totally agree. The demise of the dollar is coming, which would be the event that precipitates any collapse.

[Jul 22, 2009] Goldman and JPMorgan -- The Two Winners When The Rest of America is Losing

July 16, 2009, 11:32AM
 

Besides Goldman Sachs, the Street's other surviving behemoth is JPMorgan. Today it posted second-quarter earnings up a stunning 36 percent from the first quarter, to $2.7 billion.

The resurgence of JPMorgan and Goldman Sachs gives both banks more financial clout than any other players on the Street -- allowing both firms to lure talent from everywhere else on the Street with multi-million pay packages, giving both firms enough economic power to charge clients whopping fees, and bestowing on both firms even more political heft in Washington.

Where are the antitrusters when we need them? Alternatively, why isn't the government charging Goldman and JPMorgan a large insurance fee for classifying both firms as "too big to fail" and therefore automatically bailed out if the risks they take turn sour? Instead, we've ended up with two giants that now have most of the casino to themselves, are playing with poker chips backed by taxpayers, and have a big say in what the rules of the game are to be.

When JP Morgan repaid its federal bailout of $25 billion last month it was, like Goldman, freed from stricter government oversight. The freedom has also allowed JP, like Goldman, to take tougher and more vocal stands in Washington against proposed financial regulations they dislike.

JP is mounting a furious lobbying campaign against regulations that would funnel derivatives trading through exchanges where regulators can monitor them, and thereby crimp JP's profits. Now the Street's biggest derivatives player, JP has generated billions helping clients navigate these contracts and assuming counter-party risk in such transactions. Its derivatives contracts were valued at roughly $81 trillion at the end of the first quarter, representing 40 percent of the derivatives held by all banks, according to the Office of the Comptroller of the Currency. JP has played down its potential risk exposure from these derivatives contracts, of course, but anyone who's been paying attention over the last ten months knows that unregulated derivatives have been at the center of the storm.

The tumult on the Street has also given both firms extraordinary market power. That's where much of the current profits are coming from. JP used the crisis to snap up Bear Stearns in March and Washington Mutual last fall, with the amiable assistance of the FDIC. The deals have boosted JP's dominance in retail banking and prime brokerage, enabling it to charge its corporate clients heftier fees for lending and other financial services, and to corner more of the market in fixed-income and equities. JP also bolstered its earnings by helping other financial companies raise capital following the stress test results in May.

Antitrust law was designed to prevent just this sort of market power and political heft. The Justice Department or the Federal Trade Commission should investigate the new-found dominance of Goldman and JP -- and, if warranted, break them up. Alternatively, Congress should impose a surtax on the newly-exclusive group of Wall Street firms, most notably Goldman and JPMorgan, which are now backed by implicit government bailout insurance guaranteeing that, should they get into trouble, taxpayers will keep them afloat. The surtax would approximate the economic benefit to these firms of such government largesse, which I'd estimate to be at least 50 percent of their profits from here on.

[Jul 22, 2009] Daily Kos Details Emerge of Atrocious CA Budget Deal

Jul 20, 2009

 It is important to bear in mind what voters actually want to see in the state budget:

The vast majority of voters surveyed said the state should balance both spending cuts and tax increases to address the state budget shortfall. Revenue options supported by a strong majority of voters include:

Increasing taxes on alcoholic beverages (75% support)

Increasing taxes on tobacco (74% support)

Imposing an oil extraction tax on oil companies just like every other oil producing state (73% support)

Closing the loophole that allows corporations to avoid reassessment of the value of new property they purchase (63% support)

Increasing the top bracket of the state income tax from nine point three percent to 10 percent for families with taxable income over $272,000 a year and to eleven percent for families with taxable incomes over $544,000 a year (63% support)

Prohibiting corporations from using tax credits to offset more than fifty percent of the taxes they owe (59% support)

While voters strongly support these options to help California increase its revenue, voters are strongly against specific spending cuts proposed by Governor Schwarzenegger:

76% oppose cutting public school spending by $5.3 billion

73% oppose cutting funding for state colleges and universities by $1.2 billion

68% oppose cutting the state's funding for health care services by $1.1 billion

62% oppose cutting the state’s funding for homecare services by $494 million

[Jul 21, 2009] Fed's Game is Delay and Pretend

MyCountryIsDestroyed says:

Please consider this at the most basic level.

The real measure of a nation's economic strength is its ability to produce goods and services. On that count, the US is completely destroyed. Even worse, TPTB have convinced a portion of the population that we don't need to produce anything.

Instead, the US is reduced to smoke-and-mirrors, TARP, bailouts, PPIP, $24 trillion in the hole, deception, speculation, Ponzi schemes, scams, food stamps.........

None of the smoke-and-mirrors will really work. We all know it. Now we are stuck with one scam after another. Please consider looking at Paul Craig Roberts' columns that suggest that we don't really have an economy. We replaced our economy with schemes and deception.

When are the American people going to scream "NO MORE" and do something about it?

The Emperor has no clothes. Time to stop pretending.

[Jul 21, 2009] Another Nail in Buy-and-Hold's Coffin

Good post, must read !
Selected comments

lainvestorgirl says:

Don't worry, it will all be okay once we drink the koolaid... 

black swan says:

“sigmonster says: 
 
"@black swan 
 
In this video, Paulson indicates that his family is not invested in Goldman........." 
 
Sigmonster, who are you going to believe, me or that liar, Hank "the crank" Paulson? 
 
From the Video: 
 
Rep. Kaptur: "Have you or your FAMILY had any financial ties or investments related to Goldman Sachs, in any way what so ever?" 
 
PAULSON: "No." 
 
REP. KAPTUR: "What about Bank of America?" 
 
PAULSON: "Not that I know of." 
 
Obviously Paulson, like Geithner, doesn't pay attention to his tax returns. Here is the truth: 
 
When Paulson took the Treasury job in 2006, he sold $500 million of his Goldman Sachs holdings and put them into to Treasuries, tax free, and sold another $100 million in Goldman Stock, from which he realized a $40 million dollar profit, tax free, and put them into a family trust, the Bobolink Foundation. Then he resigned as President, leaving his son and wife in charge of over $106 million. Here were some of the foundation's holdings when Paulson was Treasury Secretary: 
 
$53 million Goldman Sachs 
$397,000 Bank of America 
$250,000 Countrywide (taken over with BAC bailout money) 
$8.5 million Freddie and Fanny 
$650,000 Hartford Insurance Group 
$730,000 HSBC 
$798,000 JPM 
$730,000 Morgan Stanley 
$830,000 PNC 
$772,000 Regions Bank 
$962,000 Wells Fargo 
$500,000 Whacovia (which Wells Fargo acquired using TARP money that Paulson gave them) 
$500,000 Sovereign Bank 
$243,000 WaMu (which JPM acquired using TARP money that Paulson gave them) 
 
What do all these financial institutions have in common? They were holding Paulson family trust assets and he bailed them out with taxpayers' money. 
 
Paulson's Bobolink Foundation was set up to donate money for environmental causes. In 2006, the Bobolink Foundation gave over $1.5 million to the First Church of Christ Scientists, $453,000 to Wellsley College, and $50,000 to Harvard Business School. I wonder if they got any bumper stickers that said, "Save the Harvard Banksters". I can only hope that they are an endangered species. 
 
To prove that I am telling the truth and that Paulson is lying, Here is a link to the Bobolink Foundation's 2006 tax returns. 
 
http://dynamodata.fdncenter.org/990pf_pdf_archive/942/942988627/942988627_200703_990PF.pdf

Social Vandal says:

“In a book I am reading about the First Depression, it states production in the US (from 1929 to 1931) declined 40%. I wondered why so much then and so little now. 
 
Well, having gone to a Dairy Queen Gril and Chill with my two youngest, I noticed the photos on the walls all depicting 1940-1950 Dairy Queen events. As the kids sat there giving themselves sugar-induced diabetic comas, I thought about what life must have been like back then. 
 
We made all of our own TVs, Radios, Cars, Planes, Type-writers, machine tools, steel, telephones, office equipement & supplies, hardware, fixtures, etc. And we did so in 1929. 
 
We had a manufacturing economy to be decreased. Today, where can we get a 40% decline in any industry since I believe most of what we sell we import? So, Japan takes the 40% decline in production. 
 
We are getting a slow stangulation of retail/service jobs being masked by fiat printing and government welfare handouts? Down from over-time a few years ago to 33 hours per week? That does appear to be what is happening? 
 
Are we just holding on? Are we stretching the rubber band and will something snap? Are we all to become wards of the state living on extended unemployment and food stamps? 
 
Help me here folks.

[Jul 21, 2009] Resist The Urge To Punish Success by Mark Gimein

Money can't buy love but they can buy WaPo authors. For proof, look no further than Mark Gimein ;-)

Money can't buy love? For proof, look no further than Goldman Sachs.

Selected comments

davideconnollyjr wrote:

Mark Gimein, you must not understand what Goldman does.

Yes, there are those that berate Goldman because they are jealous, and there are those that berate Goldman because they don't like the white establishment, but there are those that berate Goldman for the right reasons, because of what Goldman does. Goldman makes much of its money essentially betting on whether things like oil, various crops, and timber will go up, or down in the future.

Some of this doesn't take an overly bright person -- we all know that gas prices rise during the summer, and oil prices rise during the winter, but you still get paid for betting on these things, though the predictability of such events lowers the odds, and you are tying up money that could be wagered on a higher paying bet. Who pays for all these payouts? The answer is, we do. We all pay higher prices for fuel, home heating oil, corn, timber for building, you name it. All of Goldman's profits ultimately come out of our wallets. Artificially stimulating demand for products to exacerbate price fluctuations is how Goldman makes money. It introduces volatility into the market, and creates artificial forces that help drive markets. It should be illegal. People that make a living manipulating other people's money are parasites that drive up the cost of everything. Companies that make a living artificially inducing stimulus into the markets, and then taking it away contribute to market volatility, and magnify price spikes via automatic, parameter set trading programs, that execute trades before individual consumers can bail, ensuring the margins are at least better than the people that actually front the capital. If Mark knows what Goldman does, and still supports it, then he is part of a big problem we have in America, of parasitic middle men looking for big, easy paydays, at the expense of everyone else.

maxtor0 wrote:

When you eat too far down the food chain, you disrupt the entire sysytem.

When profits at the top are derived from removing as much as possible from those at the bottom, eventually the system collapses.

The folks at the bottom, the ones buying merchandise from stores, cars from dealers, houses from realtors and gasoline to fuel their way to work, are a finite resourse.

When gas started to rise, people started cutting back, when interest rates started to rise people cut back on spending. Eventually soo much money was being bled from those at the bottom, that many could no longer buy discretionary items, and pretty soon, necessary items.

As they stopped buying, the need for people to sell them stuff, to manufacture stuff and transport stuff, dropped.

As these people no longer had an income they stopped buying as well. Result: as the bottom collapsed, the top of the econommic food chain crashed.

And it will again. Soon.

Gas prices again are exploding, creditcards and banks are rasing interest rates, fees penalties and payment percentages.

The stress this puts on the food(the folks at the bottom of the economic pyramid)insures that a crash is inevitable just like in a food chain - when you over harvest a food source, like oysters, crabs, bison, it collapses and you have to find a new source of food -or starve.

Already there are ominous signs in the retail sector as spending by consumers is once again falling, and stores are stll failing.

That's not success - that type of profit built on the system above is merely exploitation of your resources insuring large scale failure.

pelican4 wrote:

Goldman Sachs is not a "success"; it is a corporation driven by total self-interest, greed and questionable ethics. It has made billions of dollars on the backs of ordinary Americans by speculating with our federal funds for free while doing nothing to help the nation get back on its feet. Successful corporations are ones that stimulate job creation for the 10% of Americans who are unemployed. Successful investment firms are ones doing something to help individuals get something in return other than 0% yields for their hard-earned savings (as opposed to Goldman's speculative trading that is turning our investment markets into volatile casinos). We do not want to punish success, we want to punish and stop selfish greed that is achieved at the expense of the rest of the nation.

JEAtkinsonUSNavyret wrote:

As has happened throughout the recession, the banks, investment companies, brokers, and those who support them have missed the entire point about why people are so enraged about the huge profits they claim.

The point that is missed entirely by Mr. Gimein and others who support the system as it is now, is that people are not upset by, nor do they want to punish success. Rather, people are upset by and want to punish a system that is so flawed that it only rewards a small number of already wealthy players while leaving 90 percent of the population in increasingly worse financial straits.

Between 1946 and 1970, the percentage of people sharing in the total wealth of the county (what is called the Gini Coefficient or distribution of wealth coefficient), was close to 46 percent. What that means is that 46 percent of the U.S. population shared 90 percent of the wealth.

Starting with the pushing of Reagonomics in the 1980s and accelerating in the beginning of the 2000s at a pace unheard of since financial records were kept until the financial crisis starting in 2007, the percentage of people sharing in the wealth of the country dropped to the point that now, as of 2008, 1 percent of the people in the U.S. control 90 percent of the wealth. In fact, as shown by Bureau of Labor Statistics data, 10 percent of the population now controls 98.7 percent of the wealth in the United States.

Along with the concentration of wealth in the hands of fewer and fewer people, the middle class income has shrunk and the lower income levels have all ballooned as the other 90 percent of the people vie for the remaining 1.3 percent of the money available to them.

What that means is, like the increasingly poor and hungry in 1789 France watching the royals dining on delicacies and living the high life while the average person was starving and dying, the huge profits earned by companies like Goldman Sachs and J.P. Morgan Chase do not mean anything to the normal citizen. They do not mean anything to the normal person, because, while the banks were getting billions in loans, the average citizens have been losing jobs, lost the equity in their homes, lost billions in savings, and have been pushed closer to the brink of total financial failure.

Or, in other words, the so-called “success” of those at the top of the finance heap is seen as an affront by the average citizen, because that success for 10 percent of the people with wealth was built on manipulations of the system that caused nothing but pain and suffering for the other 90 percent of the people.

What is worse, that “success” is built on false pretenses.

Normal people are required to be responsible for their own finances. If they overspend or break the law by running up huge debts they know they cannot pay off, the government does not step in and give them money. Instead, normal people lose their homes and everything they have, and, in many cases even end up in jail for such things.

The banking and finance industry on the other hand was not, and has not been held responsible for their actions. Instead, even though the banking and finance industries caused the problems that drove the system to the brink of failure, governments bailed them out. And, instead of being grateful for the bailout, the banking and finance industry has raised interest rates and fees, frozen access to money, and gone out of their way to squeeze as much as they can out of the average person.

Then, after making things absolutely miserable for the average person while continuing to live wealthy lives built on the backs of the average people, to have companies like Goldman Sachs and J.P. Morgan Chase come along and say, hey look at me, we made a ton of money for our already wealthy clients”; well, that is about like the inaccurate but famous saying of “let them eat cake” attributed to Marie Antoinette shortly before the peasants revolted.

When long term unemployment is increasing, more and more people are struggling to make ends meet, more and more people are doing without health coverage, and 90 percent of the people are seeing less value in their homes, losing savings, and seeing no rise in income, to have the wealthy come along and say “we earned $385,000 above and beyond the salaries and benefits they already enjoy for each of our employees is doing nothing but add insult to injury.

It is an insult, because those who caused the current financial crisis get to enjoy profits and wealth rather than jail and punishment while those who were victimized continue to be punished.

$3.5 billion being obscene? No, not obscene, criminal, and since that profit was made possible by bailouts using tax payer monies, it should be given to the tax payers, not the ones who caused the problems in the first place.

drs James E. Atkinson, US Navy (ret)
MScIM, MBA, MScCIS, doctoral candidate (econometrics)

tyrell_corp wrote:

complete and total bullsh--. Goldman, as Matt Taibbi pointed out, is "successful" in the way the any mafia is successful. Goldman was not an engine for wealth creation, it produced nothing of value for society, it didn't even invest money wisely in other successful business (the supposed purpose of an investment bank). It Don Corleon, it used it's political connections to rig a wealth destructing game in it's favor. In the end there is nothing particularly clever about it - pure gangsterism. Goldman is not about capitalism - even robber baron capitalism, there is nothing there. They are societies parasites pure and simple. It is a shameful portrait of America that these people are held up as the best and brightest we have to the rest of the world. "see how bright and clever we are at stealing money" !!!! That game won't last long.

dgblues wrote:

It takes a peculiarly twisted money worshipper to accuse anyone of "punishing success" in this matter. That's a mammonist Frank Luntzian focus-grouped sound byte of distilled bullpucky.

First off, WE THE TAXPAYERS LENT THESE CRIMINALS HUNDRED OF BILLIONS OF DOLLARS, you twit. If that's punishment, please, God, punish the living crap out of me. Please.

The fact that Taibbi points out the obvious, that these financial institutions bleed all of us dry with speculation -- that they in fact create the bubbles from which they profit, and then rely on us to bail them out if they don't get out soon enough, just outrages you, doesn't it, Mr. Gimein? Oh my. Well, of course! The last thing you want is for Americans to be informed that they're being scammed.

May I remind you that most of us, who had no investment interest in the financial sector, saw our portfolios reduced significantly by their actions. And THEY are the ones being punished? You make me laugh.

Of course, you call our being scammed their "success." That says everything we need to know about your credibility relative to Mr. Taibbi's.

scone wrote:

Goldman Sachs (aka "Government" Sachs) are scum -- financial terrorist that belong at the dock in the Hague. Who but scum would turn be shorting the very products they have pushed on their customers?

Dilberta10 wrote:

It's not success, it's excess.

The only "sucess" GS has had is manipulating everything and everyone to their advantage.
Driving out their competition (think Lehman Brothers)and dipping in the Fed bailout funds given to GS and in defacto Fed funds given to AIG. Nice little ploy there.
Words cannot express my contemp for the gentleman who wrote this "editorial" and for GS.

[Jul 21, 2009] CRE Losses Piling Up

From Lingling Wei and Maurice Tamman at the WSJ: Commercial Loans Failing at Rapid Pace

Many regional and community banks had excessive loan concentrations in Construction & Development (C&D) and CRE loans. The FDIC identified this as an emerging risk in 2006 - so it is no surprise. These smaller banks have been slow to recognize the related losses - possibly because many of the deals had interest reserves that mask the performance of the commercial building until the reserve runs dry. Then there is just more work for the FDIC ...

Scrooge McDuck

US National Debt Clock: http://www.usdebtclock.org/

11T national debt
2T spending to date
57T unfunded liabilities
7T private debt

[Jul 21, 2009] “Extrapolating is dangerous” by Stacy-Marie Ishmael

So say Dresdner’s credit analysts in a note published on Friday. From the report:

On the temptation to extrapolate from Goldman’s results, they note (emphasis FT Alphaville’s):
One important point is that not all financial institutions are like GS or JP Morgan Chase. This week’s earnings were dominated by banks with very strong trading operations that benefited from wide bid/offers, as well as strong fee income from advisory and primary market activity. We fear that the commercial and retail banks that report in coming weeks will be relatively much more exposed to rising provisioning on their C&I, mortgage and consumer loan books. Therefore, we may have had the best news first, and the bad news may still follow.

And on data:

Macro indicators for the US consumer recently paused in their upward trend, and all of this suggests investors should not extrapolate too far, too early. Of course, for credit investors, the manufacturing outlook is probably even more important.

One of the most cautious notes came from SKF in Thursday’s FT. The company said the outlook is ‘incredibly uncertain’. Many expect restocking to lift earnings growth, but SKF stated that most of its businesses are seeing a slowing of (or an end to) the de-stocking rather than outright re-stocking. Margins are another critical point: so far, several companies have managed to hit earnings estimates but disappointed on the sales front. It seems corporates have aggressively cut costs, but further gains on that front may slow. The crucial issue going forward is whether corporate feel demand is strong enough to allow for increasing pricing power.

[Jul 21, 2009] Fed's Lockhart sees Weak Recovery, Exit Strategy not needed for "some time"

2009-07-20 | CalculatedRisk

From Atlanta Fed President Dennis Lockhart: On the Economic Outlook and the Commitment to Price Stability . Here is Lockhart's economic outlook:

Often a deep recession is followed by a sharp rebound in business and overall economic activity. Unfortunately, as I look ahead, I do not foresee this trajectory. I expect real growth to resume in the second half and progress at a modest pace. I do not see a strong recovery in the medium term.

There are risks to even this rather subdued forecast. The risk I'm watching most closely is commercial real estate. There is a heavy schedule of commercial real estate financings coming due in 2009, 2010, and 2011. The CMBS (commercial real estate mortgage-backed securities) market is very weak, and banks generally have no appetite to roll over loans on properties that have lost value in the recession. Refinancing problems will not directly affect GDP—it's commercial construction that factors into GDP—but I'm concerned problems in commercial real estate finance could adversely affect the otherwise improving banking and insurance sectors.

... the healing of the banking system will take time. Working off excess housing inventory will take time. The reallocation of labor to productive and growing sectors of the economy will take time. It will take time to complete the deleveraging of American households and the restoration of consumer balance sheets.

In short, I believe the economy must undergo significant structural adjustments. We're coming out of a severe recession, and it's not too much an exaggeration to say the economy is undergoing a makeover. We must build a more solid foundation for our economy than consumer spending fueled by excessive credit—excessive household leverage—built on a house price bubble.

The surviving financial system must find a new posture of risk taking. The balance of consumption and investment must adjust, with investment being financed by greater domestic saving. The distribution of employment must adjust to match worker skills, including newly acquired skills, with jobs in growth markets. Some industrial plant and equipment must be taken offline to remove excess and higher-cost capacity.

As I said, these adjustments will take time and will suppress growth prospects in the process. I believe the economy will underperform its long-term potential for a while because of the obstacles to growth that must be removed, adjustments it must undergo.
...
Let me summarize my argument here today. The economy is stabilizing and recovery will begin in the second half. The recovery will be weak compared with historic recoveries from recession. The recovery will be weak because the economy must make structural adjustments before the healthiest possible rate of growth can be achieved. While this adjustment process is going on in the medium term, I believe inflation and deflation are roughly equal risks and require careful monitoring. Slack in the economy will suppress inflation. And inflation is unlikely to result—by direct causation—from the recent growth of the Fed's balance sheet. In any event, the Fed has a number of tools being readied to unwind the policies used to fight the recession, and it will be some time before their use is appropriate.

[Jul 20, 2009] Roach: Financial Crisis Isn’t Over

July 17, 2009 | Moneynews

"Sorry to break to the news, but the financial crisis is not over, à la CIT. You’ve got plenty more write-offs of bad paper to come," Roach told CNBC.

Developed economies haven’t broken out of recession yet, he said.

"Seventy-five percent of the world’s economies today are still contracting, and the biggest piece on the demand side of the global economy is the American consumer, who is dead in the water," Roach said.

Stock markets, along with many bonds, have rallied sharply in recent weeks. But Roach said markets have overdone it, given the "anemic character of the recovery."

The rally largely reflects the excess of liquidity poured into the financial system by central banks, he said.

"Liquidity is seeking return, and right now these markets are priced for a recovery that’s going to end up disappointing," he said.

Some experts are excited by recent news of better-than-expected corporate earnings. But those anticipating high profits "are going to be in for a rude awakening," Roach said.

Economist Gary Shilling agreed with Roach. “I expect the recession to run into the early part of next year,” he told Bloomberg.  Excess home inventories and retrenchment in consumer spending will restrain the economy, he said.

[Jul 20, 2009] Marc Faber sees a total collapse coming

The Mess That Greenspan Made

Faber:

"We had a crisis and nothing has been solved

... usually, a major crisis like we had should clean the system but nothing has been cleaned.

It's gotten worse politically - this linkage between politicians in America and the Federal Reserve, Treasury Department, and Wall Street.

The big crisis is yet to come. It will be huge. it will be a total collapse."

[Jul 20, 2009] Commercial Paper Outstanding July 16 2009

Paper Economy

The Federal Reserve calculates and published the total amount of CP outstanding every week and as of the latest published period, commercial paper outstanding is contracting at the fastest rate on record, registering a whopping 37.33% decline year-over-year.

Selected comments

motgagepayer

Oil prices are soaring, putting pressure on the consumer.

22. Tax revenues are down 28% in April.
23. Bernanke (the beagle) is having trouble rolling 1.2 trillion in debt in 2009.
24. Social Security and Medicare are underfunded by 50 Trillion.
25. 200 trillion in derivatives exposure in US, 500 trillion worldwide.

need I go on? good articles: http://www.iamned.com 

[Jul 20, 2009] 7 Reasons Why Housing Isn’t Bottoming Yet The Big Picture By Barry Ritholtz

July 19, 2009  | The Big Picture

Yesterday, I posted this chart and wondered why “Some people were calling for a housing bottom.” That generated a ton of emails asking about for further clarification.

The people I referred to were the usual happy talk TV suspects (and Cramer) who have been perpetually wrong about Housing for nigh about 3 years. I not only disagree with them, but don’t respect their opinion — essentially headline reading gut instinct big-money-losers. No thanks.

Then there were the slew of MSM who insist each month on reporting that 3% (+/- 11%) is a positive integer. We disposed of that silliness on Friday.

But the crux of the email was over this post. There are a handful of people whom I disagree wi and process. Over the past year, these have included Doug Kass and Lakshman Achuthan and Bill of Calculated Risk. We may reach different conclusions about a given issue, or disagree on timing, but these are the folks whose opinions force me to sharpen my own.

When I tossed up that chart yesterday,  I had not yet seen Bill’s comments on the subject — but he is one of those people I can respectfully disagree with. We simply have reached different conclusions about the timing and shape of the eventual Housing lows.

There are a plethora of reasons why I believe we are nowhere near a bottom in Housing prices or activity. Here are a few:

There are more reasons I expect the Real Estate market to remain punk for many years, but these are a good place to start when considering the question.

The Housing Boom & Bust, and the 2002-07 credit bubble created massive excesses. More than anything, it is going to take time to resolve them.

[Jul 20, 2009] CIT Watch

nova

I was hearing ad's for factoring on the radio about a year ago. This is from the top of the search on Google

What Is Factoring?

Factoring is a way to get immediate cash. You send your invoices to us, we advance you up to 90% of the invoice amount, we collect the invoice and send you the remaining balance, less our fee.

Factoring is quick and convenient: a must for all growing companies in need of capital.

We purchase creditworthy accounts receivable at a small discount and fund you with immediate cash.

MaxedOutMama

If CIT were another type of company, government infusions or DIP financing would make more sense. But realistically, we are in a massive consumer retail contraction, and the receivables don't have much value.

However CIT also got into home loans and student loans. This shows the breakdown of CIT's business as of September, 2007.
14% home loans
14% student loans
13% manufacturing
9% retail, etc.

It's not viable because there isn't enough left. They've burned through their loss reserves and the losses are still coming, and will mount in the year to come. The truly secured lenders can pick over the best, and the semi-okay lenders can go for DIP, but the risks of the loans in this type of environment would dictate a rate of interest which will double the risk of many of these loans. They haven't got a continuing business with a cash flow on most of their loans that justifies anything but liquidation.

Being able to borrow money cheaply from the Fed does nothing to lower effective interest rates when the loss risk is so high. What kind of discount would anyone on this board require on a portfolio of student loans these days? Small retail? Gurgle. That stuff is 20-30 cents on the dollar.

nova

The Cost Of The Factor's Money

So, what is your cost of money? (Here's where it gets interesting and where the major misunderstanding lies.)

So they end up with 30% return? Or not? Factoring is a pawnshop for business

Let's set up an example. You're selling $100,000 worth of widgets to General Motors every month. You ship them, then invoice GM for the parts. Let's say you've arranged 30 day terms. You also have terms of 2.5% for 30 days with your factor, with an advance of 85%.

You send the factor a copy of the invoice at the same time you invoice GM. The factor checks with GM to ensure the widgets were delivered in good condition. He then transfers $85,000 to your account by check or wire transfer. This is usually within two days of receiving the invoice. You've got operating money!

Thirty days later, GM pays the factor $100,000. The factor deducts $2500, then pays you $12,500. You do this 12 months out of the year.

What's your cost of money?

In almost all cases, my prospective clients, thinking in terms of loans, multiply the 2.5% by a factor of 12 and say, "Thirty percent! That's too expensive."

The correct answer is, of course, 2.5% if each invoice is paid within the first 30 days. (This percentage will go up incrementally with any invoices which are paid over 30 days, generally 1/30 per day, but it's still FAR BELOW the current cost of borrowing from banks or getting lines of credit.)

To prove my statement, multiply your monthly sales to GM by 12. That answer is $1.2 million. Now multiply the amount you paid for each invoice by 12. That answer is $30,000. And $30,000 is 2.5% of $1.2 million.

Please tell me where, in the banking system, you can get money at 2.5%? That is, if you can get a bank loan at all in today's uncertain times.
 

OregonGuy

A business with negative EBIT is going to have a very difficult time changing lenders right now, even if cash flow is positive. In manufacturing it is tough not to have negative EBIT over the last 6 months. Just ask Alcoa (they need to hire GE-trained accountants),

MrM

...significant part of the problems we have encountered are a result of relentless optimization, to the point of eliminating virtually any redundancy or slack with the resultant brittle and tightly coupled system.

This is very true. I would also say thaquence is that when tightly coupled systems fail, one either has to fix the whole system or take a hands-off approach and let the system find a new equilibrium. Politically driven decisions which elements of the system to save and which ones can be let fail only de-stabilizes the system further.

What an interesting PR issue for the Administration:

km4

Defanging the Fed: Why It Needs Less Power, Not More

William Greider gives six reasons why handing the Fed more power is a bad idea:

  1. It would reward failure. Like the largest banks that have been bailed out, the Fed was a co-author of the destruction.
  2. Cumulatively, Fed policy was a central force in destabilizing the US economy.
  3. The Fed cannot possibly examine "systemic risk" objectively because it helped to create the very structural flaws that led to breakdown.
  4. The Fed can't be trusted to defend the public in its private deal-making with bank executives.
  5. Instead of disowning the notorious policy of "too big to fail," the Fed will be bound to embrace the doctrine more explicitly as "systemic risk" regulator.
  6. This road leads to the corporate state--a fusion of private and public power, a privileged club that dominates everything else from the top down.

http://paul.kedrosky.com/archives/2009/07/defanging_the_f.html

[Jul 20, 2009] Financial Armageddon Signs of the Times

You'll find the following relevant and intriguing if you're not yet familiar with it. Of course, the informal economy is anathema to the Corporate-Owned shill Economists representing the formal economy, but it doesn't mean it doesn't exist, and it won't become highly influential in the years to come, even for the U.S.

"Researchers began to notice that there was no economic
explanation for how the majority of the population survived. They
didn't own land. They didn't seem to have any assets. According to
conventional economics they should have died of hunger long ago,
but they survived. To understand this, researchers looked at how
these people actually lived, rather than at economic models.

[The peasant's] way of life was completely the opposite of how a
human being in an industrial society survives. They didn't have a
job, pension, steady place to work or regular flow of income...
Their aim was survival rather than the maximisation of profit.

[In the former S.U.] there are no signs of mass hunger and the
services by and large have not collapsed. Considering the chaos of
the formal economy, this is remarkable. Teachers still go to teach
and scientists go to their laboratories even though they may not
have been paid for six months. Under normal economic rules, there
is no explanation for this. Why would they go? The answer is that
their 'jobs' help maintain social and family networks that allow
them to survive outside the collapsed formal economy. They might
grow vegetables in the institute gardens, use laboratory equipment
or run their own small businesses, run taxi services with company
cars or just trade in skills and goods among their fellow workers.
Sociologists can understand this, economists cannot.

We find in the former Soviet economies that while officials are
trying to privatise the economy, most people are living in the
informal economy that is neither communist nor capitalist... [T]he
peasants survived not through socialism, but through the informal
economy."

http://www.mail-archive.com/futurework@scribe.uwaterloo.ca/msg04564.html

[Jul 20, 2009] Jamie Dimon v. Larry Summers «

The Baseline Scenario

Selected Comments

anne

WHEN DID THE SHADOW BANKING SYSTEM BECOME “THE ECONOMY”?

That’s my question for the experts. The shadow banking system is what our policies have supported. That’s who we rescued last fall. That’s the sector seeing the profits today. (Fab profits for them – really crappy return for the investors who saved the sector, however.)

And if you look closely, the profits they’re reporting come from the shadows, not from the regulated banking sector.

What happened to all that toxic debt on their books? Has it vanished? How can profits be declared when the books sag with toxicity?

We can continue to bleed out money to wealthy bankers and let unemployment rise and consumer spending decrease – or we can initiate real reform that truly answers the needs of the real economy – in ways that get people back to work.

We seem to favor bleeding over building these days.

Kirk Tofte

I’ve said it before and I’ll say it again–the stock market went up 700 points within an HOUR after word leaked that Obama would name Geithner as his secretary of the treasury. Do you think Wall Street might have been on to something that day?
Summers will never be appointed as chairman of the Fed because sector.

Wall Street has something over or “on” Obama. Half of his campaign contributions came from corporate interests who didn’t want deal with tougher players like either Hillary or McCain would have been…and they’re REALLY getting what they paid for in ways that are hard to believe.

OregonGuy
Not sure about the “vs” in the title. The more likely scenario is Summers and Dimon laughing together over the need to placate the sheeple with a “reform”. They agree on a toothless Consumer Protection Agency as the least bad (for bank interests) of the available options. As agreed, Dimon strenuously objects in public that the CPA will “destroy banking as we know it” as a smokescreen.

Business goes on as usual. Summers collects millions in “consulting” fees from Wall Street when he leaves Government. Dimon buys a bigger yacht and gets that G5 he’s always wanted.

ifaforo

Don’t see the point of the “vs” either. Summers view has always been that financial deregulation isn’t just good for banks but is good for the country. Summers has done or said nothing that suggests a material change to that point of view (ask Joe Stiglitz about that and why he has no voice in this administration).

Tippy Golden

I haven’t had time to read through the comments yet. But it seems to me the problem is within the state of American economy itself.

Power and wealth has been captured by an oligarchy.

The very tough battle ahead is “rebalancing” the power structure through a political process.

[Jul 20, 2009] The US-China Ponzi scheme - MSN Money

If can count correctly 3% on one trillion is 30 billions. So interest payments alone are substantial. 

China is thus frozen in place, damned if it does and damned if it doesn't. It's a classic Catch-22. China's cache of U.S. bonds isn't worth anything unless the bonds are sold. But selling them on any kind of scale will gut their value.

"People need to realize that China doesn't actually have any real U.S. money," Das says. "Unless they can turn in their bonds and exchange them for something else, they're only paper assets. Yet if they try to exit the position, they'll destabilize the dollar, and the value of the rest of their assets will plunge. And that's not even their biggest problem. It's that they also need to keep buying Treasurys, or interest rates will go up and their capital losses will be terrible."

In short, Das says, Beijing thought it had discovered the perfect scheme for establishing independence from the West, yet it has instead made its dependence worse than ever. And he observes that one unspoken reason that China has gone whole-hog on its massive, $650 billion fiscal stimulus program -- creating more factory capacity in a country that is already reeling from overcapacity -- is that the effort gives it cover to stockpile copper, oil, iron ore and other hard assets that it considers to be better stores of value than dollars.

[Jul 20, 2009] Report: Record Drop in State Tax Revenues

See also State Tax Revenues Chart
Jul 18, 2009 | CalculatedRisk

No surprise ...

From the NY Times: State Tax Revenues at Record Low, Rockefeller Institute Finds (ht Ann)

The anemic economy decimated state tax collections during the first three months of the year ... The drop in revenues was the steepest in the 46 years that quarterly data has been available.

Over all, the report found that state tax collections dropped 11.7 percent in the first three months of 2009, compared with the same period last year.
...
All the major sources of state tax revenue — sales taxes, personal income taxes and corporate income taxes — took serious blows ...

Here is the report: State Tax Decline in Early 2009 Was the Sharpest on Record

And it looks much worse in Q2:

Early figures for April and May of 2009 show an overall decline of nearly 20 percent for total taxes, a further dramatic worsening of fiscal conditions nationwide.
Note: an earlier report was on state pesonal income taxes - this is all state taxes.

Selected Comments

curious

Slightly OT

I was looking through the new releases to Netflix instant play and noticed the documentary "IOUSA". I saw it when it was in theaters and highly recommend it to everyone who reads CR.

yossarian

Is this broken down state by state? I recall Arizona's revenue's were falling off a cliff months ago. And yet, there are still police and fire services. So 'collapse' is more like, 'letting the air out of a blow up toy.. '

I'd normally think this drop in revenue really means something,... some big changes, some social movements.

But hell, Goldman is still getting rich, no one is burning them in effigy... so the collapse of the welfare state .. if it happens.... is gonna be really quiet.

broward

 Unions need a reset like everything else or we still keep going down. Shared burden.
----------
True but the "investor" side of the equation like to rant about how unions destroyed GM by demanding more return than could be sustained, but we never hear about how investors demanded more return than could be sustained, too. The real economy grows around 3-4%. That's ALL you get and all this mickey mousing around of outsourcing WILL NOT CHANGE THAT.

But you guys just dont' get it it and so you must suffer long grievious pain until you shout out, ENOUGH, ENOUGH, I will accept a 3% return!".

gonna be a long time, though.

Nuke

 I suspect that before this crisis is over the opposite will result. I'm pretty sure GD I resulted in the New Deal.

Blackhalo:

That was a different time. FDR had demographics on his side. For better or worse, demographics no longer support the welfare state model. Demographics did in the auto industry (retiree costs), and will soon start taking down governments.

South EU (Greece, Portugal, Spain) will be ground zero due to VERY generous pensions, VERY low birthrates and an unproductive economy. My family tells me it is already happening in Greece. But who knows, maybe I'm wrong.

Blackhalo

 "Demographics did in the auto industry (retiree costs), and will soon start taking down governments."

No demographics take OVER governments. Get ready for 3 wolves and a sheep voting on what is for dinner.

energyecon

More than 60 companies sold bonds this year to repay commercial paper, including Consolidated Edison, Verizon Communications Inc. in New York and Kellogg, the 103-year-old maker of Keebler cookies and Rice Krispies cereal, according to data compiled by Bloomberg. Non-financial companies have sold $306 billion of investment-grade bonds this year, a record pace.

“Treasurers aren’t sleeping at night because they don’t know if they can roll over commercial paper,” said Anthony J. Carfang, a partner at Treasury Strategies Inc, a Chicago consulting firm. “They’d rather lock in money for five years and pay a little more.”

Commercial paper outstanding fell $39.7 billion, or 3.5 percent, during the week ended yesterday, its 14th straight decline, the Fed said today. At $1.097 trillion, the CP market is less than half its peak of $2.22 trillion in July 2007, with about 10 percent of it owned by the Fed, central bank data show.

welcome to the party...

Angry Renter

 China actually has a severe demographic problem as well. The One Child Policy is inverting the pyramid.

However, they don't have significant state obligations to them like our entitlement programs, and they save.

In just 30 years, people aged 65 or older are projected to make up 22 percent of China’s population. With the reduction of some, and elimination of other state-provided social services, these older adults will have to count on their children to provide for their retirement, since children are expected to be the primary providers of support and care for their retired parents, grandparents and parents-in-law. However, in what has come to be known as the “4:2:1 problem,” every child born under the one-child policy will have to care for two parents and four grandparents. With largely one-child families and no national social security plan, this responsibility will likely fall on a younger Chinese generation that is unable to fulfill it.

http://www.umich.edu/~ipolicy/china/6)%20Demographic%20Consequences%20of%20China%27s%20One-Child%20Policy.pdf 
 

[Jul 20, 2009] Slip Sliding Sideways

Jul 18, 2009 | Calculated Risk
... GDP can still turn slightly positive.

Here is a speech from San Francisco Fed President Janet Yellen in March: The Uncertain Economic Outlook and the Policy Responses.

[I]t takes less than many people think for real GDP growth rates to turn positive. Just the elimination of drags on growth can do it. For example, residential construction has been declining for several years, subtracting about 1 percentage point from real GDP growth. Even if this spending were only to stabilize at today’s very low levels—not a robust performance at all—a 1 percentage point subtraction from growth would convert into a zero, boosting overall growth by 1 percentage point. A decline in the pace of inventory liquidation is another factor that could contribute to a pickup in growth. Inventory liquidation over the last few months has been unusually severe, especially in motor vehicles—a typical recession pattern. All it would take is a reduction in the pace of liquidation—not outright inventory building—to raise the GDP growth rate.
emphasis added
This is a very important point for forecasters - to distinguish between growth rates and levels. Even if the economy has bottomed, it is at a very low level compared to the last few years, and the recovery will probably be very sluggish.

[Jul 20, 2009] Housing Starts- A Little Bit of Good News

Calculated Risk

This increase in starts means that the drag from Residential Investment will slow or stop, and also that residential construction employment is close to the bottom. Residential investment has been a drag on the economy for 14 straight quarters, and just removing that drag will seem like a positive.

And residential construction has lost jobs for several years, and even though construction employment will probably not increase significantly, not losing jobs will also seem like a positive.

This removes drags from the economy - and that is the little bit of good news.

To be clear, this is not great news for the homebuilders. It will take some time to work off all the excess inventory, so new home sales and single family housing starts will probably stay low for some time. And it is possible that new home sales and housing starts could still fall further.

 

[Jul 19, 2009] Fiscal ruin of the Western world beckons - Telegraph

The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.

My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.

[Jul 19, 2009] UN calls for overthrow of free market ideology

The United Nations has called for a return to state-led "industrial policy" for poorer countries in what amounts to a rejection of free-market thinking.

[Jul 19, 2009] Stop bashing Goldman, blame yourself

July 17 2009 | The Automatic Earth

Right, enough with the Goldman Sachs bashing. When everyone form Krugman to Huffington to the Wall Street Journal editors get in one the action, it's time to step back, inhale, exhale and take another look. Sure, Goldman is a cabal bigger and more pernicious then the heads of all the Five Families, and without the code of honor to boot. They steal whatever they can, they cheat whoever they can and they’ll lie to their wives ten times on monday mornings, before breakfast.

But that doesn't mean they are the major problem. Once again, we're getting it all wrong, in the same way we missed the mark complaining about $700 million in AIG bonuses against the backdrop of a thousand times that in Wall Street bailouts. Once you see what that adds up to, it's not wonder that furor died quietly in the night, is it?

Goldman Sachs can only get away with stealing, cheating and lying if they're allowed to do so. There is a very obvious first line of defense against such actions, which should for all intents and purposes be illegal, and where they're not yet, be made so yesterday. You all know who's in that defensive line. You pay them. It's what you call your government.

If your government stubbornly and steadfastly refuses to -in order to stop the cheating and lying- apply the laws where they're applicable, and change them where they need change, why would you expect Goldman to stop engaging in their favorite pastimes? Wouldn't you agree that that is not wholly and entirely the smartest assumption to make?

It's not Goldman that fails. Goldman even does what it is by law required to do: maximize the returns for its shareholders. If it wouldn't, its directors could be sued.

It's not Goldman, it's the government that fails. The government looks after Goldman's interests, bails them out with dozens of billions of dollars, most of which are never repaid, looks the other way when laws are broken, won't change those laws that fail to protect the public etc. The list of where and when the government fails to protect the people who voted it in is so long, and so deep, that if we would take an afternoon to try and list all applicable points, we would by the end want to crawl into a deep dark corner in order to hide the deep dark red color of our cheeks.

And I think that is why we won't make that list, of how our governments fail us. We intuitively know where that would inevitably lead. That is, our own shame.

Because we all know very well who put that government there, the Obama's, the Geithners, Barney Franks, Chris Dodds and Nancy Pelosi's.

Blaming Goldman Sachs for your problems and your anger is nothing but a cheap diversion. Who did you vote for, and if it was the Democrats, what are they doing with their new found power? How is today different from 6 or 4 or 2 years ago? How different? Do you still believe in that change, or is it time to change your beliefs?

Whatever you do, don't blame Goldman. Don’t even blame Obama.

Blame yourself. In the end, that's the only way you can keep a grip on power. And on your life.

[Jul 19, 2009] The Thesis Continues To Validate GE -

Hat tip to Financial Armageddon
July 17, 2009 | The Market Ticker

Again, we continue to see the same sort of theme in industrial and consumer products reporting - Harley Davidson (NYSE: HOG) reported units shipped down 30% year over year yesterday, anate future; in order for it to do so, revenue must come back up, and in order for revenue to come back to pre-bust levels, we would have to re-inflate the credit bubble - which simply cannot happen.

Multiples are going to continue to contract.  Those analysts and market callers who are all over the momentum trade can in fact make a good buck trading the momentum, but that's all they're trading - they sure aren't trading earnings acceleration or even stabilization.

The move in the market off the 666 levels in March has been driven by a false premise, egged on by CNBC and the other "mainstream media" - that this is a typical recession, it is short-lived, and we will soon go back to previous spending and business patterns.

That is not going to happen, yet it is what everyone in the media and analyst community is looking for and basing their valuation and market timing calls on.

I don't know how long we have to continue to put up numbers like this before people wake up, but wake up they eventually will.  When Harley Davidson ships 30% fewer motorcycles, when GE sells 17% less "stuff" (including their financial cooking) and when company after company, including Intel, IBM and others come out with revenue numbers that are down double-digit percentages on an annualized basis, there is no possible way you can justify the multiples that these firms are selling at.

When The Port of Long Beach shows container shipments down nearly 30%, when freight carloadings are down nearly 25% year over year, when sales tax receipts are down in the double digits and when income tax collections, both personal and corporate have effectively collapsed there is simply no argument that "the recession is over" or that "trend growth is around the corner."

The fact of the matter is that port, rail and tax receipts are not subject to being "gamed" by government number-crunchers, they do not play "seasonal adjustments" (since they're year-over-year numbers), they do not represent wishes, dreams, or desires.

They represent real-time, high-frequency, "right now and in your face" economic performance metrics and are impossible to argue with.

If you, as an investor, are trying to use the market as a "forward indicator" of economic conditions, you need to look at these numbers to see whether or not what the stock market is telling you can be validated with actual economic performance - not in quarterly reports to be published in a few months (the typical economic lead-time cited for the market) but in the "right here and now" reality of economic activity.

What those high-frequency data sources are telling us, here and now, today, is that we are in the middle of a 25-30% economic contraction - exactly as I predicted would occur in 2007.

The problem with this level of indicated weakness in the economy is that we have shielded firms, especially banks, from taking the losses that should have come last year and in 2007 related to their over-extension of credit.  Now those institutions are going to have to live with the reality of a much smaller economy, meaning that they will be forced to turn to dramatically increasing credit costs to customers to avoid drowning (e.g. increasing credit card rates and spreads), which is exactly what they're doing.  This in turn will suck even more money out of consumers pockets, dragging consumption down even further and will force even more defaults.

This is a vicious cycle that can only be broken when the defaults that are being hidden behind the curtain of our financial institutions are forced into the open and disposed of.  Yes, this will likely cause those firms to go bust.  But the economic penalty we are and will continue to pay for allowing The Bezzle to continue in these firms will, if not stopped, soon choke off any hope of recovery, just as it did in 1930, and lead to precisely the same sort of economic result.

Everyone seems to be hollering about the "wonderful performance" of the banks that have reported thus far, but let's be honest - if you can borrow for nothing and charge 30% interest on plastic, you make a fortune, right?  Well, for a while - until the squeeze of contracting incomes and increasing interest charges force your customers to default, at which point the charge-offs and defaults this forces in the rest of your portfolio (e.g. mortgages) kill you dead.

I see exactly nothing in any of the reported numbers thus far this quarter suggesting that we've turned an economic corner or that there will be a recovery this year or even next.

We could be near or at the bottom, but we're not, and it is precisely because we have protected the financial institutions from the consequences of their own folly in preference to the borrower (to a large degree the consumer) that this has happened.  I have warned repeatedly that the actions of our regulators and government, on the path they are on, will make durable economic recovery impossible.

The anvil of these bad loans, being carried far above actual fair-market value, will remain as a millstone around the neck until we either earn them out or default them. 

Our government and regulators have chosen "earn them out".  The problem is that this path cannot succeed because "earn them out" requires that the economy return to trend growth - that is, 3-4% GDP - before next year.  That is not going to happen; the government backstop and artificial support only work so long as they continue, and we cannot continue to borrow two trillion a year for the purpose of propping up these institutions in excess of their natural earnings power in the economy.

Yet without defaulting the bad debt that's exactly what has to happen.

If Roubini's prediction of sub-1% growth (if that) for the next couple of years is correct the squeeze between available revenue and required cash-flow from operations to keep the numbers black at the bottom of the page will become python-like over the next 12-18 months, and as the grip tightens reportable earnings will continue to contract, ultimately leading to a collapse when cash flow is exceeded by expenses.

This is the dreaded "double dip", except that it won't be a "W" as Roubini has postulated - it will look like the first three legs, but the right side "/" will instead be a flat line as credit capacity on the borrowing side collapses, destroying the banks ability to profit - without borrowers there is no interest to charge and no money to make!

Bottom line: Those who bet on the market "going much higher" from here are going to find themselves once again holding a bag handed to them by the media and market callers, just like they did in 2000 when it was said "this is just a small correction in the market" as the Nasdaq came off 5,000.

[Jul 18, 2009] Who Nationalized Whom

Looks like everything is artificial now, including S&P500 prices.  This high-speed financial masturbation that GS performs so successfully makes me question any stock moves, up or down. In such circumstances why 401K investors would be in stock market at all. The already lost 25% or more for the last ten years. Enough is enough. Let Wall Street sharks eat each other.
The Baseline Scenario
Hank Paulson’s testimony yesterday was informative, if only because it illustrated that he himself still understands little about the origins and nature of the global crisis over which he presided.  Perhaps his book, out this fall, will redeem his reputation.

A fundamental principle in any emerging market crisis is that not all of the oligarchs can be saved.  There is an adding up constraint – the state cannot access enough resources to bail out all the big players.

The people who control the state can decide who is out of business and who stays in, but this is never an overnight decision written on a single piece of paper.  Instead, there is a process – and a struggle by competing oligarchs – to influence, persuade, or in some way push the “policymakers” towards the view:

  1. My private firm must be saved, for the good of the country.
  2. It must remain private, otherwise this will prevent an economic recovery.
  3. I should be allowed to acquire other assets, opportunities, or simply market share, as a way to speed recovery for the nation.

Who won this argument in the US and on what basis?  And have the winners perhaps done a bit too well – thinking just about their own political futures?

On who must be saved, we see the new dividing line.  If you have more than $500bn in total assets, post-Lehman, you make the first cut.  If you’re below $100bn (e.g., CIT), you can go bankrupt.

On remaining private, the outcome is more complicated.  Citigroup had the best political connections in the business, but turned out to be so poorly managed that the state essentially had to take over – in a complicated and ultimately unsatisfactory way.  Bank of America’s relatively weak political connections meant that the impulse purchase of Merrill Lynch could go very badly – and also led to a bizarre form of government takeover.

The prevailing idea and organizing principle for this new sorting is not Lloyd Blankfein’s “we’re the catalyst of risk” – investment banks are peripheral, rather than central, to nonfinancial risk taking and investment in this country.  It’s Jamie Dimon’s idea: just don’t demonize the competent bankers, let us take things over and we’ll smooth it all out.

The problem with this approach is its “success”, from the point of view of the remaining bankers – their market share is up so sharply that it’s embarassing.  Of course, they can still argue that banking is a global industry with many competitors (some of which are even bigger, with more state assistance, promising much craziness in the years ahead).

But the real issue now is concentration in the political marketplace.  Hank Paulson dealt with a dozen big banks/similar institutions with deep connections to Capitol Hill and a very powerful small banking lobby.  Tim Geithner is looking at just a couple of big banks that are still independent .  Probably we should start to divide our big banks into the “nationalized” and the “nationalizers”.

The small banks still have clout – and you’ll see them in force on the regulatory reforms debate this fall – but they know now that they don’t get bailouts, and access to contigent state capital-on-amazing-terms is the ironic basis of modern financial power.

We are looking at a concentration of political power in the US banking system that we haven’t seen since the 1830s: Shades of Andrew Jackson vs. the Second Bank of the United States.  We put up with a lot from our banking elite in this country, but historically we draw the line at financial power so concentrated it can confront the power of the President.

The logic for reform and for breaking up the big banks begins to build.  Bank of America’s fall was, in some senses, a fortunate accident for Goldman and JP Morgan.  But it has also given them an excessive and unsustainable degree of political power.

Of course, you also have to ask: Who can break that power, when, and how?

By Simon Johnson

[Jul 18, 2009] World Bank warns of deflation spiral -

Jul 15, 2009  | Telegraph

The World Bank has given warning that global economy will fall into a "deflationary spiral" unless urgent action is taken to reduce high levels of excess capacity in industry. By Ambrose Evans-Pritchard
Published: 6:21PM BST

'Significant excess capacity has been built up and unless this issue is addressed, we will face a deflationary spiral' Photo: GETTY IMAGES

Justin Lin, the bank’s chief economist, said factories running idle around world threaten to trap economies in a vicious cycle, risking further spasms of financial stress, requiring yet more rescue packages.

"Significant excess capacity has been built up and unless this issue is addressed, we will face a deflationary spiral and the crisis will become protracted," he told an audience in Cape Town.

Related Articles

Mr Lin said capacity use had fallen to 72pc in Germany, 69pc in the US, 65pc in Japan, and as low as 50pc in some developing countries, mostly touching lows not seen in modern times.

The traditional cure for countries caught in slumps is to claw their way back to health through devaluation, but this cannot be done today because the crisis is global. "No country can count on currency depreciation and exports as a way out of recession. Unless we deal with excess capacity, it will wreak havoc on all countries. There is urgent need for global, co-ordinated fiscal stimulus," he said.

Investments should be focused on infrastructure in poor countries that are bearing the brunt of the crisis. The downturn is already likely to trap over 50m more people in extreme poverty this year.

Mr Lin said some $30 trillion has been wiped off global stock markets and a further $4 trillion off US house prices, creating powerful deflationary headwinds. While emergency measures have eased the financial crisis, they have not stopped it turning into a deeper "real economy" crisis entailing mass lay-offs.

The comments came as the Bank of Japan agreed to extend its quantitative easing (QE) policies – mostly the purchase of corporate debt – and warned that business investment is "declining sharply". Headline inflation has dropped to minus 1.1pc.

Michael Taylor at Lombard Street Research said Japan has been too timid, repeating the error of its Lost Decade when it failed to carry out QE on a sufficient scale.

"Japan is already back in deflation, and it is here to stay. This year the economy will shrink by around 7pc, dramatically increasing the output gap and intensifying deflationary pressures. Cash earnings are down 3pc in the last year,"

The Bank of Japan downgraded its growth forecast, predicting that the economy will contract 3.4pc in the fiscal year to next March. This follows a catastrophic fall in output at a 14.2pc an annual rate in the first quarter, the worst ever recorded.

While industrial output has bounced over the summer, there are concerns that it may have been flattered by an "inventory rebound" as companies rebuild stocks.

Eurostat confirmed on Wednesday that the eurozone has slipped into deflation. Prices fell 0.1pc in June.

[Jul 17, 2009] Paulson Defends Role in BofA -- Merrill Lynch Merger

Current unemployment 16.5%. Foreclosure Filings Hit Record 1.5 Million
Fmr. Treasury Sec. Henry Paulson testified before the House Oversight & Gov't Reform Cmte. on his role in the Bank of America (BofA) merger with Merrill Lynch. The Cmte. is investigating whether the government inappropriately pressured BofA to move ahead with the deal.

This is the third in a series of hearings. Previously, the Cmte. heard from Fed Chair Bernanke & BofA CEO Ken Lewis.

[Jul 17, 2009] 8 Questions for Henry Paulson - DealBook Blog - NYTimes.com

Why didn’t you obtain an executed fee and commitment letter or definitive agreement on the guarantee provided by the government for assets of the combined Merrill Lynch and Bank of America? After all, you were a seasoned Goldman Sachs investment banker well before you became upper management or Treasury Secretary.

In that capacity, you wouldn’t have been permitted to give such a commitment without such a letter. Why did the government act differently here?

  1. Q. - Were you aware that Lehman and Bank of America had agreed in principle on Friday evening, September 12, 2008 to an acquisition of Lehman by B of A?

    Q. - Are you aware of the public reports that B of A suddenly went radio silent on Lehman executives and lawyers on Saturday, Sept. 13, to the point where Ken Lewis’ wife asked Dick Fuld that afternoon to stop calling her husband at home?

    Q. - Do you know why B of A suddenly walked away from the table with Lehman on Saturday morning?

    Q.- Did you or anyone from your office speak with Ken Lewis on Friday evening or Saturday morning about B of A’s negotiations with Lehman, or about a proposed acquisition of Merrill by B of A?

    — Indy54

[Jul 17, 2009] What Economy? There's Nothing Left to Recover By PAUL CRAIG ROBERTS

There is no economy left to recover. The US manufacturing economy was lost to offshoring and free trade ideology. It was replaced by a mythical “New Economy.”

The “New Economy” was based on services. Its artificial life was fed by the Federal Reserve’s artificially low interest rates, which produced a real estate bubble, and by “free market” financial deregulation, which unleashed financial gangsters to new heights of debt leverage and fraudulent financial products.

The real economy was traded away for a make-believe economy. When the make-believe economy collapsed, Americans’ wealth in their real estate, pensions, and savings collapsed dramatically while their jobs disappeared.

The debt economy caused Americans to leverage their assets. They refinanced their homes and spent the equity. They maxed out numerous credit cards. They worked as many jobs as they could find. Debt expansion and multiple family incomes kept the economy going.

And now suddenly Americans can’t borrow in order to spend. They are over their heads in debt. Jobs are disappearing. America’s consumer economy, approximately 70% of GDP, is dead. Those Americans who still have jobs are saving against the prospect of job loss. Millions are homeless. Some have moved in with family and friends; others are living in tent cities.

Meanwhile the US government’s budget deficit has jumped from $455 billion in 2008 to $2,000 billion this year, with another $2,000 billion on the books for 2010. And President Obama has intensified America’s expensive war of aggression in Afghanistan and initiated a new war in Pakistan.

There is no way for these deficits to be financed except by printing money or by further collapse in stock markets that would drive people out of equity into bonds.

The US government’s budget is 50% in the red. That means half of every dollar the federal government spends must be borrowed or printed. Because of the worldwide debacle caused by Wall Street’s financial gangsterism, the world needs its own money and hasn’t $2 trillion annually to lend to Washington.

As dollars are printed, the growing supply adds to the pressure on the dollar’s role as reserve currency. Already America’s largest creditor, China, is admonishing Washington to protect China’s investment in US debt and lobbying for a new reserve currency to replace the dollar before it collapses. According to various reports, China is spending down its holdings of US dollars by acquiring gold and stocks of raw materials and energy.

The price of one ounce gold coins is $1,000 despite efforts of the US government to hold down the gold price. How high will this price jump when the rest of the world decides that the bankruptcy of “the world’s only superpower” is at hand?

And what will happen to America’s ability to import not only oil, but also the manufactured goods on which it is import-dependent?

When the over-supplied US dollar loses the reserve currency role, the US will no longer be able to pay for its massive imports of real goods and services with pieces of paper. Overnight, shortages will appear and Americans will be poorer.

Nothing in Presidents Bush and Obama’s economic policy addresses the real issues. Instead, Goldman Sachs was bailed out, more than once. As Eliot Spitzer said, the banks made a “bloody fortune” with US aid.

It was not the millions of now homeless homeowners who were bailed out. It was not the scant remains of American manufacturing--General Motors and Chrysler--that were bailed out. It was the Wall Street Banks.

According to Bloomberg.com, Goldman Sachs’ current record earnings from their free or low cost capital supplied by broke American taxpayers has led the firm to decide to boost compensation and benefits by 33 percent. On an annual basis, this comes to compensation of $773,000 per employee.

This should tell even the most dimwitted patriot who “their” government represents.

The worst of the economic crisis has not yet hit. I don’t mean the rest of the real estate crisis that is waiting in the wings. Home prices will fall further when the foreclosed properties currently held off the market are dumped. Store and office closings are adversely impacting the ability of owners of shopping malls and office buildings to make their mortgage payments. Commercial real estate loans were also securitized and turned into derivatives.

The real crisis awaits us. It is the crisis of high unemployment, of stagnant and declining real wages confronted with rising prices from the printing of money to pay the government’s bills and from the dollar’s loss of exchange value. Suddenly, Wal-Mart prices will look like Nieman Marcus prices.

Retirees dependent on state pension systems, which cannot print money, might not be paid, or might be paid with IOUs. They will not even have depreciating money with which to try to pay their bills. Desperate tax authorities will squeeze the remaining life out of the middle class.

Nothing in Obama’s economic policy is directed at saving the US dollar as reserve currency or the livelihoods of the American people. Obama’s policy, like Bush’s before him, is keyed to the enrichment of Goldman Sachs and the armament industries.

Matt Taibbi describes Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentless jamming its blood funnel into anything that smells like money.” Look at the Goldman Sachs representatives in the Clinton, Bush and Obama administrations. This bankster firm controls the economic policy of the United States.

Little wonder that Goldman Sachs has record earnings while the rest of us grow poorer by the day.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com

[Jul 17, 2009] Is Goldman Sachs a blood-sucking vampire squid?

Looks like Goldman lost some friends in high places...
Jul 14, 2009

Proof, as if we needed it, that Wall Street inhabits a parallel universe. While the rate of US unemployment creeps towards double digits and businesses across the heartland struggle to stay afloat, Goldman Sachs tots up quarterly profits of $3.44bn.

The Goldman money-making machine is running at $38m per day - or $1.58m per hour. For each second it takes to read this, Goldman will make another $439 of profit.

How do they do it? They're not really telling us. Almost all of the bank's earnings come from trading. But Goldman explains away $10.78bn of revenue from its trading and principal investments operation in just four vaguely worded paragraphs of a press release.

On a conference call, chief financial officer David Viniar waffled on about a "terrific client franchise" and a "very strong culture of risk management". What this amounts to is that Goldman is fast, ruthless, opportunistic and canny in its multi-billion dollar bets on the direction of financial markets.

Awash with dollar bills just weeks after repaying $10bn in government aid, Goldman is taking heat as never before. In a lengthy oeuvre for Rolling Stone magazine, journalist Matt Taibbi characterised the firm as "the great American bubble machine", offering a roll-call of Goldman alumni in powerful government positions and blaming the bank for every financial bubble since the Great Depression.

"The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," writes Taibbi.

The New York Times has joined in, in typically more restrained fashion. It reported that Goldman's traders were known in the Big Apple as the Bandits of Broad Street and quoted an unnamed executive at a rival bank who compared Goldman staff to bellicose "orcs" in the Lord of the Rings.

Gazillions of dollars in profits don't look good when employment is evaporating from the US economy at a rate of more than 400,000 jobs a month. But in the eyes of many critics, the most objectionable aspect of Goldman's success is that the bank's earnings are shared by such a small number of already ultra-wealthy people. Goldman distributes 49% of its revenue to employees who may get an average pay packet of as much as $900,000 this year.

The former New York governor Eliot Spitzer hit the nail on the head during a Bloomberg television interview this morning. While observing that Goldman made a "bloody fortune", he said the immediate issue was not the rights or wrongs of making a profit - but the question of where the proceeds go.

"It's obviously better that banks be making money than losing it," said Spitzer. "The question is does that generate jobs - which is the word we haven't heard anything about - out in the real economy."

After an infusion of billions of taxpayer dollars to keep Wall Street banks afloat, Spitzer asks whether any significant portion of Goldman's capital will go into sustainable employment - say, in biotech or new energy: "Their job, from a macroeconomic perspective should be to raise capital and put it into those sectors that will create jobs. If they're not getting that done, then why are we supporting them in the way we have?"

While you may be loathe to listen to lessons in propriety from a man with as colourful a recent past as Spitzer, he has a point. Goldman's earnings are a warning flare. After the cataclysmic events of the past 18 months, are we simply going to allow bankers to go back to enriching themselves through an elaborate, opaque form of casino trading which is semi-detached from the rest of society?

Selected comments

  • Anyone who thinks Goldman's only got a TARP loan from the US government is sadly mistaken. Goldman's were at the absolute front and centre of the biggest financial redistribution of taxpayers money to the banks - $100s of billions going either directly or indirectly to them, billions more in fees and charges. The Whitehouse has simply become another branch of Goldman Sachs, their to raid the wealth of society for the benefit of a tiny bunch of banking oligarchs.
     
  • damiendamien

    15 Jul 09, 9:53am

    Lets not forget the $12 billion of magic AIG payments they got miraculously without any sort of haircut (thanks Hank!), the considerable evidence they took out said CDS knowing AIG didn't have the ability to cover them and would have to be bailed out, essentially betting against the taxpayer. The 1% tax they paid as a corporate last year, the elaborate tax planning individuals there use to avoid income tax and of course opaqueness of their balance sheet still loaded with level 3 mark to fantasy land assets (all these are also applicable to our own beloved BarCap)
     
  • JimVinFalz 15 Jul 09, 2:35pm

    From that socialist rag, The Economist:

    "For a firm that probably would have collapsed without government capital, debt guarantees and fast-track approval to turn itself into a commercial bank (not to mention a multibillion-dollar payout as a counterparty of American International Group), such largesse is cheeky at best, distasteful at worst."

    The key is to keep your torso well clear of the "blood funnel" of Goldman Sucks.

  • [Jul 17, 2009] Lessons for the future- Ideas and rules for the world in the aftermath of the storm, Part I, by Guido Tabellini, Vox EU

    Economist's View

    ...banking regulation has created a mechanism that amplifies the effects of shocks and accentuates cyclic fluctuations in the indebtedness of financial intermediaries.

    I think there are dangers when political power becomes concentrated in too interconnected to fail financial institutions, and this potential contributor to the crisis deserves more emphasis.

    [Jul 16, 2009] The recession is over! (Technically.)  By Daniel Gross

    The third quarter is just started 15 days ago.  and the question is what is driving recovery other then technicalities (bounce from the bottom). The problem is that unemployment is still ticking up.
     July 14, 2009 | Slate Magazine

    The Recession Is Over! What America's best economic forecaster is saying.

    Could our long national nightmare be over? The economic contraction, this Great Recession, began in December 2007, and there's no apparent end in sight. As the unemployment rate has spiked, analysts have thrown cold water on Federal Reserve Chairman Ben Bernanke's March sighting of "green shoots." The stock market's spring rally has fizzled.

    But in this season of doubt, I'm prepared to declare that the recession is really, most probably over. Why? Well, it's not because the economists surveyed by the Wall Street Journal believe it'll end in this quarter. (These guys wouldn't know an economic inflection point if it hit them upside the head. All through 2008, when the economy was contracting, they projected growth for the year.)

    No, two of the best and most objective forecasters, who are not connected to investment banks or to the CNBC noise machine, have recently called the upturn. Macroeconomic Advisers, the St. Louis-based consulting firm that compiles a monthly GDP index, reported to its clients Monday that while second-quarter GDP was tracking at negative 0.1 percent (recession), the third quarter was tracking at 2.4 percent growth.

    The folks at the Economic Cycles Research Institute agree enthusiastically. It's not because they've detected green pea shoots in Central Park. Rather, it's because we've seen the three P's, says Lakshman Achuthan, managing director at ECRI, which has been studying business cycles for decades and was one of the few outfits to call the last two recessions with any degree of accuracy.

    The economic data that get the most play in the news— unemployment, retail sales—are coincident or lagging indicators and historically have not revealed much about directional changes in the economy. ECRI's proprietary methodology breaks down indicators into a long-leading index, a weekly leading index, and a short-leading index. "We watch for turning points in the leading indexes to anticipate turning points in the business cycle and the overall economy," says Achuthan. It's tough to recognize transitions objectively "because so often our hopes and fears can get in the way." To prevent exuberance and despair from clouding vision, ECRI looks for the three P's: a pronounced rise in the leading indicators; one that persists for at least three months; and one that's pervasive, meaning a majority of indicators are moving in the same direction.

    The long-leading index—which goes back to the 1920s and doesn't include stock prices but does include measures related to credit, housing, productivity, and profits—hits bottom and starts to climb about six months before a recession ends. The weekly leading index calls directional shifts about three to four months in advance. And the short-leading index, which includes stock prices and jobless claims, is typically the last to turn up.

    All three are now flashing green. According to Achuthan, the long-leading index growth rate has been recovering since November 2008, the weekly leading index has been recovering since last December, and the short-leading index growth rate bottomed in February 2009. In sequence, each turned up, "and by April the three Ps had all been satisfied." Sure, corporate profits continue to disappoint, and the unemployment rate is climbing. But for ECRI, which navigates by relying exclusively on its instruments, that's only a part of their picture. They're the Spocks of the economic forecasting crowd—unemotional, uninvested in anything but the logic of what history and their dashboard tell them. "From our vantage point, every week and every month our call is getting stronger, not weaker, including over the last few weeks," says Achuthan. "The recession is ending somewhere this summer." In fact, it may already be over.

    There's plenty of ground for skepticism, in part because the news flow is still quite negative, especially when it comes to corporate profits. ECRI's response? "Indicators are typically judged by their freshness, not their prescience. Since most market-moving numbers are coincident to short leaning, while corporate guidance is often lagging, it is no surprise that analysts do not discern any convincing evidence of an economic upturn."

    Still, Achuthan warns that one of the most important indicators—employment—isn't showing recovery yet. The reason: The combination of deleveraging and the long-term decline of manufacturing is hindering job creation and destroying existing jobs. After the last recession ended in 2001, the service sector created jobs, but payroll employment continued to fall through 2003 because millions of jobs were lost in the manufacturing sector during the expansion. "We may see some echo of that in this recovery." But while employment is vital, payroll jobs growth alone doesn't make the difference between recession and expansion. "We've always felt that employment is very important, but it's a roughly coincident indicator," said Achuthan. "We would not expect the employment indicators to be mirroring anything we're seeing in the leading indicators." ECRI notes that job losses and unemployment claims are off their worst levels. "If we're right and the recession is over, the job market should improve by year's end."

    Of course, improvement doesn't mean the sort of 1990s-vintage broad-based employment growth that boosts wages and expands benefits coverage. And without the tailwind of cheap money and a housing boom, it's difficult to see—as it always is at the beginning of expansions—what is going to produce large-scale jobs growth.

    The recession is over! Let the jobless recovery begin!

    [Jul 16, 2009] The Fed and pumping money into the economy

    Selected comments

    mcwop says

    Agreed that the problem is NOT lack of liquidity, it is the lack of credit worthy borrowers, higher lending standards, and home price drops that are killing equity lines. I suspect many people will not be able to borrow again until the end of 2010, and possibly 2011.

    Rob says:

    Paying attention to money aggregates is a fool's game.  They are meaningless unless velocity is really well behaved and it isn't.

    JLR says:

    “The fed funds rate is at zero and not all of the special lending facilities have been utilized at anythig near capacity. I think that the plot shown here is just evidence that the fed no longer has the control over the money supply that it once did.

    Tao Jonesing says:

    “David Rosenberg had a chart in one of his "Breakfast with Dave" reports a few weeks back showing the cash reserves of banks. That chart looks remarkably like your M1 chart.

    Basically, the money that the Fed printed back in 2008 has simply accumulated in the banks.

    mcwop argues that the reason for this accumulation is "the lack of credit worthy borrowers, higher lending standards, and home price drops that are killing equity lines." I disagree. Those things are just symptoms of the real problem, which is banks that are insolvent or on the brink of insolvency. They simply have too many toxic assets (and soon to be toxic assets) on their books to lend out that money except to the lowest risk customers.

    Clearly, in a crisis like this, printing money and giving it to the banks is as useless as cutting taxes. The liquidity created just accumulates and does not find its way into the economy. Milton Friedman was wrong, and monetarism is now truly dead.

    Can we try to go back to Keynes' prescription, which requires that the money that gets printed be delivered directly to the end consumer without a middleman?

    Tao Jonesing replies:

    See Steve Keen's post about "the roving cavaliers of credit" and ask yourself whether the Fed ever had the level of control over the money supply that it once had.

    http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/ 

    @VtCodger,

    I think JLR's point about the velocity of money nicely encompasses mcwcop's "lack of credit worthy borrowers" thesis, my "insolvent banks" thesis and your "lack of interest in borrowing" thesis, all of which, if true, reduce the velocity of money. And I think they're all true.

    [Jul 16, 2009] FT.com The Economists' Forum The deleveraging process is inevitable

    The evidence leads me to my counterfactual question. Can the deleveraging process be stopped through fiscal interventions? Admittedly, it will be interesting to quantify the losses and calculate the costs of intervention to assess if intervention is feasible by looking at the aggregate numbers before answering the question. I have not analysed the aggregate numbers for the US, UK or Spain.  But I doubt intervention is feasible. So maybe we need to drop the orthodox prescription to contain this systemic banking sector crisis, such as: 

    My sense is that in the US, even if intervention on the order of magnitude required was feasible (and I doubt it), the political will, financial resources, and economic wisdom to intervene to offset the assets and wealth losses are simply not there. So as painful as it is, maybe the leveraging process has to proceed and the government should stand by ensuring only the payment system, and facilitate the deleveraging process.

    I realize those conclusions are unconventional. Comments are welcome.

    Comments

    1. Leveraging in the recent decades has enabled growth from cheap money for the global economy. It has also created a huge amount of "not needed" money - readily invested into a cascade of bubbles in the stock and commodity markets...

      Look at the S&P500. The "bubble" startet 30 years ago. When the pendulum will swing back - we will see 200 - 300 again! Image what this will mean for our pension plans...

      So, what is your solution: Let it happen? OK, let's sell short and make a fortune. Bernanke will at least secure the payment system...

      Best regards
      Manfred Baumgärtner
      www.bvb-consult.com
       

    2. Just one observation on house prices: when prices fall below replacement cost, which is now the situation in the US in many areas, there would seem to be a natural floor over the medium term in that housebuilding will shudder to a halt and supply reduction will have its impact.

    [Jul 16, 2009] Stocks Soar After Strong Results at Intel

    For an IT specialist the statement "computer sales are picking up faster than had been expected" looks like dark humor. What if this is just GC trading computer malfunction ?  Of if  GC computers are betting that they can find greater fool who'll snap S&P500 they pushed to 930 on higher levels on Fed-induced recovery expectations...
    Yahoo

    Investors are betting on the economy again. Strong earnings and an upbeat forecast from Intel Corp. pulled investors into the stock market Wednesday as hopes grew that the economy could be starting to recover. The chip maker's results signal that computer sales are picking up faster than had been expected.

    [Jul 16, 2009] Show me the Engines of Growth

    2009-07-15 | CalculatedRisk

    Back in February I pointed out that I expected to see some economic rays of sunshine this year. But I never expected an immaculate recovery forecast from the FOMC.

    Although I've argued repeatedly that a "Great Depression 2" was extremely unlikely, I think the other extreme - an immaculate recovery - is also unlikely.

    It is probably a good time to review the usual engines of a recovery. (see Business Cycle: Temporal Order for the order in and out of a recession)

    The following table shows a simplified typical temporal order for emerging from a recession.

    When Recovery Typically Starts
     
    During Recession Lags End of Recession Significantly Lags End of Recession  
    Residential Investment Investment, Equipment & Software Investment, non-residential Structures
    PCE Unemployment(1)

    Housing usually leads the economy both into and out of recessions (this was true for the Great Depression too). However this time, with the huge overhang of excess inventory and high levels of distressed sales, it seems unlikely that residential investment will pick up significantly any time soon.

    Note: Residential investment is mostly new home construction and home improvements.

    And that leaves Personal Consumption Expenditures (PCE), and as households increase their savings rate to repair their balance sheets and work down their debt, it seems unlikely that PCE will increase significantly any time soon. Maybe there will be a pickup in auto sales from the current depressed levels, but in general a strong increase in PCE seems unlikely. So even if the economy bottoms in the 2nd half of 2009, any recovery will probably be very sluggish.

    Most companies are not investing in new equipment and software - other than the normal equipment replacement purchases - because they already have too much capacity. They will not need to expand until their sales pick up significantly. So it seems unlikely that investment in equipment and software would boom until consumer spending has increased. Of course increased U.S. exports would help - but export to whom? China, and a few others ... but most of the world is also hurting.

    I still think the keys are Residential Investment (RI) and PCE, and therefore I think the recovery will be sluggish. The increasingly severe slump in CRE and non-residential investment in structures will be interesting, but that is a lagging indicator for the economy.

    (1) In recent recessions, unemployment significantly lagged the end of the recession. That is very likely this time too.

    [Jul 16, 2009] Washington's Dilemma This Isn't a Recession, It's a Collapse -- Seeking Alpha

    Crisis of state finance is just a new stage of the crisis...  "States, counties, cities, and municipalities are where the rubber meets the road and government actually produces the communal goods and services you consume."

    Washington is bluffing that it will not bail out California, and every other state suffering from collapsed revenues and massive job losses. If cuts in police and schools don’t force DC off from its current position, then the math will. Because in many states the aggregate revenue losses and looming cuts to state payrolls will largely render the intended effects of federal stimulus as moot. Frankly, unless Washington prints money and bails out every state that needs capital, including California, federal power will decline amidst this severe economic recession, and the process of a soft American devolution will begin. If you think this idea is outrageous, then you’ve still not come to terms with a core reality of our current situation: the structure of this financial crisis is wholly different than any in our post-war era. This isn’t a recession. This is collapse.

    In Recession vs. Collapse published in March, this blog explained that in a normal recession existing savings are used to support government debt issuance and that those who remain employed increase their savings to also support government debt issuance. Neither phenomenon is at work today. Yes, the savings rate has soared in the US. But this has not resulted in any actual accrued savings. Because private sector debt came to define the internal structure of the US system, savings currently is little more than debt service. Also, bank purchases of US Treasuries are really just a result of the circularity of monetization. It’s just money from the FED being recycled into Treasuries. There is no privately driven growth of bank deposits, in the aggregate. Americans as a class are broke. What the savings rate more accurately measures is a collapse of consumer spending.

    The internal composition of the US economic and financial system when it hit 2007/8 was very different than in previous recessions, even the severe recession of 1980/82. It’s this internal composition that’s now determinative, to the outcome. The sawdust of debt, and the monetization of assets rather than the production of goods, continually came to define the internal composition of the system. The economy cannot, therefore, express the same kind of resilience it has done so often, since WW2.

    This is the core problem of this collapse and why the prospect for recovery is dim. Americans can’t actually rebuild the savings that the banking system needs to escape from the current mess. Individually, Americans are trapped by debt and cannot spend. In The Seigniorage Curse, I explain that one of the primary mechanisms for the hollowing out of the American economy over many years was the dollar advantage, which at first was earned. And then, came to be un-earned. By the time the US reached the 21st century, our primary manufactured product was debt, and dollars. Is it any wonder that once that system collapsed, that we quickly gave up 100% of the phantom job growth that had been sitting on top of the debt bubble? The current level of employment in the United States has now returned to the levels of June 2000. Enough said.

    Washington apparently has a fresh dilemma on its hands, just inside of 6 months after the new administration came to power. Clearly the economic team, even though they were given almost 18 months to study the nature of the current crisis (starting in the Summer of 2007), incorrectly judged this recession to be of the post-war variety. Is that any surprise?

    Nothing in the public record since the year 2000 indicates that Larry Summers, Ben Bernanke, or Tim Geithner understood that we had been building a skyscraper of private sector debt in textbook blow-off style, since the deflation scare of 2001. Now, two years after FED repair operations began on the broken credit system, and over 3 years since US real estate topped in price, major portions of the country are staring at further home price declines in most major markets. Indeed, it appears that the same macro cycle of the last two Autumns is about to repeat, with more waves of foreclosure, more withdrawals from savings and investment to pay for living expenses, and the attendant bailouts of financial institutions that comes around each time.

    Washington can’t really take a pass on this situation. If the federal government decides it can wait while “the states rebuild their balance sheets and clean up their payrolls” (as in past recessions) they’ll be waiting forever. None of that is underway.

    It’s no surprise therefore that the country is already being prepped for a second stimulus. Sure, Washington would like to act tough and tell the States to clean up their act. This is the moral hectoring version of Ben Bernanke saying in 2006 he doubts US real estate will ever decline year over year, or Treasury Secty Paulson saying that the front-end of the crisis was just a problem contained to sub-prime. We’ve seen this script before. If California issuing IOUs in a state where banks refuse to accept them doesn’t get the message across, nothing will. We are on the front end, not the back end, of a crisis within the States.

    Unless Washington prints up dollars and bails out the States, of what use is Washington? Exactly what services can Washington provide, if California is let go? Left on its own, there would no doubt come an initial hooray from rubber-neckers and I-Told-You-So-ers. A newly broken relationship between Washington and the states might also quicken the pulse of anti-federalists, who feel we are long overdue for a tip in the balance of power. Perhaps it would all work out well. For the best, even?

    In Washington today the annual budget deficit crossed the one trillion mark. In Sacramento, there is a 26 billion dollar shotgun hole in their budget. (One hopes that CALPERS is marking to market, because if they’re not, that would be a new liability for Sacramento to deal with). Meanwhile, Autumn approaches and whole range of rather nasty choices looms over the school system. Imagine living in a prime area of California and watching your house decline by 40%, your household income knocked for an initial 30%, and the after-school programs and town services get cut. Now throw some fees and tax hikes on top of that mess. For the coup de grace, imagine California voters sitting down each night to another wave of bailouts from Washington to financial corporations. Under those circumstances it seems quite unlikely Washington can say no, to the States.

    Photos:
    George Washington by Ike E. Morgan, Outsider Folk Art Gallery.
    Barack Obama, Golf Swing Without a Club, Reuters.
    FDR, via the Smithsonian.

    [Jul 16, 2009] Yes, Unemployment Is Worse Than Reported By Barry Ritholtz

    July 15, 2009 | www.ritholtz.com

    One of our longstanding complaints has been that the traditionally reported measure of Unemployment, U3, dramatically under-reports unemployment in America. It is far too narrow and ignores too many people that want to work full time, but cannot.

    We have detailed this over the years, and last summer, modestly proposed the media begin reporting U6, the broadest measure of joblessness. (see Previously, below)

    So you can imagine our pleasure when yet another MSM gets hip to this. In the rpesent instance, it is the New York Times, Part-Time Workers Mask Unemployment Woes:

    In California and a handful of other states, one out of every five people who would like to be working full time is not now doing so.

    It is a startling sign of the pain that the Great Recession is inflicting, and it is largely missed by the official, oft-repeated statistics on unemployment. The national unemployment rate has risen to 9.5 percent, the highest level in more than a quarter-century. Yet it still excludes all those who have given up looking for a job and those part-time workers who want to be working full time.

    Include them — as the Labor Department does when calculating its broadest measure of the job market — and the rate reached 23.5 percent in Oregon this spring, according to a New York Times analysis of state-by-state data. It was 21.5 percent in both Michigan and Rhode Island and 20.3 percent in California. In Tennessee, Nevada and several other states that have relied heavily on manufacturing or housing, the rate was just under 20 percent this spring and may have since surpassed it.

    Of course, we also know from history that unemployment will continue to rise, even after the recession is officially over (so we got that going for us, which is nice).

    Surprisng to see Oregon with the worst Unemployment in the nation — I would have guessed Michigan.

    Click for interactive graphic

    broad-ue-u6

    Previously:
    A Closer Look at Unemployment (September 2007)
    http://www.ritholtz.com/blog/2007/09/a-closer-look-at-unemployment/

    Unemployment Reporting: A Modest Proposal (U3 + U6) (June 2008)
    http://www.ritholtz.com/blog/2008/06/unemployment-reporting-a-modest-proposal-u3-u6/

    Pervasive Pollyannas of Prosperity (July 2008)
    http://www.ritholtz.com/blog/2008/07/pervasive-pollyannas-of-prosperity/

    NFP: Even Worse Than Reported (December 8th, 2008)
    http://www.ritholtz.com/blog/2008/12/nfp-even-worse-than-reported/

    Persons “Marginally Attached to the Labor Force” (July 4th, 2008)
    http://www.ritholtz.com/blog/2008/07/persons-marginally-attached-to-the-labor-force/

    Source:
    Part-Time Workers Mask Unemployment Woes
    DAVID LEONHARDT
    NYT, July 14, 2009
    http://www.nytimes.com/2009/07/15/business/economy/15leonhardt.html

    Selected comments

    1. mark Says: July 15, 2009 at 8:12 am

      David Rosenberg has also pointed out in one of his recent notes that continuing claims are much worse than reported since so many are now on Federal extended unemployment benefits which are not reported in the headline data. Counting everyone give a new record not just in absolute numbers but also as a percentage of the workforce.

      People dropping off state unemployment rolls and going on Federal. Now that’s a green shoot we can believe in.
       

    2. flipspiceland Says:

      There comes a time when the old models simply will not work any longer. We have seen that played out on the stage of finance, manufacturing, service and professional careers, jobs, and other uses of the people’s time.

      Vonnegut wrote of this time in two of his novels, when work was no longer an option for billions of people. That time seems to have transcended fiction and now is a reality. There has been no work to do for billions of people in third world countries. There is massive global ‘unemployment’ in the sense that the people either cannot do anything due to geography, demand, or lack of any skills-for-hire.

      We are now at the early stages of the same thing happening in many first world countries. And no one is doing anything about this sea-change, this new paradigm that is not going to go away.

      Either people are going to take to the streets when the pressure of no money for living becomes too great, since they will be starving and/or homeless, a miracle will happen and magically a new demand will rise for some product or service that will employ millions, or the governments of various countries, states, and cities are going to have to devise new methods to keep people employed in some activity that provides the masses with something to do with their time. The alternative, revolution, is a non-starter.

    [Jul 15, 2009] Goldman’s Gain, America’s Risk - Room for Debate Blog -

    July 14, 2009 | NYTimes.com

    A Poster Child for Financial Insanity

    William K. Black, associate professor of economics and law at the University of Missouri, Kansas City, is a former financial regulator. His book, “The Best Way to Rob a Bank is to Own One,” focuses on the role of “control fraud” in financial crises.

    It’s difficult to decide which is more insane: the efforts of the Bush and Obama administrations to recreate the failed financial markets, e.g., collateralized debt obligations that produced the worst global financial crisis in three generations, or continuing to make obscenely wealthy the financial idiot-savants that caused the crisis.

    Goldman Sachs is the poster child for both forms of insanity. The news that Goldman has purportedly earned astonishingly large profits in the latest quarter and plans to pay many billions of dollars in “bonuses” to people who are already in the top 1 percent of the wealth distribution raises issues in two categories: performance and pay.

    Goldman’s profits show that government is maximizing moral hazard at firms that pose a risk to the entire economic system.

    Personally, I’m more concerned by the performance. I care about pay primarily because it creates perverse incentives to engage in accounting/securities fraud and other forms of abuse. There are two possible explanations of Goldman’s performance — and they are both frightening. “Economic recovery” is not a possible explanation. Reports of “green shoots” simply means that things are getting worse at a slower rate than six months ago. The recession, already our worst in modern history, is getting worse.

    Goldman is the textbook case of “moral hazard.” It recognizes that both administrations have guaranteed that it will not be allowed to fail no matter how badly it is run. (Treasury Secretary Geithner, in a portion of a speech ignored by the media, twice used the phrase “capital insurance” to describe our new policy. The taxpayers no longer insure only depositors — we insure the shareholders, or more precisely, the senior officers.)

    “Moral hazard” is well known in insurance and economics. If there is little downside to the senior officers and if they can capture the upside, e.g., through massive bonuses, then it pays to either engage in ultra high-risk gambles, or the sure thing, accounting fraud. Either explanation is frightening because it is simply a matter of time before this strategy causes an even bigger financial crisis than this one.

    Of course, you can’t send out a memo to 10,000 employees and tell them explicitly to engage in either ultra high-risk strategies or accounting fraud. That’s the genius of bonus systems — you can send the same message without risk of prosecution. When the Business Roundtable was looking to respond to the Enron and WorldCom wave of “control frauds,” they choose as their spokesman Franklin Raines, then chief executive of Fannie Mae. A reporter asked him why there were so many scandals on Wall Street. Mr. Raines replied:

    “Don’t just say: ‘If you hit this revenue number, your bonus is going to be this.’ It sets up an incentive that’s overwhelming. You wave enough money in front of people, and good people will do bad things.”

    Goldman’s profits should teach us (1) that our policies are maximizing moral hazard, (2) at firms that pose a systemic risk to the entire economic system, and (3) changing executive compensation to minimize the perverse incentives is not “merely” a matter of fairness — but essential to protecting ourselves from future crises.

    Selected comments

    1. We “the people” got “taken” by Goldman Sachs. Its obvious, its unethical, morally indefensible. But, it is exactly what Wall Street is all about, and it is exactly why Wall Street exists. The idea that anyone at Goldman Sachs will feel the least compunction about fleecing the country while it suffers an economic meltdown–is fantasy. These people have no consciences and will take every penny we let them steal. They are economic sociopaths and well rewarded exactly for that quality.
       
    2. Just tax them–pass a higher employer contribution tax rate for employees making over $400,000 per year, and an even higher one for employees making over $1million per year.

      Then, tax the bonuses to employees at higher rates also, with the above cut-offs.

      Until the entire federal bailout money is repaid with 24% interest–the rate banks are charging credit card holders.
       

    3. When the government is of Goldman Sachs (GS), for GS and by GS, this is what is happens.

      Notice the significant profits came from trading. Since they are a bank it must be nice to be able to borrow from the Fed at zero % and play the market. And since they cannot be allowed to fail, party on!

      Additionally if you look at the stock volume on NYSE, GS is a very significant player. Talk about opportunities and profits that come with market manipulation that come with being a significant player.

      Watch out when GS decides to go short the market….

      — Mehul Shah
       
    4. It’s interesting that our colonial ancestors, whose names and spirit are always being invoked by politicians–particularly conservative, “fiscally-responsible” Republicans–would have hung from the highest tree the bankers, “regulators” (enablers would be a better term) and politicians who allowed all this to happen.

      Revolutions have happened over far less. But here, with more tools for knowledge than ever in our 21st century, we go about our daily lives worrying about Jon and Kate, Michael Jackon’s resting place, who will marry some bachelorette, and other pressing issues.

      The United States will fall, and it deserves to. Time to pass the torch on to someone else in the quest for a better way of life, for we blew our magnificent bounty a long time ago.

      — John
       

    5. I am convinced that their gain comes from the same sort of activities that they participated in over the last 10 years. They are not building anything long term or useful. I have no doubt that Goldman is profiting on the bankruptcy and near bankruptcy position of many American corporations, that didn’t and won’t receive bail out money, to the benefit of foreign investors and the detriment of the United States. They are robber barons.

      — Dennis
       

    6. “a clear and comprehensive explanation of how exactly Goldman made the money”?

      Here’s a very straightforward one: Had Treasury not pumped over $100 billion into AIG, Goldman would have been out over $10 billion. The entire profits they just reported would have been wiped out. That seems to answer to me how exactly Goldman made the money.

      — dt
       

    7. Where is this money really coming from? They aren’t pulling it out of thin air. We are all,… the whole global community, paying more for something, somewhere along the line due to these obscene “profits”. The relationship with Exxon Oil is a lot clearer,… one-to-one,… one extra dollar at the pump, one windfall dollar in Dallas, but this Goldman scam, it is insideous, like cancer, or like roaches.

      They slime around, out of sight, under the radar, making stock and commodity trades, in positions directly counter to my 401k or my grocery store check out total.

      They take these extra fees now - supposedly - from state, local and county debt…. HELLO- , every extra billion they usurp is money me and my neighbors pay back to someone in taxes. This is NOT a zero sum game. They win, America loses, I’m repulsed by it.

      Earth to Obama, … . . . (sos). Can you PLEASE regulate this nonsense. I know you are too intimidated to tax the incentive out of it.

      — charles c
       

    8. A more pointed and just line of questioning would need to be aimed at the closeness of Goldman Sachs to the Government and to its regulators.

      There is an obscure concept that journalists/pundits are loath to consider in regards to the elite that circle above them personally: Corruption.

      Goldman Sachs’ former CEO Hank Paulson was appointed Treasury Secretary, by the Bush Administration. From there, Paulson made decisions that resulted in huge boons to GS. Paulson also appointed former GS exec Liddy to AIG, and from there AIG awarded GS billions. GS bet billions that the Mortgage Security market was a vast negligently over priced/risk-assessed bubble. GS was also a major player in this market.

      The real outrage isn’t really about resentment towards the over-compensated.

      Over-compensation is the straw man.

      The real issues concern overlooked justice — about the GS role (w/Government) in the Oil Bubble, CDO market, Derivatives, and AIG.

      In addition, the issue of bonuses overlooks the hazard of the individual reaping rewards for risk, while making the group (Corp/Bank/Taxpayer/society as a whole) pay later for the individual’s risk taking.

      — Volt Rare
       
    9. The AIG conduit episode still needs to be investigated. Where are the Congressional committees? Where are the 12-screen Times Magazine articles? Michael Lewis off-handedly writes in the current Vanity Fair that had the AIG infusion not happened, it “would have led to the bankruptcy of every major American financial institution,” presumably including Goldman. Seems to me some of those Goldman profits should be conduited back to the one that ultimately saved Goldman from total collapse, namely the public treasury.

      — dt

    10. Greed never takes a holiday. Lawyers, Doctors, Bankers and any number of other professions have simply lost their way. Professions are in every sense supposed to be “service providers” NOT profit centers per se. Bankers (Goldman is now a bank) role in society is to provide credit for the use and purpose of those with sound business models who actually produce goods and other services and for those housing their families.

      Leveraging money and manipulating the markets is not investing it is gambling and such trading should be strictly limited as to holding periods, etc.

      Incentive compensation does not lend itself to the type of conservative lending/investing in the real economy that is the appropriate role of the financial community.

      — FER

    11. Investment banking became the basis of the modern US economic system , and it is also the basis of most global economic systems .

      Making money with money , nothing else matters.

      How much better can it get ?

      Unlimited supply of it , no worries , a healthy, clean world for everybody to enjoy .

      If we all participate in it , we don’t have to work anymore , make nothing , produce nothing , we only have to go to school to become an investment banker or commodity trader .

      Wow…..America -- Can it get any better ?

      — Henry Detlef
       

    12. Goldman is as profitable as the Mafia is. There profits come from the most astute coercions possible.

      This comes at the expenses of the taxpayers and all entities who have to pay Goldman’s fees. Do you think that they are happy to pay those high fees? No - but they don’t have a choice because Goldman control the game. It is obvious that when profits are constantly that high you’re dealing with a racket.

      If Goldman had not bought the congress they would be in jail. I wish they’ll go the way of Marion Jones and will have to give the gold back - and their glory when the fraud will be exposed.

      — Bill Delamin
       

    13. these idiot-savants are thieves. these are no super-humans. they are ordinary, greedy, selfish, self-absorbed gamblers. they play poker to ‘develop trading skills’. disgusting excuses for human lives. gambling other people’s money for a living while having cab drivers and school teachers pay for their excesses via tax subsidies. the only reason they go into public service afterwards is to propagate their power even further and preserve their privilege through covert corruption. lynch them all - they won’t be missed.

      — Rob

    [Jul 15, 2009] How Should We Interpret Goldman Sach's Unexpectedly Large Earnings

    "Yet they continue to enjoy a grossly asymmetric deal, socialized losses versus privatized gains."
    Economist's View

    One of the reasons I expect the recovery to be slow despite improvements in the financial sector is that the economy cannot go back to where it was before the crisis hit. The financial and housing sectors need to shrink, too many economic resources were used unproductively in support of these activities, and the automobile sector is also in transition.

    [Jul 15, 2009] Five reasons to fear inflation

    July 14, 2009 | The Mess That Greenspan Made

    While the debate rages over whether the years ahead will be dominated by in-flation, de-flation, or some combination of the two, a quick look at the reasons why so many people are so terrified of inflation is in order.

    This is not meant to be an all-inclusive discussion, simply an overview.

    1. They've been printing so much money, it's got to go somewhere

    Yes, I know, the newly created trillions of dollars that monetary authorities around the world have sent out to failing banks, auto companies, insurance companies, and others - much of that money is currently just sitting there as bank reserves, not entering the economy in the form of new bank loans that would have this sum leveraged up to who knows how many tens of trillions of dollars.

    Of course, that's today's story.

    Tomorrow's story (probably sometime next year) will be one of economies that have hit bottom, at which time, banks will be more willing to lend and consumers more willing to borrow. That's when all the newly printed money starts to create inflation.

    The doubling of oil prices seen earlier this year is just a teaser for what's to come since central banks quickly lose control over where the money goes once it starts to move again. Of course, if there is no economic recovery, that money will just sit there and there will be little or no inflation. But, if we do manage to pull ourselves up out of this mess, we'll see the highest inflation in generations as policymakers will be loathe to repeat the mistakes that led to the 1937 recession, following the Great Depression.

    2. The government's inflation numbers are bogus

    When inflation does come roaring back, you probably won't see too much of it showing up in the government's Consumer Price Index (CPI) data since this measure has been systematically neutered over the last thirty years to make rising prices seem as though they're not all that bad compared to what we saw back in the 1970s.

    You hear a lot about how economic policies have "defeated" inflation over the last few decades when, in fact, much of the lower inflation numbers have to do with cheap oil from the Middle East, cheap imported goods from Asia, and, most importantly, changes in the way the Bureau of Labor Statistics calculates the inflation statistics.

    Since home prices were stripped out of the index in 1983, it's hard to imagine how we could ever see inflation over ten percent again since housing rental costs now account for more than 30 percent of the index. With the glut in housing due to the recently popped bubble (a bubble that would not have been possible if home prices had not been stripped from the inflation data), we'll have downward pressure on rents for years to come.

    The bad news is that domestic services and energy will keep on rising and this will feel like 20 percent inflation even when the government says it's only six.

    3. Peak oil is real and it is near

    The ongoing recession/depression has been a boon to those who have long scoffed at the whole notion of Peak Oil - that cheap energy, fossil fuel that comes gushing up from out of the ground with little or no effort and has served as the very foundation of the world economy over the last 80 years or so, will soon be a thing of the past.

    Since changes in global energy consumption are inextricably tied to changes in economic growth, the only way that peak oil is not going to be a problem in the years ahead is if the global economy grows at a much slower pace. Slow growth means less jobs which mean lots of people have lots of idle time on their hands and governments don't generally like that.

    Look for item #1 above to solve many of the world's economic problems in the near-term while creating even bigger inflation problems in the long-term as a return to world-wide economic growth once again stresses the relatively limited energy production capacity as it did last year.

    4. Rich, smart people are buying gold

    I don't know about you, but when I hear about people like John Paulson of Paulson and Company buying billions of dollars in gold bullion for his hedge fund and when stories begin to circulate about very wealthy individuals buying bullion by the truck load, apparently OK with the whole idea that it neither earns interest or pays a dividend - then I start to worry a little bit.

    Most of the rich people in the world are rich for one very good reason - because they're smart.

    And even though most of the investment world still doesn't have much of a clue about the nature of money and how, after almost four decades, a very long experiment with a world overflowing with fiat money is now going horribly wrong, a lot of smart people with a lot of money have figured it out.

    In private clubs, board meeting rooms, and social gatherings all around the world, the likes of which neither you nor I will ever experience, they are swapping stories about how to buy and store gold because rich, smart people know the long history of paper money.

    Paper money, issued by government fiat and backed by nothing other than confidence in the issuing government to act responsibly, has never endured. Governments always abuse this power and to think that it will be different this time is not only not very smart, it is naive.

    5. The central bank does not fear inflation

    The single most important reason to fear inflation is that the Federal Reserve and its minions of economists, accountants, and ne'er do wells do not fear it.

    Never before have there been so many signs of impending financial calamity that have been missed by so many central bankers, economists, and policy makers around the world that there is absolutely no reason to think that they will be any better able to spot early signs of rip-roaring inflation than they were able to spot signs of a stock market bubble, a credit bubble, or a housing bubble.

    In fact, even if there are indications of monstrous price increases on the horizon, the Federal Reserve and others will likely embrace the arrival of rising prices since what they really fear is de-flation. On this side of the Atlantic, they are determined to avoid a repeat of the 1930s when a sound money system had a completely different set of dynamics and they are loathe to do anything substantive to combat inflation until they are sure that they have vanquished their nemesis - de-flation.

    Sure, they'll keep talking about "exit strategies" and how to "remove the accommodation" that has been provided over the last year or so in the form of trillions of newly created dollars, but they don't really mean it.

    In the next few years we'll be creating a whole new chapter of economic history, one where inflation will play a central role. When the historians look back at 2009 they'll wonder, "Why wasn't anyone worried about inflation back then? When they could have done something about?"

    [Jul 15, 2009] no-one-saw-this-coming-balderdash by Stephen Keen

    July 15, 2009 | Debtwatch

    The widely believed proposition that this financial crisis was “a tsunami that no-one saw coming”, and that could not have been predicted, has been given the lie to by an excellent survey of economic models by Dirk Bezemer, a Professor of Economics at the University of Groningen in the Netherlands.

    Bezemer did an extensive survey of research by economists or financial market commentators, looking for papers that met four criteria:

    “Only analysts were included who:

    1. provide some account on how they arrived at their conclusions.
    2. went beyond predicting a real estate crisis, also making the link to real-sector recessionary implications, including an analytical account of those links.
    3. the actual prediction must have been made by the analyst and available in the public domain, rather than being asserted by others.
    4. the prediction had to have some timing attached to it.”

    On that basis, Bezemer found eleven researchers who qualified:

    Researcher Role Forecast Date
    Dean Baker, US Co-director, Center for Economic and Policy Research 2006
    Wynne Godley, US Distinguished Scholar, Levy Economics Institute of Bard College 2007
    Fred Harrison, UK Economic Commentator 2005
    Michael Hudson, US Professor, University of Missouri 2006
    Eric Janszen, US Investor & iTulip commentator 2007
    Stephen Keen, Australia Associate Professor, University of Western Sydney 2006
    Jakob Brøchner Madsen & Jens Kjaer Sørensen, Denmark Professor and Graduate Student, Copenhagen University 2006
    Kurt Richebächer, US Private consultant and investment newsletter writer 2006
    Nouriel Roubini, US Professor, New York University 2006
    Peter Schiff, US Stock Broker, investment adviser and commentator 2007
    Robert Shiller, US Professor, Yale University 2006

    Having identified eleven researchers who did “see it coming”, Bezemer then looked for the common elements in the way that these researchers analyzed the economy. He argued that if there were common elements—and if these differed from the approach taken by the overwhelming majority of economists, who didn’t have a clue that a crisis was approaching—then the only useful economic models would be ones that included these common elements.

    He identified four common elements:

    1. “a concern with financial assets as distinct from real-sector assets,
    2. with the credit flows that finance both forms of wealth,
    3. with the debt growth accompanying growth in financial wealth, and
    4. with the accounting relation between the financial and real economy.”

    A non-economist might look at these elements in puzzlement: surely all economic models include these factors?

    Actually, no. Most macroeconomic models lack these features. Bezemer gives the topical example of the OECD’s “small global forecasting” model, which makes forecasts for the global economy that are then disaggregated to generate predictions for individual countries—like the ones touted recently as indicating that Australia will avoid a serious recession.

    He notes that this OECD model includes monetary and financial variables, however these are not taken from data, but are instead derived from theoretical assumptions about the relationship between “real” variables—such as “the gap between actual output and potential output”—and financial variables. As Bezemer notes, in the OECD’s model:

    “There are no credit flows, asset prices or increasing net worth driving a borrowing boom, nor interest payment indicating growing debt burdens, and no balance sheet stock and flow variables that would reflect all this.”

    How come? Because standard “neoclassical” economic models assume that the financial system is like lubricating oil in an engine—it enables the “real economy” to work smoothly, but has no driving effect—and that the real economy is a miracle machine that always returns to a state of steady growth, and never generates any pollution—like a car engine that, once you take your foot off the accelerator or brake, always returns to a steady 3,000 revs per minute, and simply pumps pure water into the atmosphere.

    The common elements in the models developed by the Gang of Eleven that Bezemer identified are that they see finance as more akin to petrol than oil—without it, your “real economy” engine revs not at 3,000 rpm, but zero—which can contain large doses of impurities as well as hydrocarbons. The engine itself is seen as a rather more typical gas-guzzler that pumps not merely water and carbon dioxide, but sometimes unhealthy amounts of carbon monoxide as well.

    That’s encapsulated in the flowchart that Bezemer copied from a paper by Michael Hudson, shown below. Without credit from the Finance sector, producer/employers don’t get the finance needed to run their factories and hire workers; but with credit they accumulate debt that has to be serviced from the cash flows those businesses generate.

    The component left out of the above flowchart—but incorporated in all the models praised by Bezemer for seeing the crisis coming—is that the finance system can fund not merely “good” real economy action but “bad” speculation on financial assets and real estate as well. This also leads to debt, but unlike the lending to finance production, it doesn’t add to the economy’s capacity to service that debt.

    The growth in thus unproductive debt was the common element identified by Bezemer’s “Gang of Eleven”, which was why we most definitely did see “It” coming.

    I’ll finish this analogy-laden article with a sideswipe at an inappropriate one—that this crisis is “like a tsunami”. Though that image captures the suddenness and devastating nature of the crisis, it is wrong not merely once but twice in characterizing how it came about.

    Firstly, unlike a tsunami, this crisis was predictable by economists who take what Bezemer characterized as a “Flow-of-fund or accounting” approach. Secondly, a tsunami is actually caused by a huge shift in the planet’s tectonic plates, and the shift itself relieves the tension that caused the tsunami in the first place: in a sense, the tsunami resets the system to a tranquil state.

    This financial tsunami was caused by the bursting of asset price bubbles driven by excessive levels of debt, but the bursting of those asset bubbles hasn’t eliminated the debt—far from it. Instead, economic performance for the next decade or more will be driven by the private sector’s attempts to reduce its debt levels, and this will depress economic activity for years. Unlike a tsunami, a debt crisis is a wave of destruction that keeps on rolling unless the debt is deliberately eliminated.

    Everything that is being done by policy makers around the world is instead trying to restart private borrowing. A better analogy is therefore not a tsunami but a drug overdose—and our “neoclassical” economic doctors are attempting to bring the patient back to health by administering more of the same drug.

    marvenger said,

    mind boggling small number. I can’t help but feel capitalism needs this ignorance to function, if people knew the game no one would play.

    How on earth is Goldman Sachs getting away with their bonuses. they received over $20b in gov funds through the AIG conduit. I think I’m starting to know how the Romans felt when Nero became Emperor. All hail the The United States of Goldam Sachs

    Philip said, in July 15th, 2009 at 2:11 pm

    Excellent work by Bezemer, and well done Steve. This finding confirms James Galbraith’s statement when he was interviewed by the New York Times about the US property bubble. He correctly said that out of 15,000 professional economists in the US, about 10-12 actually saw the bubble before it burst.

    This is what happens when economic and financial policy is crafted by neoclassical economists. 

    gordon said, in July 15th, 2009 at 2:34 pm

    Well done, Steve, being recognised internationally at last. And the final analogy does seem more apt.

    But I do wonder about many others that I have read who also recognised the unsustainabilty of the debt bubble well in advance yet receive no recognition in this report. What about Doug Noland with his epic Credit Bubble Watch at Prudentbear, and the myriad of goldbugs?

    Still, a good start. 

    MACCA said, in July 15th, 2009 at 3:44 pm

    Thanks very much – again- Steve.

    Looking at the stranglehold Banksters have on Govts, I am not confident at all that just because the current dominance of neoclassical economic theory has been proved resoundingly wrong , will it be discarded for what is obviously the correct “stock to flow” versions.

    Debt and credit as we all know is enormously profitable and very big business. The “gang of eleven” economic models are anathema to Big Bank business models and therefore will struggle to gain any acceptance from the Bankster minions in Govts. 

    mannfm11 said, in July 15th, 2009 at 6:14 pm

    I am not an official economist, but you might plug mannfm11 in google and see the writings over the past 8 years where I called for the same thing. But, there is a guy Steve might know, Doug Noland who studied in Australia in 2002, but continued to write for the Prudent Bear Fund prior to, during and after 2002. His post, called the Credit Bubble Bulletin, tracked all the different financial bubbles and Doug was waiting for this disaster much before Roubini ever even thought about it. I believe Doug testified in front of Congress about the dangers of allowing the GSE’s to pump credit and securitize it. I read one of his posts which said that credit was like a shark, once it stops swimming it dies. Doug’s most recent writing was about China’s current lending, which he says has put them now in the credit bubble twilight zone where they are either going to have to accelerate their lending going forward or collapse, meaning they are now repeating what Greenspan and Wall Street did which started this mess in the 1990’s. I am not sure that the deflation of Japan didn’t start a chain reaction, where we are now running all bubbles to stay afloat. The world response is clearly absurd, more of the hair of the dog that bit you. It seems they are only making Goldman Sachs many more billions.

    [Jul 15, 2009] More Inventory Correction

    2009-07-14 | CalculatedRisk

    The Manufacturing and Trade Inventories and Sales report from the Census Bureau today showed more evidence of declining inventories.

    Click on graph for larger image in new window.

    The Census Bureau reported:

    Manufacturers' and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,368.1 billion, down 1.0 percent (±0.1%) from April 2009 and down 8.0 percent (±0.4%) from May 2008.
    The above graph shows the 3 month change (annualized) in manufacturers’ and trade inventories. The inventory correction was slow to start in this recession, but inventories are now declining sharply.

    However, even with the sharp decline in inventories, the inventory to sales ratio has only declined to 1.42 in May - since sales have fallen sharply too.

    There has been a race between declining sales and declining inventory. Even as sales start to stabilize (appears to be happening), inventory levels are still too high compared to the lower sales levels, and further inventory reductions are probably coming.

    [Jul 15, 2009] Obama- Unemployment Rate will "tick up for several months"

    While professor Roubini is an opportunist who is a rather bad forecaster (but like clocks that stop working shows time correctly one time a day, can be right on certain issues)  and has prognostications this a distinct  "recession porno" flavor, still  official forecasts are too rosy....
    Calculated Risk
    ...Professor Roubini wrote today:
    In the U.S., the unemployment rate, currently at 9.5%, is poised to rise above 10% by the fall. It should peak at 11% some time in 2010 and remain well above 10% for a long time.
    ...
    But these raw figures on job losses, bad as they are, actually understate the weakness in world labor markets. If you include partially employed workers and discouraged workers who left the U.S. labor force, for example, the unemployment rate is already 16.5%; even temporary employment is sharply down.

    ...Moreover, many employers, seeking to “share the pain” of the recession and slow down the rate of layoffs, are now asking workers to accept cuts in both hours and hourly wages. Thus, the total effect of the recession on labor income of jobs, hours and wage reductions is much larger.

    [Jul 15, 2009] Guest Post- Anticipating Financial Instability - High Time for a Coherent Macroeconomics

    Paper pushers from Goldman and like will fight against this pretty sound idea...

    naked capitalism

    If macroprudential supervision or any such related effort at reducing the odds of systemic economic crises unfolding from financial instability is to be successful, the core analytics will need to be built around a stock/flow coherent approach macroeconomics. The ground work in this area has been already been done by the likes of Claudio Borio, Wynne Godley, Levy Institute research associates, and others working in financial stability projects within various national and international institutions. Without paying attention to unsustainable sectoral cash flows and the resulting balance sheet leverage building up over time, financial vulnerabilities that can trip up the entire economy – indeed, as we have seen, the entire global economy - will remain largely invisible to investors, entrepreneurs, and policy makers. Perhaps that serves the interests of asset bubble perpetrators, but after recent events, it is high time to question whether those interests should remain paramount.

    Selected comments

    Haigh said...
    How about publishing a dashboard page on Naked Capitalism that graphically depicts "unsustainable sectoral cash flows and the resulting balance sheet leverage" ?

    The best way to kill off a bad paradigm with a new one is for the new one to show results superior to the old one.

    It may take a few popped bubbles to get it right, but there is no better time than now to publish a V1.

    Shiller was recently interviewed and claimed Systemic Risk now is worse than it was in 2008. Does this new model support that?

    The world wide web will beat a path to the door of any dashboard that works. Policy makers will then have no choice.

    July 14, 2009 12:24 PM

     
     DownSouth said...
    @"...we do believe ignoring useful frameworks for understanding financial instability, and leaving applied analysis based on these frameworks essentially ignored or marginalized, is unlikely to benefit anyone except those who gain the most from manufacturing and milking serial asset bubbles."

    We must face the appalling fact that we have been betrayed by both the Democratic and Republican parties.
    ~
    --Martin Luther King, "Facing the Challenge of a New Age"

    History is the long and tragic story of the fact that privileged groups seldom give up their privileges voluntarily.
    ~
    --Martin Luther King, "Letter from Birmingham City Jail"

    It is the height of naivite to believe that the Goldman Sachses of the world will surrender their entrenched priviliges just because the theories that underpin them have been proven to be wrong.

    The men of power in modern industry would not, of course, capitulate simply because the social philosophy by which they justify their policies had been discredited. When power is robbed of the shing armor of political, moral and philosophical theories, by which it defends itself, it will fight on without armor...
    ~
    Reinhold Niebuhr, Moral Man & Immoral Society

    July 14, 2009 12:58 PM

     
     Anonymous said...
    Unbelievably good article. Thanks.

    It seems like there is a monotonous cry of 'new paradigm' at the top of each one of these bubbles, and it seems inconceivable that economists can choose to ignore the basics of macroeconomics, decade after decade, in favor of cheap money and further bubbles.

    This is great stuff, and with luck, these views will start to permeate both through the establishment, and to the people, though it may take people starting to go hungry before this happens.

    July 14, 2009 1:44 PM

     
     Francois said...
    Since I'm no economist nor a finance-trained pro, I can't claim to fully understand the concept of stock/flow coherent macroeconomics.

    However, I've been trained (some would say "whipped") to sort out order from chaos, signal from noise in highly charged situations. SO, if there is a common characteristic shared by several people that properly perceived and analyzed a situation that escaped the majority, chances are there is a good deal of validity in their approach.

    It seems that the first step in further studying and possibly integrating this framework into the mainstream is to repeatedly highlight the contrast between those who got it and those who didn't while presenting the trait (stock/flow coherent macroeconomics) that the victors shared but the losers did not. There will come a time when it will be perceived as plain dishonest to ignore this approach.

    The sooner this is done the better. We clearly need to "Think Different".

    July 14, 2009 2:34 PM

     
     Anonymous said...
    Nassim Taleb has gained notoriety for his view that the recent episode of financial instability is an example of a Black Swan event

    Taleb does not claim that the recent events were a Black Swan. In fact he feels they were definitely not a Black Swan because the crack-up was quite predictable.

    I've been pointing this out for close to years now: After each airline disaster/Shuttle disaster/engineering disaster there is a thorough investigation by an independent party, yet there hasn't been one investigation of the recent events in the financial markets.

    July 14, 2009 2:42 PM

     
     Lord said...
    Quite right. Whenever I hear that this was the result of people believing their incomes would double in 5 years, or people believing their wealth would double every 5 years forever, they are so preposterous no one can believe anything they say.

    July 14, 2009 3:22 PM

     
     Don said...
    It seems clear to me that most of the seers were afraid of Debt-Deflation, which we have, and, even worse, a Debt-Deflationary Spiral, which we've managed to avoid so far. Surely that leads to Irving Fisher:

    http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

    From my point of view, this schema has been the best lens through which to view this crisis. In fact, I interpret Fisher's views in a way that can help explain this oddity as a consequence of Debt-Deflation:

    http://blogs.wsj.com/economics/2009/07/10/job-losses-outpace-gdp-decline/#top

    "In a research note, Carson says job losses in prior downturns have been roughly proportional to the decline in gross domestic product. But in the current recession, the proportion of jobs lost is running about a third greater than the drop in real GDP."

    This is just one reason that Debt-Deflation is so scary. Job loss can vastly outpace the decline in GDP.

    Don the libertarian Democrat

    July 14, 2009 4:25 PM

     
     MacroStrategy Edge said...
    Haigh - Agree about the dashboard idea, and in fact have been wading through the various financial stability projects to gather a good working set that is also underpinned by coherent macro for a Ford Foundation project that is unfortunately overdue.

    DownSouth - I have no illusions that speaking truth to power can get you more than a new set of teeth. But history also suggests a clear view of what went wrong and what it takes to make it go right can help galvanize change. Otherwise you are just relying on personality cults, which tend to go horribly wrong.

    Thanks Anon1 - send the views around. People are already starving, or at least more are on food stamps. It is one reason I feel compelled to keep harping on these fundamental misunderstandings.

    July 14, 2009 4:26 PM

     
     MacroStrategy Edge said...
    Francois - If you know how to balance your checkbook, then you are on your way to a coherent stock/flow macro approach. If you get cash flow statement analysis (sources and uses), you are even closer, but I will see if I can post a link to some examples or related papers that might help reveal a stock/flow coherent approach.

    Anon2 - Taleb is belatedly coming around to a view that debt has something to do with the issue of financial instability, judging by his recent co-authored article.

    Good step in the right direction, but he needs to keep going, maybe read a little Minsky while he is at it. All of this stuff needs to be rediscovered - and quickly so.

    I suppose Black Swans events are "predictable" in the sense that the normal distribution in fact has fat tails which we fail to recognize until after the Swan has flown past our noses, and then we quickly try to forget we ever saw it.

    But that kind of predictability does not get us very far, does it? I would suggest we need predictability in the sense of understanding the underlying economic and financial dynamics common to episodes of financial instability...and in other than purely statistical terms as well. 2nd and 3rd moments of bell shaped distributions don't mean much to most people. But perhaps I am misinterpreting the thrust of Taleb's contribution.

    Lord - Agreed, there are some simple truths that should prevail, but don't when people get caught in the fervor of asset bubbles. What amazes me is the speed with which people are willing to forget about prior bubbles and suspend their disbelief. Under such conditions, perhaps by the time markets police themselves, too much leverage has been built up to unwind in any kind of orderly fashion. At a minimum, some independent assessment of the degree of financial instability in the system needs to be made available, if not brought directly in to policy deliberations.

    For example, after the past 18 months of trial by fire, any central banker who has yet to figure out that inflation stability is not the only kind of stability worth evaluating needs to take a long, well deserved vacation. Maybe even a permanent one.

    Don - Yes, Fisher got many of the moving parts belatedly (he had to be stripped of his theoretical illusions about market equilibrium by losing his fortune and his house in the Great Depression, but I admire his courage in facing the facts).

    His 1933 contribution is rich, but a bit of a jumble, and it takes until Minsky hit's full stride 3-4 decades later before we get a clearer statement of financial instability dynamics. With Wynne Godley a decade or so late, we get the financial balances framework more fully exposed.

    But unfortunately, most of these contributions have been ignored or forgotten as much of modern macroeconomics has gone retrograde, huddling itself into a corner of applied calculus with little practical relevance to the world we actually inhabit.

    [Jul 14, 2009] Is Meredith Whitney bullish now

    Ina Pickle said...

    I don't think that those were bullish calls in the slightest. I think that she very clearly said that the banks are being handed a HUGE quarter, and to be very careful not to be short them in the near term. DUH. She said a 15% bounce wouldn't surprise her.

    She also continued to say what she's been saying all along: that the core business of banks doesn't make money. I think this is consistent, just pointing out that the rules are completely changed.

    She also made some extremely bearish sounds about the long run: consumers aren't coming back, no new lending, one offs, etc.

    What, do you disagree with her on GS? Seems to me that the market should just price in that they are in a unique position as the government sponsored gorilla in the markets. They have a license to print money.

    emca said...

    Meredith also predicts unemployment will reach 13%-15%. Bullish on banks but not America, I guess. May have something to do with what Ed suggested below, that GS has entered the realm of international financial mechanization and, I would add, should be judged on that variable (all grumblings by fellow peons damned).

    The phenomena of Goldman's was not entirely unpredictable. Earlier this year the New York Times speculated on Goldman's 'competitive' advantage given brain-drain resulting from their (Goldman's) unfretted ability to compensate its troops. Added the demise of organizations with might dull their competitive edge (i.e. Lehman's) and Goldman's political acumen, one can only shrug at marvelous insight Meredith Whitney (et. al.) are now yacking up.

    From this station the train does part, to what destination we care not, as it is the only vestige moving away.

    Edward Harrison said...

    Ina Pickle,

    I have to admit, you're right about Whitney. She IS saying the same things. The problem I have is not with WHAT she is saying, but the stress and the tone.

    I wish she would acknowledge that her tone and stress are different because that would make her statements that much more credible.

    On substance, I agree with her very much i.e. the banks are benefiting from government largesse and accounting rule changes. I don't agree that the underlying earnings power of banks is negligible however.

    For now, that's neither here or there because we both agree that a lot of money is going to be made by GS and probably by JPM, WFC and BAC. Citi is another story.

    [Jul 13, 2009] How globalisation led to universal banking in America

    naked capitalism

    Last week, I followed up Yves Smith’s excellent post on “Why Big Capital Markets Players Are Unmanageable” with “More on why big capital markets players are unmanageable.”  I would like to extend the discussion beyond the U.S. border into a look at how the universal banking model abroad encroached on the U.S. banking system and created a response that made the repeal of Glass-Steagall an inevitability.

    ... ... ...

    ...ironically, the U.S. banking system is much more prone to systemic risk today than it was a year ago or a decade ago.  Moreover, these institutions still have an enormous amount of so-called toxic assets on their balance sheet hidden in Level Three assets (see post “Level Three Assets: banks are hiding the ball on credit writedowns”).  These assets have not been written down to reflect present market values. And, many more writedowns from commercial real estate and credit cards, leveraged loans and high yield bonds remain to be taken.

    My conclusion, therefore, is that the likely technical recovery toward the end of this year or the beginning of 2010 is a fake recovery.  Much underlying systemic weakness remains.  Moreover, the U.S. banking system post-crisis is more concentrated and more vulnerable than ever before.  Will bringing back Glass-Steagall solve this?  No.  This post demonstrates that there are forces in the global marketplace that make Glass-Steagall a relic of the 1930s.  Nevertheless, a move away from the self-regulatory nonsense of the last generation is warranted. Enforcement of existing regulations, regulation of OTC derivatives and the shadow banking system are all important steps that need to be taken.  However, above all, I am most concerned with the concentrated risk in our financial system.  I see no other way to reduce this concentration than to break up too big to fail institutions.  If you do see another way please feel free to comment

    Selected Comments

    Joe Costello said...

    Hi Edward,

    While there's some points to your history, I'd say its pretty industry standard view of what happened, especially over the last three decades.

    One thing is the banks played a role in opening up the S&L industry so they could get their grimy paws all over that. Check out Greider's analysis in "Who Will Tell the People?"

    Also, you drop profitability and "internationalization" in there as reasons.

    1) Getting money from money is much of the time profitable, the size of the profits is the issue. Everyone hates to see other people make more than themselves, especially Wall Street and the banks. Its ok to regulate certain aspects of the financial system to low profits and if people aren't happy with that, they can get into another business.

    2) Internationalization, it was the corporations that created this system. It's not some a priori force of nature. There's ability to protect things from forces deemed harmful. You write this very much how the narrative has been the last three decades. The mega-corporations were behind the whole corporate globalization process and they kept using it for reasons that things had to change, while they were the force behind the whole process. So, when you say internationalization as a cause, its not, it is a process we allowed to be created.

    Finally, Glass Steagall was not a relic. It's greatest importance and that of many of the regulations of the era were to separate the money supply and sectors, so that if there was a problem in one area, it didnt instantly spread across the whole system. Again, it's ok if your going to lend money to certain areas of the economy, its not tremendously profitable, just enough, that keeps things stable. Like I said if you want bigger profits go somewhere else.

    This is why all the talk from Obama et al is not getting to the point. You don't need a systemic regulator, you need rules and regulations that don't allow bubbles, we had them for fifty years and they worked well, sure some can always be updated, but there's a lot of wisdom from what they did in the 30s we could relearn. I'm not a neo-New Dealer.

    The financial sector needs to be caged back up, it needs to be shrunk by at least half.

    Yves Smith said...

    Ed,

    I have to differ a wee bit with your history.

    Citibank had universal banking aspirations since the early 1980s. Ditto JP Morgan, BT was keen since the late 1970s to get into investment banking, but didn't think having consumer deposits was a plus and famously sold their branch network

    And by "universal banking" most people meant the euorbanks, like DeutscheBank, which even as of the 1970s had been permitted for more than a century to own unlimited stakes in industrial companies and underwrite and trade securities. So this was a long standing model, not a new model. The Germans and Swiss just were not very good at the investment banking part, sine their securities markets were not as deep and developed as the US.

    Also, the US bank acquisitions of UK brokers post 1986 were notably unsuccessful. The view among investment bank prior to this exercise, and it appeared to confirm their prejudices, is that commercial banks would screw up any securities industry deal by imposing new, inappropriate management systems on the staff, leading them to quit. The first kind of investment banking deal I recall succeeding was the Swiss Bank Corporation acquisition of O'Connor & Associates, a derivatives trading firm. I was very much surprised they kept the people and were successful at skill transfer. They had a JV in 1992 and did the full acquisition in 1993. If anyone knows of any earlier deals that could be deemed successful, I'd be interesting in knowing about them.

    And Glass Steagall was shot full of holes by the time it was formally repealed in 1998. The main practical impact was allowing the Citi-Travellers merger to proceed. Look, I had Citi as a client in the 1980s and as of 1986, they had bought and sold an industrial company, meaning not as an M&A advisor (that was perfectly kosher) but moving it through their balance sheet. This appeared to be one of those typical Citi "let's do it because we can" sort of the way engineers take apart and reassemble washing machines for fun. Any regulator would have been horrified. And the real waivers took place in the later 1980s and 1990s.

    The big deal for the commercial banks was the rise of derivatives. New product, the highest tech, they got in on the ground floor, and balance sheet strength was important in that business.

    [Jul 13, 2009] Steve Keen’s DebtWatch No 31 February 2009- “The Roving Cavaliers of Credit”

    Talk about centralization!

    "The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralization, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner— and this gang knows nothing about production and has nothing to do with it.” [1]

    Ten years ago, a quote from Marx would have one deemed a socialist, and dismissed from polite debate. Today, such a quote can (and did, along with Charlie’s photo) appear in a feature in the Sydney Morning Herald—and not a few people would have been nodding their heads at how Marx got it right on bankers.

    [Jul 13, 2009] Now they listen to William White

    Jul 12, 2009

    This story and associated slide show in Spiegel Online (hat tip Tailwind) about William White, former chief economist at the BIS (Bank for International Settlements), offers new hope that maybe, just maybe, the global economy will someday be put on a steadier course.

    William White predicted the approaching financial crisis years before 2007's subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.

    Selected GDP Forecasts

    2009-07-12 | CalculatedRisk

     Professor Roubini thinks the economy will be in recession through the end of 2009, and that the recovery will be "shallow". More from Christian Menegatti at RGE Monitor:

    The general consensus is that this recession will end sometime in the second half of 2009. While RGE Monitor expects more quarters of negative real GDP growth in 2009, we also expect the pace of contraction of economic activity to slow significantly. We forecast negative real GDP growth in Q2 2009 and Q3 2009, and for real GDP to remain flat in Q4. After the sharp contraction in economic activity in 2009, growth will reenter positive territory only in 2010, and then at a very sluggish rate, well below potential.
    Paul Kasriel at Northern Trust is a little more optimistic: When We Get “There”, Will We Know It?
    Back in April, our forecast update commentary was entitled, “Are We There Yet?” The “there” referred to a resumption of real growth in the overall economy. Our answer in April was “no,” which also happens to be our answer in July. When will we get there? Our answer in April was the fourth quarter of this year, which also happens to be our answer now. Assuming we get there in the fourth quarter, would most households and businesses in America know it if they were not so informed by the media? Probably not. We anticipate another “jobless recovery,” which implies a relatively feeble one. We would not be surprised to hear terms early in 2010 such as “double dip.”
    I think Kasriel might be a little too optimistic about 2010.

    Jan Hatzius at Goldman Sachs sees a little positive GDP growth starting in Q3, and a sluggish recovery (no link).

    Here are the quarter by quarter real GDP (annualized) forecasts from Northern Trust and Goldman:

    Quarter Northern Trust Goldman Sachs
    Q2 2009 -2.2% -1.0%
    Q3 2009 -2.1% 1.0%
    Q4 2009 2.3% 1.0%
    Q1 2010 1.2% 1.5%
    Q2 2010 2.4% 1.5%
    Q3 2010 2.4% 2.0%
    Q4 2010 3.3% 2.0%
    I think the real GDP growth will turn slightly positive sometime in the 2nd half of this year, but my guess is 2010 will be barely positive, with the unemployment rate rising for most of 2010.

    [Jun 13, 2009] Shiller, Roubini Discuss `Anemic’ Economic Recovery

    More signs of the coming collapse of living standards engineered by wall streeters and banksters

    The Big Picture

    1. cvienne Says:

      @CNBC

      Some of the “Song Remains the Same” (Led Zepplin)…but I found the interview well worth passing the time listening to…

      Among the highlights:

      • Roubini comment: Green Shoots - Yellow Weeds - Brown Manure (although I still find it curious how he comes up with 1% growth in 2H10…I assume he’s discounting a Taleb (which I’m not)
      • Roubini: Instead of taking away the punchbowl in 2001 they added whiskey, vodka, & gin…
      • Acknowledgement of the STRUCTURAL LEVERAGE problem by both…Maybe not new, but decisively a DEFLATION before INFLATION argument…
      • Thoughts on extension of decay rate in unemployment.
      • Thoughts on FASBY and level 2&3 asset reporting for next 3 quarters.
      • Thoughts on Bureau of International Settlements
      • Thoughts on lack of multiplier effect in last stimulus
      • Thoughts on Fed’s use of “rhetorical confidence” in statements
      • Thoughts on “behavioral economics vs. political response”…
      • Thought on PERMANENT behavioral change ( that current increase in savings belies improved confidence numbers)

      There were interesting questions from the audience as well…

      It was interesting to me that Schiller IS CLEARLY AN ACADEMIC & NOT MONEY MANAGER…He struggled with the “one asset class for the next 6 months question” (and probably got the answer wrong)…Roubini had a better answer…
       

    2. willid3 Says:

      http://economistsview.typepad.com/economistsview/2009/07/average-weekly-hours.html
      more signs of the coming collapse of living standards engineered by wall streeters and banksters
      and we can’t forget the gran pewbar that lead us here

      http://www.boston.com/business/globe/articles20070314greenspan_let_more_skilled_immigrants_in/
       

    3. super_trooper Says:

      Roubini is a lousy predictor of the future. He keeps overestimating the turn of the economy. During the winter he predicted a recovery in the 2nd half of the year. Now it’s next year.

      Sounds like predicting the next 6 months is very hard, why even bother.

    [Jun 12, 2009] Safe Haven Speculator Policymaker Foe or Friend

    Speculator: Policymaker Foe or Friend?

    I believe it was sometime in late 2002 - or perhaps early 2003. I recall one of the major macro hedge fund managers appearing on CNBC. He made what I thought at the time was an extraordinary comment: "The government wants me to buy junk bonds, so I'm buying junk bonds."

    It was always my view that Fed chairman Greenspan directly targeted the leveraged speculating community, as necessary, for use as a mechanism for monetary stimulus/reflation. The Greenspan Fed would actively manipulate market interest-rates, hence speculative profits. If financial crisis erupted - such as with the collapse of Long-Term Capital Management, the bursting of the Tech Bubble, or 9/11 - Greenspan would immediately collapse short-term borrowing costs, assure the marketplace ample liquidity and, accordingly, inflate the price of most fixed income securities.

    This signaled to the leveraged players that it was an opportunistic time to buy risk assets - especially corporate debt and mortgages. These purchases would reduce market borrowing costs, increase Credit Availability, and boost marketplace liquidity. And like clockwork, ultra-loose financial conditions would work their magic on the equities and real estate prices, as well as the real economy. After awhile, speculators simply loaded up on risk assets - anticipating the next crisis and Fed-induced speculative profit bonanza.

    With the Fed able and willing to manipulate speculative profits and (along with the GSE) "backstop" marketplace liquidity, leveraged speculation flourished and expanded to unimaginable dimensions. The leveraged speculating community evolved into the most powerful monetary force in history - and the Federal Reserve was soon playing with a bonfire.

    July 8 - New York Times (Edmund L. Andrews):

    "Reacting to the violent swings in oil prices in recent months, federal regulators announced... that they were considering new restrictions on 'speculative' traders in markets for oil, natural gas and other energy products.

    The move is a big departure from the hands-off approach to market regulation of the last two decades. It also highlights a broader shift toward tougher government oversight... In the case of oil and gas trading, regulators made it clear that they were willing to move, without waiting for Congress to act on Mr. Obama's overhaul, invoking their existing powers.

    The Commodity Futures Trading Commission said it would consider imposing volume limits on trading of energy futures by purely financial investors... 'My firm belief is that we must aggressively use all existing authorities to ensure market integrity,' said Gary Gensler, chairman of the commission...

    He said regulators would also examine whether to impose federal 'speculative limits' on futures contracts for energy products."

    Mr. Gensler's comments really caught the markets off guard. Isn't he a long-time Wall Street, free-markets guy? And while one can view the clampdown on "speculative" energy trading as simply part of the tough new post-Bubble regulatory backdrop, I suspect there's more to it.

    The good ole' days of policymakers enticing the leveraged players into junk bonds and mortgages have past. Recall that the Bernanke Fed cut rates 200 bps during 2008's first quarter. Instead of the typical signal to buy US debt securities, speculative flows rushed to trade out of dollar securities for real things that can't be so easily devalued away. Over several months, commodities prices rocketed to record highs, as crude oil reached an astounding $145 a barrel. At that point, the leveraged speculating community had been lost as a reliable Fed monetary management tool. Indeed, the inevitable day had arrived when speculation was viewed as one huge problem in a gigantic mess.

    Washington has a dilemma. Unprecedented monetary and fiscal stimulation are being employed in hopes of spurring rapid economic recovery. But these policy measures risk unwieldy - and self-reinforcing - speculative flows out of dollar securities and into "undollar" assets such as energy and commodities. And recall that it was about a month ago that the dollar was breaking down, commodities were on a run, and crude was approaching $75. At that that time, 10-year Treasury yields jumped to almost 4% and MBS yields spiked to 5.07% (up more than 100bps in a month). Housing and economic recoveries were in trouble.

    Ironically, stock investors a month back were interpreting the rise in commodities and market yields as positive confirmation that recovery was taking hold. Fast forward a month - with crude and commodities now sinking - and sentiment has shifted somewhat negatively. I tend to hold the view that markets fluctuate - and news/analysis is there waiting to follow market direction. I don't want to over-read commodities price moves as an indicator of the vitality of global reflation.

    As expected, the US economy is lodged in deep mud. Europe remains very weak. But the global reflation thesis rests first and foremost upon happenings in China and Asia. China, in particular, is living up to all my reflationary expectations - and then some.

    China's preliminary June bank lending data was out this week. Incredibly, loans increased by $224bn. First half loan growth surpassed $1.0 Trillion, about three times the year ago rate and way above government forecasts. As a Credit analyst, these numbers gave me the chills. The Chinese Credit system appears to have commenced the "terminal phase" of Credit excess. Export industries may remain weak, but Chinese housing, auto and equities markets - the current focal point of Credit expansion - are generally robust.

    Perhaps Chinese authorities are already moving behind the scenes to try to rein in excesses. Yet a key facet of a Credit Bubble's "terminal phase" is that it becomes a formidable challenge to muscle the Jeanie back in the bottle. Over time, Bubble economies become increasingly unstable. As we witnessed here at home, a point is reached where policymakers view the risks of bursting the Bubble as too great - and they justify and rationalize. Too many - individual and institutions - become dangerously exposed to inflated asset prices. The unbalanced and maladjusted economy becomes acutely vulnerable to a downward spiral. Erratic behavior engulfs assets markets, economic activity and speculative flows, creating confusion and policymaker paralysis. And, especially relevant to the current Chinese predicament, an increasingly unequal distribution of (Bubble economy) wealth creates a volatile social backdrop. When push comes to shove, authorities will generally feed the Credit beast - and the unchecked "terminal phase" is left to run completely out of control.

    "Macro" analysis remains as fascinating as it is challenging. Here at home, Washington seems poised to move against unhelpful speculation. The marketplace has good reason to fear heavy-handedness. But don't be surprised if it turns out more a case of light coddling: "Speculators please take notice that it is to your advantage to buy corporate bonds and mortgages instead of oil futures contracts." Fiscal and monetary policymakers are formulating a recovery strategy. I would expect them to pull out all the stops - and not give up easily - in their efforts to accomplish objectives.

    And despite the recent bludgeoning meted out in the commodities markets, I'm not keen to abandon the global reflation thesis. At its root, global reflation is premised upon a synchronized global government finance Bubble consequent to bursting Credit Bubbles and the breakdown in the global dollar reserve system. I am comfortable with the thesis yet recognize the analysis is tough and the circumstances fluid. Mostly, uncertainty and market volatility are as expected.

    The global system remains in historic, uncharted, troubled and uncertain waters. But with $2 Trillion of US federal debt issuance on tap this year - perhaps matched by upwards of (a previously unimaginable) $2 Trillion of Chinese bank Credit growth - ongoing "Monetary Disorder" remains the best bet. And, of course, our policymakers are keen to this dynamic, and it would be typical of policymakers in such a predicament to resort to increasingly creative means to try to stabilize a desperately unstable pricing system. Can Washington rein in speculative flows? Can they channel and mobilize them?

    [Jun 12, 2009] Devil’s in the details for defaults by Tracy Alloway

    Jul 10  | FT Alphaville

    An interesting report is out from Standard & Poor’s on Friday, entitled “The Devil is in the Details: Understanding the Variation in Corporate Default Rates and Rating Transitions.” Now doesn’t that sound exciting?

    (Ahem)

    The thrust of the piece is that while it’s obvious global corporate default rates increase overall in times of crisis, they do not necessarily rise at the same levels across sectors, regions and ratings-classes. For instance, and perhaps predictably, the default rate for AAA- and AA-rated corporates tends to be much lower than for speculative grade-rated stuff.

    Related links:
    Brace yourselves for record defaults - FT Alphaville
    Corporate credit bears - FT Alphaville

    [Jun 12, 2009] Doomsville by Neil Hume

    Jul 10 | FT Alphaville

    Lest anyone was thinking of turning bullish after listing to the siren calls of Bond and Winder, we present the following counterpoint.

    From an email doing the rounds in the City of London on Friday morning (The author is an MD at one of the big banks):

    US Housing

    It lead us into this recession & it will likely lead us out.

    US Consumer

    Too much debt, not enough credit.

    US Insiders

    A vote of No confidence.

    US Dividends

    70% of US equity rtns since 1900 (LBS) have been generated by dividends. -In Q2 just 233 S&P names raised their divi (a record low) & 250 names actually cut (2nd worst ever reading).

    US Valuation

    Valuations are not at a level that discounts any ongoing negative news.

    We just clocked up 40%! With the “P” already there we need the “e” to catch up real fast to validate this rally.

    US Technicals & Volume

    Better to wear out than rust up? -Dow has broken its 8300 Head & Shoulders neckline support & 200 day move ave (FTSE has broken its 4295 Triple Top neckline, 200 day & failed to breach its channel top). Dow theory (DJT has failed to validate the main index highs) is also firmly in the bear camp. S&P has been clinging on by its fingernails but the breach below its 200 @ 887 & a subsequent fall below major support @ 875 wld frighten lots of rabbits.

    -Ave daily vol has contracted by 30% on the S&P & c 50% on the Dow over the last 3 mths (Trimtabs). -Bear mkt bottoms (19 going back to the war) have typically been associated with steady eddy rallies on good vol (Hussman). The 4 episodes that were the exception & saw rel light vol also only rallied modestly. We’ve just belted the biggest rally since the Depression on thin vol with just slightly less depressing news….which reminds me of the Sage of Omaha’s axiom that “you can’t make a baby in a day by making 9 women pregnant”.

    Light trading vol (compounded by higher vol on recent down days vs lower vol on recent up days), and a diminished response to “positive” news imply that we don’t need to see strong selling pressure to roll us over some more. Just buyer’s fatigue. And we need to beat (a 62% beat rate in Q1) not just meet consensus eps forecasts for Q2.

    US Issuance

    Today’s problem or tomorrow’s promise? May clocked up $64bn & June was similar. The prev record issuance was $38bn. There have only been 12 mths since ‘98 that Corp issuance has exceeded $30bn & the ave rtn of the S&P over the nxt qtr was btwn -4% to -7% (Trimtabs)

    US Quotes (recent)

    US/China

    Our knight in shining armour. But…

    People are talking up de-coupling again, despite the fact that that particular chocolate teapot got melted before.

    And finally

    California, Russian banks, CMBS, Sovereign risk (Baltic states), Swine Flu….

    Still bullish?

    (H/T Grim Reaper)

    [Jul 12, 2009] Researchers- "Few Preventable Foreclosures"

    The problem is that renegotiation exposes lenders to two types of risks that can dramatically increase its cost.
    7/11/2009 | Calculated Risk

    And the Fed economists respond:

    We argue for a very mundane explanation: lenders expect to recover more from foreclosure than from a modified loan. This may seem surprising, given the large losses lenders typically incur in foreclosure, which include both the difference between the value of the loan and the collateral, and the substantial legal expenses associated with the conveyance. The problem is that renegotiation exposes lenders to two types of risks that can dramatically increase its cost. The first is what we will call “self-cure” risk. As we mentioned above, more than 30 percent of seriously delinquent borrowers “cure” without receiving a modification; if taken at face value, this means that, in expectation, 30 percent of the money spent on a given modification is wasted. The second cost comes from borrowers who redefault [30 and 45 percent]; our results show that a large fraction of borrowers who receive modifications end up back in serious delinquency within six months. For them, the lender has simply postponed foreclosure; in a world with rapidly falling house prices, the lender will now recover even less in foreclosure. In addition, a borrower who faces a high likelihood of eventually losing the home will do little or nothing to maintain the house or may even contribute to its deterioration, again reducing the expected recovery by the lender.
    I'd argue for a third reason: If it became widely known that lenders routinely reduce the principal balance for delinquent borrowers with negative equity, this would be an incentive for a large number of additional homeowners to stop paying their mortgages.

    These economists would argue that the lenders are behaving rationally and that foreclosure - when all costs are considered - is frequently the least costly alternative.

    Vonbek777

    In 2001 (may have been 2002, memory is fuzzy), right after my parents got back from a 4 year army tour in S. Korea, I had the opportunity to have dinner with my parents and a gentleman and his wife from Texas who had been involved with the board of Nations Bank, then Bank of America, and then a mortgage security company he started. Basically he explained how they were making these mortgages and then selling them almost immediately in large packages as securities. Almost instant profit, little risk, actually used the term "like taking candy from a baby."

    I brought up the fact that from my uneducated point of view this was like financial alchemy and turning lead into gold never worked in the long run. The answer to that was 'well that will be a problem for someone else, not me, I am just following the law.

     This country was founded upon the smart taking financial advantage of the stupid.' After the dinner I got in a huge argument with my dad about the issue. I said that the whole problem with America was that we no longer made products, we just made money out of nothing. Selling imaginary financial products which only made money do to fee and markups in value for the elite. It was all a scam. Dad said I had class envy, and as long as I thought poor, I would be poor and jealous of those who worked for a living.

    Jump to now, and in my opinion nothing has changed, it is just everyone knows the emperor doesn't have any clothes on now...my dad now blames deregulation and select individuals who 'gamed' the system. In my opinion, this isn't a select problem of a few people without scruples, but a reflection of the new reality of America. The only way to get rich is to take advantage of someone else.

    Basel Too

    here's a good explanation on the relationship between servicers, lenders, borrowers, and MBS, and the legal hurdles for modification.

    http://www.brokencredit.com/?p=2099

    Effective Demand

    Especially if they can afford the same house now. The lender exercises the terms of the loan. the borrower exercises the terms of the loan. The market and price discovery work. New loans are generated using more rational criteria.

    Also you have to foreclose because you remove the ruthless default risk (defaulting just to get a loan mod) and the self-cure risk. The highest NPV for the bank and the whole banks portfolio would be to foreclose. You give people the choice they signed up for.

    mmckinl

    GEE, Doesn't seem there is much you can do. I guess we could always let this whole housing and bank thing play itself out.... Nah

    ~~~~~

    That's what they are doing ... letting it play out ... after giving the banks trillions ... It's called the "Audacity of Hope "

    mmckinl

    Comrade Coinz is exactly correct ....

    "In the end, all banker gambles get paid off with taxpayer money and they own all the empty houses while millions are homeless."

    and so is lawyerliz ...

    "why is moral hazard ok for rich bankers, but not Joe 6 pack? "

    pavel.chichikov

    There's a horrible fascination in watching the Titanic and the iceberg on a collision course.

    Re that gentleman from Texas: The problem is moral and cultural. That's the reason for the bad practice and policy, and the prevailing Tragedy of the Commons. The gent from Texas was only living it out.

    When Pres. Bush said that Wall Street got drunk, he was referring to the captain and the officers of the watch on the Titanic.

    pavel.chichikov

    "IMO, they are more about the national idea of the social contract and the national sense of the social justice."

    Engrave it. Hang it on the wall.

    pavel.chichikov

    "As a student in modern political philosophy class (the only political science course I ever took), I basically said the social contract was nonexistent and a served only to conceal the non-consensual nature of the use of force by government to seize private property and our inability to refuse the deal."

    RIF, that can't be entirely true, or our society would be a Hobbesian field of battle, avoiding collapse only by the exercise of monarchical power. No, the cynical abusers live side by side with those who serve willingly because service to others is still alive.

    Firemen don't rush into burning buildings for the pay.

    ResistanceIsFeudal

    sm_landlord

    No system is perfect, but some are better than others at certain things.
    Our systems seem to have combined some of the worst aspects of oligarchy and populism.

    Yes but I do not think it is a recent phenomenon. I think we just have much better visibility into the process now, and that visibility is forcing us to acknowledge just how awful the system really is.

    [Jul 12, 2009] Economic View - The Invisible Hand, Trumped by Darwin - NYTimes.com

    July 11, 2009

    IF asked to identify the intellectual founder of their discipline, most economists today would probably cite Adam Smith. But that will change. Economists’ forecasts generally aren’t worth much, but I’ll offer one that even my youngest colleagues won’t survive to refute: If we posed the same question 100 years from now, most economists would instead cite

    Darwin, renowned for the theory of evolution, was a naturalist, not an economist, and his view of the competitive struggle was different from Smith’s in subtle but profound ways. Growing evidence suggests that Darwin’s view tracks economic reality much more closely.

    Smith is celebrated for his “invisible hand” theory, which holds that when greedy people trade for their own advantage in unfettered private markets, they will often be led, as if by an invisible hand, to produce the greatest good for all. The invisible hand remains a powerful narrative, but after the recent economic wreckage, skepticism about it has grown. My prediction is that it will eventually be supplanted by a version of Darwin’s more general narrative — one that grants the invisible hand its due, but also strips it of the sweeping powers that many now ascribe to it.

    Smith’s basic idea was that business owners seeking to lure customers away from rivals have powerful incentives to introduce improved product designs and cost-saving innovations. These moves bolster innovators’ profits in the short term. But rivals respond by adopting the same innovations, and the resulting competition gradually drives down prices and profits. In the end, Smith argued, consumers reap all the gains.

    The central theme of Darwin’s narrative was that competition favors traits and behavior according to how they affect the success of individuals, not species or other groups. As in Smith’s account, traits that enhance individual fitness sometimes promote group interests. For example, a mutation for keener eyesight in hawks benefits not only any individual hawk that bears it, but also makes hawks more likely to prosper as a species.

    In other cases, however, traits that help individuals are harmful to larger groups. For instance, a mutation for larger antlers served the reproductive interests of an individual male elk, because it helped him prevail in battles with other males for access to mates. But as this mutation spread, it started an arms race that made life more hazardous for male elk over all. The antlers of male elk can now span five feet or more. And despite their utility in battle, they often become a fatal handicap when predators pursue males into dense woods.

    In Darwin’s framework, then, Adam Smith’s invisible hand survives as an interesting special case. Competition, to be sure, sometimes guides individual behavior in ways that benefit society as a whole. But not always.

    Individual and group interests are almost always in conflict when rewards to individuals depend on relative performance, as in the antlers arms race. In the marketplace, such reward structures are the rule, not the exception. The income of investment managers, for example, depends mainly on the amount of money they manage, which in turn depends largely on their funds’ relative performance.

    Relative performance affects many other rewards in contemporary life. For example, it determines which parents can send their children to good public schools. Because such schools are typically in more expensive neighborhoods, parents who want to send their children to them must outbid others for houses in those neighborhoods.

    In cases like these, relative incentive structures undermine the invisible hand. To make their funds more attractive to investors, money managers create complex securities that impose serious, if often well-camouflaged, risks on society. But when all managers take such steps, they are mutually offsetting. No one benefits, yet the risk of financial crises rises sharply.

    Similarly, to earn extra money for houses in better school districts, parents often work longer hours or accept jobs entailing greater safety risks. Such steps may seem compelling to an individual family, but when all families take them, they serve only to bid up housing prices. As before, only half of all children will attend top-half schools.

    It’s the same with athletes who take anabolic steroids. Individual athletes who take them may perform better in absolute terms. But these drugs also entail serious long-term health risks, and when everyone takes them, no one gains an edge.

    If male elk could vote to scale back their antlers by half, they would have compelling reasons for doing so, because only relative antler size matters. Of course, they have no means to enact such regulations.

    But humans can and do. By calling our attention to the conflict between individual and group interest, Darwin has identified the rationale for much of the regulation we observe in modern societies — including steroid bans in sports, safety and hours regulation in the workplace, product safety standards and the myriad restrictions typically imposed on the financial sector.

    Ideas have consequences. The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all. If, as Darwin suggested, many important aspects of life are graded on the curve, his insights may help us avoid stumbling down that grim path once again.

    The competitive forces that mold business behavior are like the forces of natural selection that molded elk. In each case, we see instances of socially benign conduct. But in neither can we safely presume that individual and social interests coincide.

    Robert H. Frank, an economist at Cornell, is a visiting faculty member at the Stern School of Business at New York University.

    [Jul 12, 2009] Obama’s Jobless Safety Net Torn by Rebecca Alvarez (Update1) - By Rich Miller

    See also Unemployment rate, United States Helping banksers was probably done with excess zeal. Now Government needs to concentrate on problem of unemployment. It's fairly evident that the national "unemployment rate" (U3) produced by the Department of Labor's Bureau of Labor Statistics represents a low-end figure ... “It will be a big public-policy problem.” that can doom the reelection chanced for Obama...   There is a blog devoted to the problem: unemploymentadvice.blogspot.com
    July 10 | Bloomberg

     Rebecca Alvarez says she’s “barely hanging on.”

    Without a job for seven months, the 48-year-old computer- network administrator said she’s stopped dining out, cut back cable-television services and put off paying a photography class bill from her 14-year-old son’s school in Monrovia, California. She is among more than 4 million Americans who have been looking for work for more than 26 weeks, representing 29 percent of the unemployed, the most since records began in 1948.

    Hundreds of thousands of lost jobs in industries such as autos and construction haven’t been replaced with new ones, shrinking payrolls by 6.5 million since the recession began in 2007, Labor Department figures show. The June jobless rate reached 9.5 percent, the highest since 1983.

    “We are going to have a huge pool of unemployed, second only to the Great Depression,” said Allen Sinai, chief economist at Decision Economics in New York. “It will be a big public-policy problem.”

    Benefits Run Out

    As many as 650,000 workers may exhaust even their extended benefits within three months, said Maurice Emsellem, policy co-director for the National Employment Law Project, a nonprofit advocacy group headquartered in New York.

    That means Obama may need to aim directly at reducing joblessness, said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania. Among options: enhanced job training, tax credits for businesses that take on new employees or a temporary cut in payroll taxes.

    The U.S. traditionally hasn’t had to deal with long-term joblessness. During the last 30 years, Americans who were thrown out of work took an average 15.8 weeks to find new positions. In June, the average duration of unemployment was 24.5 weeks, the longest since records began in 1948. The number of people collecting unemployment benefits reached a record 6.88 million in the week ended June 27.

    Peak Unemployment

    While unemployment will peak between 10.5 percent and 11 percent in the U.S., it will remain high and stay above 7 percent, said Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., manager of the world’s largest bond fund.

    “The United States right now is in transition,” El-Erian said in an interview from Pimco headquarters in Newport Beach, California. “It’s coming out of one regime. It’s on this bumpy and painful journey to what we’ve called here the new normal.”

    Alan Blinder, the former Fed vice chairman (one of Greenspan's cronies -- NNB) who is now an economics professor at Princeton University, isn’t as pessimistic as El-Erian about the economic outlook. He says he sees the jobless rate peaking at 10 percent or a little higher in the first half of next year, then gradually coming down.

    The proportion of unemployed workers who have permanently lost their jobs -- as opposed to those on temporary layoff -- reached a record 53.5 percent in June, government figures show. About six people are seeking work for every job opening, the most since the government began keeping such records in 2000. A year ago, the ratio was a little more than two-to-one.

    ‘Plain Depressing’

    “Being out of work for three weeks is very different from being out of work for 30 weeks,” said Dirk van Dijk, director of research for Zacks Investment Research Inc. in Chicago. “It is a very scary prospect. Economically it further depresses your spending and psychologically it is just plain depressing.”

    A measure of consumer sentiment fell in July to the lowest level since March, as mounting job losses undermined confidence. The Reuters/University of Michigan index slid to 64.6, less than forecast, from 70.8 in June, a report today showed.

    The average American is ill-prepared for a lengthy spell of unemployment, said van Dijk. Households reduced their savings in the last expansion -- putting aside less than 1 percent of disposable income in 2005-2006, compared with an average 6 percent the previous 30 years -- and thus didn’t have much in reserve.

    Savings Gone

    “I don’t have any more savings,” said Alvarez, who is drawing jobless benefits and “trying to avoid” taking other government assistance. “I’m down to living on $200 a week.”

    Home-equity borrowing is no longer an option for many families. House prices are down about 25 percent from their 2006 peak, according to the National Association of Realtors in Washington. And banks, stung by $1.5 trillion of writedowns and credit losses since 2007, are getting stingier. The Federal Reserve’s latest quarterly survey of senior loan officers showed about 65 percent of banks lowered credit-card limits.

    Even the highly educated are finding it tough to get work. Washington resident Alexandra Moller, 34, who holds a law degree and two master’s degrees, has been unemployed since September. She’s searching for a position with the federal government or a nonprofit organization.

    The most frustrating part is “the constant refrain that it’s such a hard time to find something,” she said. “It adds to a certain resignation that it’s going to take a long time.”

    Lowered Expectations

    The surfeit of job seekers is forcing people to lower their salary expectations. Liz Mandel, who lost her job in January as a senior clinical-data manager at a biopharmaceutical company, said she has had to look for positions that pay about $15 less an hour than what she earned before.

    “I absolutely, definitely feel anxious,” said the 42- year-old San Francisco resident.

    Earnings per hour for production workers climbed at a 0.7 percent annual pace in the second quarter, the least since records began in 1964, according to government figures.

    That’s putting a squeeze on spending, even for essentials. A national poll of unemployed workers conducted in November by Peter D. Hart Research Associates in Washington for the National Employment Law Project found that more than two-thirds had cut back on food expenditures.

    Long-term joblessness is also a “profound problem” for housing, said Paul Willen, senior economist at the Boston Fed.

    “If a person becomes unemployed, they’re going to start missing mortgage payments,” he said. “The main exit strategy for a troubled borrower is another job. At this time, it’s extremely hard to find one.”

    Mortgage Delinquencies

    Mortgage delinquencies rose to a record in the first quarter, and about one in every eight Americans is now late on a payment or already in foreclosure, according to the Washington- based Mortgage Bankers Association.

    Unemployment also has “immense social costs,” said JoAnn Prause, senior lecturer at the University of California in Irvine’s Department of Psychology and Social Behavior. “Bouts of unemployment have been associated with increases in depression, reduced self-esteem, and increases in alcohol abuse,” she said.

    That’s prompting calls for added stimulus.

    “We’re going to need more medicine,” Warren Buffett, chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc., said in a June 24 interview. “We’re going to have more unemployment.”

    Worker Training

    Besides beefing up jobless benefits, economists are calling for more training and education programs, tax changes and government support for corporate investment.

    Obama’s original stimulus package provided $3.95 billion for training, including $750 million in grants to prepare and place workers in jobs in high-growth and emerging industries.

    Senators Sherrod Brown, an Ohio Democrat, and Olympia Snowe, a Maine Republican, proposed legislation to pair companies offering new jobs with workers seeking specialized skills.

    The bill would “allow local people to come up with what they need to train workers,” Brown told a New America Foundation conference in Washington on June 24.

    Sinai, of Decision Economics, wants Obama to reconsider providing tax credits to companies that take on more workers. Before becoming president, Obama proposed offering a $3,000 tax credit for each new-hire.

    [Jul 11, 2009] Lost ‘Animal Spirits’ Worsen Economy, Roubini Says (Update1) - Bloomberg.com

    "Animal spirits" can also be interpreted as the level of confidence in the fairness of the system. It's gone...
    July 10 | Bloomberg

    The worst recession in half a century may be prolonged because consumers see few signs job losses and declines in home prices are ending, economists Nouriel Roubini and Robert Shiller said.

    “The fundamental problem, as Franklin Delano Roosevelt said in 1933, is fear,” Shiller, a Yale University professor, said yesterday on Bloomberg Radio’s “Surveillance.” The Great Depression was deepened by a “sense of lost confidence or animal spirits that was a self-fulfilling prophecy. The worry is that we will have the same kind of issue arising again,” he said.

    ... ... ...

    The recession will probably continue for six months as companies struggle to pay their creditors, he said. The cost of protecting corporate bonds in the U.S. from default jumped to the highest in six weeks on July 8, according to Phoenix Partners Group data.

    “The wave of corporate defaults is going to be massive,” Roubini said. “We’re not out of the woods.”

    Unmanageable Risks

    Both Shiller and Roubini said a lack of regulation allowed banks to take unmanageable risks, leading to the government’s takeover of American International Group Inc. and the collapse of Lehman Brothers Holdings Inc.

    Home prices in 10 major U.S. metropolitan areas fell 0.7 percent in April, the least since June 2008, according to a S&P/Case-Shiller home-price index, the latest sign that the worst of the housing slump may be passing. Sales of existing homes increased in April and May, while new construction rose in May from a record low.

    “A slowing in the rate of decline is good news, and it suggests that it will continue to slow in coming months,” Shiller said

    [Jul 10, 2009] Reich: "When Will The Recovery Begin -- Never."

    Personally, I don't buy into either camp. In a recession this deep, recovery ... depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery ...
    Calculated Risk
    From Robert Reich: When Will The Recovery Begin? Never. (ht Bob Dobbs)
    The so-called "green shoots" of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed. On one side are the V-shapers who look back at prior recessions and conclude that the faster an economy drops ...

    Unfortunately, V-shapers are looking back at the wrong recessions. ...

    That's where the more sober U-shapers come in. They predict a more gradual recovery ...

    Personally, I don't buy into either camp. In a recession this deep, recovery ... depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery ...

    Eventually consumers will replace cars and appliances and other stuff that wears out, but a recovery can't be built on replacements. Don't expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don't rely on exports. The global economy is contracting.

    Eventually the economy will start growing again ... but I think the "recovery" will be very sluggish.

    Reich suggests the only market for cars will be replacements - but the replacement level (based on scrappage rates) is in the 12 to 13 million range. And that would be a significant increase from the current 9.7 million annual sales rate. That is still well below the peak, but recovery is from the bottom of the cliff - and is not measured from the previous peak.

    [Jul 10, 2009] Bloomberg is coming down hard on Goldman

    Something is fishy about Goldman reaction to the alleged stealing of code. The code in question requires special hardware and special access to NISE platform. So in no way Goldman is in any danger from "copycats".  What are the benefits for Goldman in bringing to the public attention the fact that it milks transactions on NISE ?  If this is a retaliation, then it 's very badly thought out because it already became a PR disaster for Goldman. And Goldman prices itself for top brains.

    The video linked below is a must-see piece of journalistic skepticism. The duo at Bloomberg News are discussing the recent alleged theft of trading code by a former Goldman employee Sergey Aleynikov who moved to a hedge fund called Citadel.  Their commentary is incredulous.  Their tone seems to ask: “Is the Government working for Goldman now?”

    Here are a few gems:

    Selected comments

    Brick said...
    Yes lots of questions on blogs starting with zerohedge then Karl Denninger over at the market ticker, but also on FTAlphaville. Much of the initial consternation was there before the arrests with some good analysis over at Themis Trading of how these HFT (High Frequency trading) programs use liquid assets like ETFS to move markets disproportionately.

    http://blog.themistrading.com/

    My own take would be that the arrest is a bit of a storm in a tea cup which has tipped off citadel to the future aspirations of Teza. I don't think these systems are designed for front running yet searching around and it becomes obvious that they have some front running elements. These tend to be used by brokers to alert to miss trades or mistakes, but in the hands of someone else could be used in other ways (See link below).

    http://www.a-teamgroup.com/article/progress-apama-partners-with-object-trading-to-deliver-ultra-high-frequency-trading-solution/

    That Goldman had such quick access to the FBI just shows the influence they have and the circumstances under which they discovered the theft is suspicious. Since Goldman seems to have cornered a large proportion of the market through these trading systems and through being the only SLP provider to the NYSE it seems politically naive of Goldman to assume people would not notice.
    Jonathan Weil at Bloomberg tends to be one of the reporters there to take note of so I am not surprised to see his involvement. There is of course nothing from CNBC yet.

    [Jul 10, 2009] The Stimulus Trap, by Paul Krugman, Commentary, NY Times

    This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.

    My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.

    The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. ...

    Selected comments

    steve from virginias says...

    There ... here ...!

    It would be bracing if our politically timorous President would get on television and level with the American people.

    That would almost convince me to go out and buy a TV!

    First of all the President would have to tell Americans that the relentless consumption of fossil fuels has permanently broken the United States economy. It is broken completely. The returns on commercial activities are exceeded by input costs. This is true not only in America but in Europe and Japan and the rest of the world.

    The President would also have to tell the American people that years of debt - incurred to hedge against increasing energy prices - have effectively pauperized the country by exchanging physical value for worthless paper claims upon it.

    He would tell the country that it faces the greatest challenge of its history. He would tell Americans that there was no turning back to the 'easy living' past of Business as Usual. He would tell Americans that the only course for the future was hard work and sacrifice and more sacrifice.

    He would tell Americans that the good times that lasted since the end of World War Two are more or less permanently over and that the payment for those good times are about to begin.

    He would tell Americans that there were no easy monetary or fiscal fixes for the predicament we have consumed ourselves into.

    He would tell Americans and the world that the debts that had been incurred over the past twenty five years would be repaid. He would tell Americans that all citizens would have to work as hard as possible to see that this was done.

    He would offer himself as an example, by foregoing a salary, but foreswearing vacations, by eliminating his perks; the helicopters and limousines and private airplanes.

    He would offer to fire the ineffective officials who had mislead the public and had violated public trust; Geithner, Summers, Goolsbie ... the entire Goldman-Sachs alumni. He would promise to investigate both financial negligence and wrongdoing. He would end all further bailouts and stimulus plans. He would promise that the United States would begin living within its financial - and energy means.

    He would demand back the trillions handed as gifts to the richest people in the world under the pain of prosecution.

    He would end both wars in Iraq and Afghanistan and withdraw forces in three weeks or less. He would shut down the unsupportable archipelago of worldwide US military bases.

    He would close Guantanamo in 48 hours and remove prisoners to either trials or release. He would promise to prosecute torturers. He would end the national security state and the various states within states enforced by private contractor armies.

    He would promise Americans that should the currency collapses that no American would go hungry or freeze. He would level with the public about the unpayable Social Security and Medicare promises.

    He would promise that the government would not steal any more of the citizens' wealth. He would promise social order and security. He would set priorities for fuel use so that food is available to all at all times.

    He would end the Americans' 'love affair with the car'!

    He would put Americans to work; tearing down vacant buildings, constructing street car systems around the country, and shrinking the unsupportable infrastructure overhang. He would put a million new organic farmers to work.

    He would prepare the country for the worst because the storm that is breaking over this country is greater than any disaster that America has faced in its history.

    He would tell Americans that the corporations and their servants in the Capital have left the land rich in resources and potential ... a ruin. He would level with the people and tell them that this was done simply for greed.

    He would purge the money lenders and money takers from the temple of civic virtue!

    In other words, Barack Obama would be a different person than who he is!

    I hate to break it to you Mr. Krugman, but you are beating a dead horse!

    kharris says...

    I just can't help myself. Krugman's ideas seem right, but he didn't write right and that's a problem when you are in marketing.

    June jobs data did not make clear the stimulus was too small. "One month's data does not make a trend" blah, blah, blah. June jobs data were emotionally important because the hope was for a continued, steady trend toward fewer losses, and instead we got more losses. Evidence the stimulus was too small started to mount up even as the stimulus bill was being debated, with the jobless rate rising 0.4% per month in 3 of the 4 months prior to passage. Anybody familiar with the behavior of that series knows a rapid deterioration tends to persist.

    Bruce's point is one I would make, too. While "fail" is a loaded word, it is not incorrect to say that a policy that proved to small to the task at hand has failed. It is not politically useful to do so, because the bad guys will quote you to death. The answer is to avoid using a failure/success dichotomy and find some other way to convey the idea.

    I edit my colleagues work a good deal, and when they demonstrate an urge to say things that are kinda right, kinda wrong and likely to mislead their reader, I tell them they have a writing problem, rather than an analytic problem. They have chosen an expression to convey their meaning which doesn't do the job. I' afraid that Krugman is falling into that trap right now, saying things that aren't as useful as they could be, because he is boxed in by the words he has chosen.

    Feng,

    The way that Krugman knows the stimulus is too small is just math and a bit of logic. If you wanted to fill a hole 1/3 of the way, and the hole proved bigger than you thought, then the stuff you provided to fill the hole won't be enough, and you need more. The hole is bigger than Obama, Blue Chip, or CBO thought. Krugman isn't judging the technical quote

    ...GS, through access to the system as a result of their special gov't perks, was/is able to read the data on trades before it's committed, and place their own buys or sells accordingly in that brief moment, thus allowing them to essentially steal buttloads of money every day from the rest of the punters world.

    Two things come out of this:

      1. If true, this should be highly illegal, and would, in any sane country result in something like what happened to Arthur Andersen...

     (2. ... is way off point....)

    God help Goldman if this is true and the government goes after them.  This would constitute massive unlawful activity.  Indeed, the allegation is that Goldman alone was given this access!

    God help our capital markets if this is true and is ignored by our government and regulatory agencies, or generates nothing more than a "handslap."  Nobody in their right mind would ever trade on our markets again if this occurred and does not result in severe criminal and civil penalties.

    There apparently is reason to believe that Sergey might have been involved in exactly this sort of coding implementation.  Specifically, look at the patent claims cited on DailyKos; his expertise was in fact in this general area of knowledge in the telecommunications world......

    This is precisely the sort of thing that a Unix machine, sitting on a network cable where it can "see" traffic potentially not intended for it, could have an interface put into what is called "promiscuous mode" and SILENTLY sniff that traffic!

    ASSUMING THE TRAFFIC IS PASSING BY THE MACHINE ON THE WIRE THIS IS TRIVIALLY EASY FOR ANY NETWORK PROGRAMMER OF REASONABLE SKILL TO DO.  IF THAT TRAFFIC IS EITHER UNENCRYPTED OR IT IS EASY TO BREAK THE ENCRYPTION.....

    Folks, I have no way to know what the code in question does, but if there's anything to this - anything at all - there is a major, as in biggest scam of the century - scandal here - something much, much bigger than Madoff or Stanford.

    What would this mean, if it was all to prove up?

    It would mean that Goldman was able to "see" transaction order flow - bid, offer, and execute messages - before they were committed in the transaction stream.  Such a "SNIFF" would be COMPLETELY UNDETECTABLE by the sender or recipient of the message.

    The implication of this would be that they would be able to front-run any transaction where the data was visible to them, thereby effectively "stealing pennies" from each transaction they were able to front-run.

    Again: I have absolutely nothing on the content of the allegedly-stolen code nor can I validate the claim made that Goldman had "special network access."  Nothing.  All I have to go on with regards to "market manipulation" (which such a program would be, writ large!) is the statement of the US Attorney that I cited in my earlier Ticker.

    This may be nothing more than a crazy conspiracy theory put out by someone at Daily Kos.  But consider the following:

    The last few days the the market has traded "organically."  I and many other market participants have noted that prior to the week before July 4th the market had been acting "very odd" - normal correlations between interest rate, foreign exchange the the stock markets had been on "tilt" for the previous couple of months, with the amount of "tiltage" increasing dramatically in the last three or four weeks.  In fact, many of my usual indicators that I use for daytrading had become completely useless.  Suddenly, just before the July 4the weekend, everything started correlating normally again.  I have no explanation for this "light-switch" change but it aligned almost exactly with the day the NYSE had "computer problems" and extended trading by 15 minutes.  Was there a configuration change made to their networking infrastructure, one asks?

    Zerohedge's information, if you believe it, seems to point toward some sort of distortion.  The cite above claims statistically "as likely as an asteroid hitting earth it is not true" proof of distortion in the market.  I have not analyzed the data to independently validate that conclusion, but even if the odds of these "effects" in the market being random chance are only as good as getting hit by a tornado this afternoon......

    Every market participant deserves answers on this point.   Specifically to the NYSE and all other markets where colocation connections are made and allowed:

    1. Was it possible for message traffic to be "seen" by computers on your network and colocated into your infrastructure by other than the originator and recipient every market participant who had or has equipment colocated on the NYSE infrastructure must be immediately served with a subpoena for a true and complete copy of all software operating on every machine connected to said infrastructure for immediate forensic investigation to ascertain if any participants were indeed "sniffing" traffic and front-running orders.

      The charge made on the pages of Daily Kos is incredibly serious.  If this happened it is a case of literal robbery of every market participant for the entire duration of the time that the code in question was executing on the network, with losses to market participants potentially running into the hundreds of billions of dollars.

      Market participants deserve an answer to these questions.

    [July 9, 2009] Is Goldman Stealing $100 Million per Trading Day

    The Big Picture

    What is the inference of potentially illegality here?

    “That Goldman Sachs may just possibly have used security access codes and built a system to acquire trading information PRIOR to transaction commit time points at NYSE.

    The profitability of this split-second information advantage would have been and could have been extraordinary. Observed yielding profits at $100,000,000 a day. [summary to address complaints with respect to complexity.]

    GS has special access inside the system from its status assisting the Working Group on Financial Markets (colloquially the Plunge Protection Team) created by Presidential Order two decades ago. GC also acts as Special Liquidity Provider for NYSE.

    With 60% dominance of NYSE program trading, what’s good for Goldman defines what shows as overall market performance.”

    There is likely to be more info about this trickling out over the coming days and weeks. Stay tuned . . .

    Hat tip Bill King

    Sources:
    Goldman Sachs’s $100 Million Trading Days Hit Record
    Christine Harper
    Bloomber, May 6
    http://www.bloomberg.com/apps/news?pid=20601087&sid=a7HGVAn8w73Y&

    Jonathan Weil Says:

    Goldman Sachs Loses Grip on Its Doomsday Machine

     http://www.bloomberg.com/apps/news?pid=20601039&sid=aFeyqdzYcizc 

    Never let it be said that the Justice Department can’t move quickly when it gets a hot tip about an alleged crime at a Wall Street bank. It does help, though, if the party doing the complaining is the bank itself, and not merely an aggrieved customer.

    Another plus is if the bank tells the feds the security of the U.S. financial markets is at stake. This brings us to the strange tale of Goldman Sachs Group Inc. and Sergey Aleynikov.

    Aleynikov, 39, is the former Goldman computer programmer who was arrested on theft charges July 3 as he stepped off a flight at Liberty International Airport in Newark, New Jersey. That was two days after Goldman told the government he had stolen its secret, rapid-fire, stock- and commodities-trading software in early June during his last week as a Goldman employee. Prosecutors say Aleynikov uploaded the program code to an unidentified Web site server in Germany.

    It wasn’t just Goldman that faced imminent harm if Aleynikov were to be released, Assistant U.S. Attorney Joseph Facciponti told a federal magistrate judge at his July 4 bail hearing in New York. The 34-year-old prosecutor also dropped this bombshell: “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.”

    Marie Antoinette Says:

    July 9th, 2009 at 9:16 am It occurs to me that this story (whatever its final parameters) will have a major impact on popular opinion for the simple reason that 99% of Americans have no idea that Wall Street has become nothing more than Las Vegas East by the takeover of the quants in recent years. It no longer has much relationship to the “real” (tattered) economy.

    These guys are bookies and numbers runners and Washington exists only to serve them.

    When America wakes up to THAT fact, watch out.

    [July 9, 2009] Bear Market Enters Final Phase

    Safe Haven

    If the banks do not want to lend and the consumers do not want to borrow and instead are focused on paying off debt and saving more money at the same time as mass mood is falling and geopolitical tension is rising, we have the perfect setup for a credit contraction and stock market crash followed by economic depression.

    [July 9, 2009] Our banks are beyond the control of mere mortal"

    [July 9, 2009] Just Because You're Paranoid Doesn't Mean Law Enforcement Isn't Out to Help You

    This Russian guy looks extremely naive and dumb to be classified as a spy: outbound FTP transfers are routinely checked by corporations (often they are blocked by a proxy). It is possible that was too greedy, but doing such things close to your termination date is really suicidal. Any decent programmer understand that, especially a programmer who used to work at a networking provider like IDT. So much for an industrial espionage case. The hypothesis that he overdid the archiving of some modified open source Erland libraries looks more or less plausible although I do not understand why he needed to download something to the German server while UCB stick is more then enough for the purpose. It's also unclear why he did not used diffs against the reference published version (if we assume that Goldman version has some bugs fixed or some enhancements implemented) instead of full code if this is an open source.
    From the coolest possibly-corporate-espionage story of the week:
    If only the FBI were to tackle cases of national security and loss of life with the same speed and precision as they confront presumed high-frequency program trading industrial espionage cases... especially those that allegedly involve Goldman Sachs.
    The original is from Reuters.

    Selected comments

    Jack says:

    “"...the proprietary advantages are part of the system and have the blessings of the regulators." Talbot 
     
    To say that a structure or process is "built-in" to a system is not to say that the system is working in accordance within the free market  frame work so frequently sited as the most efficient and equitable form of market activity.  The the regulators, really the regulations,  accept  such a system only suggests that the foxes are watching the hen house.  Generally those foxes are satisfied to continuously make off with the 
    best of the eggs.

    Some times they get greedy and try to make off with the entire flock.  That's when we observe the markets in free fall, crashing into the dust. The issue  becomes ever more clear when we then witness the foxes licking their respective chops as the regulators  prepare to restore the entire flock and coop and send the bill to the farmer whose livelihood has been decimated. 

    A nice allegory that begs the  question of who is there that will ride to hounds and rectify the situation?

    World Wide Military Expenditures

    Country Military expenditures - dollar figure Budget Period
    World $1100 billion 2004 est. [see Note 4]
    Rest-of-World [all but USA] $500 billion 2004 est. [see Note 4]
    United States $623 billion FY08 budget [see Note 6]
    China $65.0 billion 2004 [see Note 1]
    Russia $50.0 billion [see Note 5]
    France $45.0 billion 2005
    United Kingdom $42.8 billion 2005 est.
    Japan $41.75 billion 2007
    Germany $35.1 billion 2003
    Italy $28.2 billion 2003
    South Korea $21.1 billion 2003 est.
    India $19.0 billion 2005 est.
    Saudi Arabia $18.0 billion 2005 est.
    Australia $16.9 billion 2006
    Turkey $12.2 billion 2003
    Brazil $9.9 billion 2005 est.
    Spain $9.9 billion 2003
    Canada $9.8 billion 2003
    Israel $9.4 billion FY06 [see Note 7]
    Netherlands $9.4 billion 2004

    America's Fiscal Train Wreck

    The ability of policymakers to reduce military expenditures is actually seldom discussed topic, But it might the most important factor in creating inflation and destruction of the dollar as a reserve currency... “You can always count on Americans to do the right thing - after they've tried everything else.” Winston Churchill
    Here’s the question: can the U.S. run up a huge deficit now as long as it shows a credible plan to reduce it over the long-term? I have suggested that healthcare (and social security) be a main target of that longer-term deficit reduction plan. But, is this a trade-off that can actually work? Your comments are appreciated.

    Here is the original post. Enjoy. (Note: I filed this post under the categories Health care and Banana Republic.)

    I think a technical recovery will happen in the Q4 to Q1 timeframe. But this recovery is likely to be weak, if it happens at all. Downside risk remains. Unfortunately, the Obama administration has fired all its bullets, spending huge political capital bailing out the big banks and putting together a weak stimulus package we all knew was going to fail.

    Now, Joe Biden is trying to save face, talking as if recovery is guaranteed and no further stimulus is necessary. Yet, on the eve of the G-8 summit, it takes Gordon Brown to remind us that the Great Depression II meme is still at play. If the United States wants to keep deflationary forces at bay, it will need to support the economy with fiscal stimulus.

    The problem is the U.S. government budget deficit. In April, in a post called “The Cult of Zero Imbalances,” Marshall Auerback made the case for stimulus, aware of the downside risks for the dollar and bond prices because of that deficit. Yes, there are risks for America associated with deficit-inducing stimulus in the short-term, but they can be mitigated if the Obama Administration actually showed a plan to reduce the longer-term deficit. But, as David Leonhardt has argued, Obama’s team has no deficit reduction plan whatsoever.

     
     
    shargash said...
    I think your question is moot. There will be no credible plan to reduce the deficit in the future. If such a plan were crafted, the first place to look to reduce spending should be the military. The US spends more than the rest of the world combined, and 10x what either Russia or China spends. As a starter, cut the military budget in half. As you point out, we also need healthcare price reform. The problem is that I'm not sure that cutting defense spending in half coupled with significant healthcare reforms are enough.
    Brick said...
    There are a number of different questions here which need to be broken down. Firstly there is the question of whether a further stimulus is appropriate and I might be tending towards agreeing it might be. The second question is whether it is appropriate to increase the deficit to pay for the stimulus and here I would suggest it might not be. This might be achieved by rebalancing the budget towards more labour intensive fields rather than low employment expensive items. I expect this to be ignored because of the political structure and lobbying that goes on in the US.

    The next question is whether the deficit is sustainable and I think a big mistake is being made in looking at the deficit purely as relative to GDP. What should be looked at is the size of the deficit relative to available investment. Where Italy may be able to look at available investment as an inexhaustible pool the same probably will not apply to the US. Having said that I don't expect the collapse of the dollar or treasuries in the next few months, but rather in a longer time frame as the deficit approaches 60 percent of GDP.

    The big question to be answered is whether taxes will be raised at the right point if at all. Most economies including those in Europe have a good record of raising taxes when the need arises, while the US has a very bad record with such policies likely to completely undermine the political structure there.

    I doubt whether healthcare reform will reduce deficit without some sort of price capping which will be fought tooth and nail by some very strong lobby groups. Bold steps are required and it all looks rather timid at the moment.

    ronald said...
    Of course deficit's matter but when the economic system has crashed the debate needs to be broader then what is framed by the financial sector press. The fact that American standard of living is in for a reduction is not news nor has it been for a number of years. The idea that average middle class workers can afford large homes, multiple auto's, ATV's and assorted hi-tech gear,cheap healthcare and large pensions makes good political slogans but has no reality.
    RTD said...
    If the stimulus is successful at jump starting the economy, it will at least partially pay for itself through higher tax revenues. In any case, I don't see any viable alternatives to fiscal stimulus, however imperfect it may be, right now. The laissez-faire, let them fail and "come what may, let the heavens fall" crowd is insane. Monetary policy has done just about all it can at this point. Short of a debt jubilee, which will never happen in the absence of a violent revolution, there aren't any other alternatives to fiscal stimulus. My biggest worry is a partial recovery later this year or early next year, followed by another leg down, in which case even a second stimulus will likely be too little too late.

    The reality is that the bursting of a credit bubble on this scale has only happened a few times in modern history - 1990's Japan, the Great Depression, and the 1873-1879 depression. While there are measures that can be taken to soften the blow, there are no quick fixes - this is the lesson we don't seem to want to learn. Bubbles MUST be prevented, Greenspan couldn't have been more wrong when he said it's easier to just clean up after the fact.

    --RueTheDay

    The Associated Press MOUNTAIN OF DEBT Rising debt may be next crisis

    The overall debt is now slightly over 80 percent of the annual output of the entire U.S. economy, as measured by the gross domestic product.

    Interest payments on the debt alone cost $452 billion last year — the largest federal spending category after Medicare-Medicaid, Social Security and defense. It's quickly crowding out all other government spending. And the Treasury is finding it harder to find new lenders.

    The debt gap is "something that keeps me awake at night," Obama says.

    He pledged to cut the budget "deficit" roughly in half by the end of his first term. But "deficit" just means the difference between government receipts and spending in a single budget year.

    This year's deficit is now estimated at about $1.85 trillion.

    Deficits don't reflect holdover indebtedness from previous years. Some spending items — such as emergency appropriations bills and receipts in the Social Security program — aren't included, either, although they are part of the national debt.

    The national debt is a broader, and more telling, way to look at the government's balance sheets than glancing at deficits.

    According to the Treasury Department, which updates the number "to the penny" every few days, the national debt was $11,518,472,742,288 on Wednesday.

    The overall debt is now slightly over 80 percent of the annual output of the entire U.S. economy, as measured by the gross domestic product.

    By historical standards, it's not proportionately as high as during World War II, when it briefly rose to 120 percent of GDP. But it's still a huge liability.

    Also, the United States is not the only nation struggling under a huge national debt. Among major countries, Japan, Italy, India, France, Germany and Canada have comparable debts as percentages of their GDPs.

    Where does the government borrow all this money from?

    The debt is largely financed by the sale of Treasury bonds and bills. Even today, amid global economic turmoil, those still are seen as one of the world's safest investments.

    That's one of the rare upsides of U.S. government borrowing.

    Treasury securities are suitable for individual investors and popular with other countries, especially China, Japan and the Persian Gulf oil exporters, the three top foreign holders of U.S. debt.

    But as the U.S. spends trillions to stabilize the recession-wracked economy, helping to force down the value of the dollar, the securities become less attractive as investments. Some major foreign lenders are already paring back on their purchases of U.S. bonds and other securities.

    And if major holders of U.S. debt were to flee, it would send shock waves through the global economy — and sharply force up U.S. interest rates.

    ... ... ...

    Some budget-restraint activists claim even the debt understates the nation's true liabilities.

    The Peter G. Peterson Foundation, established by a former commerce secretary and investment banker, argues that the $11.4 trillion debt figures does not take into account roughly $45 trillion in unlisted liabilities and unfunded retirement and health care commitments.

    That would put the nation's full obligations at $56 trillion, or roughly $184,000 per American, according to this calculation.

    On the Net:

    Second Half Recovery Suddenly not a Sure Tthing

    MarketWatch

    For months, policymakers from Federal Reserve Chairman Ben Bernanke on down told investors that a second-half recovery was a safe bet.

    Investors, optimists by nature, eventually bought in.

    But now, even though the second half has actually arrived, the curtain on the recovery has so far remained down and questions are being raised on whether it will go up at all.

    Suddenly notable economists say the whole thing might not happen. Others, including Harvard economist Martin Feldstein, predict the curtain may go up for a brief period but then go crashing back down.

    [Jul 5, 2009] Banks' Bogus Bonuses Is Wall Street pay really bouncing back The Big Money

    Bogus  increase in profits will not last: "In fact, according to Hecht's data, it's hard to see where Wall Street could pull in more profits besides trading."

    More likely, banks are taking advantage of new accounting rules that allow them to place a higher paper value on the mortgages than the price they actually paid for them. These "mark-to-market" changes took effect just in time for the second quarter. Bank profits have improved for months because of the new accounting rules that allowed banks to mark up the value of the troubled assets already on their books. What is new is that banks are buying more MBS to add to that tally. Banks could buy the MBS at low prices in the market, which would boost the banks' own trading fees, since banks get paid whenever they trade for their own accounts. Banks could also record as "profit" the difference between the price they paid and the price that the securities are thought to be really worth. They make money because they're buying more MBS, recording more profit on both the old and new ones, and paying themselves fees.

    There are several other reasons to keep the champagne corked before celebrating the apparent newfound health of banks. Wall Street bonus estimates—especially early in the year—are often useless. Things change. Michael Hecht told The Big Money that Wall Street is doing well now, but for the rest of the year, "It won't be the crazy outsize business we've seen over the past few months. We're concerned about how sustainable this is. Things are OK but not on fire." Hecht believes that Wall Street has benefitted from temporary boosts that won't be significant by the end of this year: the fall of Lehman and Bear, the fact that Citigroup and Morgan Stanley have reduced their leverage and become smaller, and the large "spreads" between bond prices and Treasury bond prices, which fuel trading profits but are destined to shrink by December.

    In fact, according to Hecht's data, it's hard to see where Wall Street could pull in more profits besides trading. The business of advising on mergers and acquisitions is hibernating for now: Completed acquisitions were down 56 percent this year compared with the same time in 2008. No record bonuses there. Underwriting activity—helping companies sell stocks and bonds—rose only 9 percent and totaled $5 billion in fees for the second-quarter months of April, May, and June. Equity underwriting—helping companies sell stock—was down in June, a letdown after a boom in May when several banks including Morgan Stanley, U.S. Bancorp, Fifth Third, and others all raised money to meet stress-test requirements and ensure an escape from the government's onerous Troubled Asset Relief Program.

    [Jul 5, 2009] Yield Forecast Further Rise Ahead in 2010 - Barrons.com

    THE HIGHS FOR THE YEAR IN TREASURY YIELDS may have been reached in June, according to this column's semiannual sampling of interest-rate forecasts from prominent seers. But by mid-2010, the benchmark 10-year note could be considerably higher than the 3.50% it yielded Thursday.

    Though the consensus of the group is that, to varying degrees, the U.S. economy will be on the road to recovery in the second half of this year, they mostly agree the Federal Reserve will maintain its accommodative policy, including maintaining its 0-0.25% target for the overnight federal-funds rate through the middle of next year.

    [Jul 5, 2009] American jobs data are worse than we think By Mohamed El-Erian

     July 2 2009 | FT.com

    What if the US unemployment rate rises above 10 per cent and stays there for an extended period? This is a question that is not being asked enough, even though it entails yet another historical anomaly that will further complicate policy formulation and open it up to greater political interference.

    The unemployment rate is traditionally characterised as a lagging indicator and, as such, is viewed as having limited predictive power. After all, unemployment is a reflection of decisions taken earlier in the cycle so the rate always lags behind the realities on the ground – or so says conventional wisdom.

    This conventional wisdom is valid most, but not all of the time. There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviours and outlooks.

    Today’s broader interpretation is warranted by two factors: the speed and extent of the recent rise in the unemployment rate; and, the likelihood that it will persist at high levels for a prolonged period of time. As a result, the unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system.

    In just 16 months, the US unemployment rate has doubled from 4.8 per cent to 9.5 per cent, a remarkable surge by virtually any modern-day metric. It is also likely that the 9.5 per cent rate understates the extent to which labour market conditions are deteriorating. Just witness the increasing number of companies asking employees to take unpaid leave. Meanwhile, after several years of decline, the labour participation rate has started to edge higher as people postpone their retirements and as challenging family finances force second earners to enter the job market.

    Notwithstanding its recent surge, the unemployment rate is likely to rise even further, reaching 10 per cent by the end of this year and potentially going beyond that. Indeed, the rate may not peak until 2010, in the 10.5-11 per cent range; and it will likely stay there for a while given the lacklustre shift from inventory rebuilding to consumption, investment and exports.

    Beyond the public sector hiring spree fuelled by the fiscal stimulus package, the post-bubble US economy faces considerable headwinds to sustainable job creation. It takes time to restructure an economy that became over-dependent on finance and leverage. Meanwhile, companies will use this period to shed less productive workers. This will disrupt consumption already reeling from a large negative wealth shock due to the precipitous decline in house prices. Consumption will be further undermined by uncertainties about wages.

    This possibility of a very high and persistent unemployment rate is not, as yet, part of the mainstream deliberations. Instead, the persistent domination of a “mean reversion” mindset leads to excessive optimism regarding how quickly the rate will max out, and how fast it converges back to the 5 per cent level for the Nairu (non-accelerating inflation rate of unemployment).

    The US faces a material probability of both a higher Nairu (in the 7 per cent range) and, relative to recent history, a much slower convergence of the actual unemployment rate to this new level. This paradigm shift will complicate an already complex challenge facing policymakers. They will have to recalibrate fiscal and monetary stimulus to recognise the fact that “temporary and targeted” stimulus will be less potent than anticipated. But the inclination to increase the dose of stimulus will be tempered by the fact that, as the fiscal picture deteriorates rapidly, the economy is less able to rely on future growth to counter the risk of a debt trap.

    Politics will add to the policy complications. The combination of stubbornly high unemployment and growing government debt will not play well. The rest of the world should also worry. Persistently high unemployment fuels protectionist tendencies. Think of this as yet another illustration of the fact that the US economy is on a bumpy journey to a new normal. The longer this reality is denied, the greater will be the cost to society of restoring economic stability.

    The writer is chief executive and co-chief investment officer of Pimco. His book, When Markets Collide, won the 2008 FT/Goldman Sachs Business Book of the Year

    [Jul 5, 2009] The Bigger Idiot Theory Is Alive and Well!

    MonkeyBusinessBlog

    What's funny here is Moody's is actually starting to do its job when they say;

    Analysts at Moody's Investors Service warned Tuesday that U.S. banks with debt that is rated by the Moody's Corp. unit face about $470 billion in losses through next year. If the economy continues to suffer, those losses could swell to $640 billion, and Moody's would likely accelerate its bank-debt downgrades.

    "In such a scenario, absent continuation, and likely deepening, of U.S. government capital and liquidity support programs for the banking industry, numerous banks would be insolvent," the Moody's analysts wrote.

    [Jul 5, 2009] Make Sure You Get This One Right

    naked capitalism

    Are we facing a deflationary spiral[1] or will the monetary and fiscal stimulus ultimately create (hyper) inflation?

    Unfortunately, the answer is less straightforward. There is no question that, in a cash based economy, printing money (or ‘quantitative easing’ as it is named these days) is inflationary. But what actually happens when credit is destroyed at a faster rate than our central banks can print money?

    ... ... ...

    The return of the boom & bust

    Going forward, not only will economic growth disappoint, but the economic cycles will become more volatile again (see chart 1) with several boom/bust cycles packed into the next couple of decades. This is a natural consequence of the Anglo-Saxon consumer-driven growth model having been bankrupted.

    Growing consumer spending over the past 30 years led to rapidly expanding service and financial sectors both of which will now contract for years to come as overcapacity forces players to downsize.

    ... ... ...

    The liquidity trap

    We are effectively caught in a liquidity trap. The Bank of England, the European Central Bank and the Federal Reserve have all flooded their banking system with enormous amounts of liquidity in recent months but what has happened? Instead of providing liquidity to private and corporate borrowers as the central banks would like to see, banks have taken the opportunity to repair their balance sheets. For quantitative easing to be inflationary it requires that the liquidity provided to the market by the central bank is put to work, i.e. lenders must lend and borrowers must borrow. If one or the other is not playing along, then inflation will not happen.

    [Jul 5, 2009] Herd Mentality On Steroids

    immobilienblasen

    It seems I wasn't far off..... Everybody is once more chasing the same strategy.......

    No wonder when computer trading ( must see clip Themis Trading: "Principal Program Trading Is A Way To Get The Market Go In Your Direction" ) & models are the dominant force on the exchanges these days.....

    This leaves unfortunately little room for "common sense".....

    I doubt that this will end as hilarious ( see "Depression-Era Bear Market Rallies" ) as in the following clip .....

    FT Alphaville

    June 29 (Bloomberg) — Investors are moving in lockstep like never before, driving up stocks, commodities and emerging markets and risking a replay of last year, when they all plunged the most since World War II.
     

    The Standard & Poor’s 500 Index, whose increase in the past three months was the steepest in seven decades, is rallying in tandem with benchmark measures for raw materials, developing- country equities and hedge funds. The so-called correlation coefficient that measures how closely markets rise and fall together has reached the highest levels ever, according to data compiled by Bloomberg . .

    The correlation coefficient for the S&P 500 and the Reuters/Jeffries CRB index of commodities has been at 0.74 for the last 60 days.

    A value of 1 means perfectly correlated, but to give you the historical significance of a reading of 0.74 — it’s the highest correlation in at least five decades, according to Bloomberg

    The S&P is also increasingly (weirdly) moving in tandem with the price of crude oil, with the correlation value above 0.7 in June. The correlation between the S&P and the MSCI Emerging markets index is also apparently the tightest since Russia defaulted on its debt in 1998

    The rather dramatic increase in correlation should be a bit of a worry for investors, since it makes diversification rather difficult.

    > Here another stunning chart.....

    [Jul 5, 2009] Econbrowser Back to the Stimulus Debate W, Timing, the States, and Baselines

    Martin Feldstein predicts a relapse into recession (a beautiful symmetrical W)
    A "W" Recession?

    Martin Feldstein has recently raised the possibility that we might experience a relapse into recession (a beautiful symmetrical W), with the next dip in 2010. In my view, this means (1) we should have opted for a bigger and better composed stimulus package, and (2) the timing of expenditures in the stimulus package might not be as problematic as many commentators have indicated. From Bloomberg:

    "I think we're going to see a temporary substantial improvement," Feldstein, the former head of the National Bureau of Economic Research and a Reagan administration adviser, said today in an interview on Bloomberg Radio. "I emphasize the words temporary and substantial."

    Feldstein -- a member of the private panel that dates the start of recessions and recoveries -- suggested the economy will contract into next year, and that the pattern of economic turnaround will be more of a seesaw than what he called "a beautiful symmetrical W."

    Interestingly, neither the OECD nor Deutsche Bank project such a "W" shaped trajectory. Nor do any of the forecasters in the May WSJ survey.

    Selected Comments

    steve from Virginia

    Hmmmm ....When you are in a war, the important thing is to fight the correct enemy. Our current enemy is presented here as a business cycle recession with credit defects, causing liquidity shortages.

    If you look at credit creation as a hedge against rising energy costs beginning in 2002 it is possible to cast the current situating as an energy price problem, instead.

    Added stimulus that has reached the economy so far has maintained average oil costs @ a level above $45 a barrel. The average cost for 2008 was $70 a barrel and the current price is very close to $70 a barrel. The assumption that this price is not sufficient to effect the economy is just that ... an assumption.

    The Federal Reserve considered the increases in oil price from 2002 onward to be sufficient to justify increasing Funds rate. Perhaps this was overdue, but the Fed did misunderstand both the deflationary pressure generated by increased oil cost as well as the aim of the finance industry during that period to render fungible all cost inputs to finance - including oil costs.

    You can read minutes of FOMC meetings on the Federal Reserve System webpage.

    When the Fed raised interest rates beginning in 2003, it shattered the ability of structured finance to maintain asset bubbles in real estate and structured securities. Cheap credit became expensive and when added to expensive oil, the total costs began to eliminate profits and generate defaults.

    The Fed is in an identical dilemma now - whether to raise rates in the intermediate term or reduce the flows of liquidity or unwind its grossly unbalanced 'balance sheet'. It clearly cannot continue to expand its holdings of bank etc. paper forever. However, to reverse the easing process would shatter the ability of the now- damaged money brokers to maintain the asset bubble in public finance!

    We are going in circles!

    What does this tell you? That the problem isn't in finance per se, since neither Wall Street nor the Fed are interested in remediating credit risk. The problems are elsewhere and there is nowhere to look but at oil prices.

    Oil over $45 a barrel is an economy killer. Unfortunately, the clock cannot be turned back to the time of cheaper oil. Alas, valuable real resources have been irretrievably consumed and the underpinnings of industrial 'progress' are currently being priced into systemic unaffordability by the industrial process itself.

    This being the case, it is more likely that the recession will be more of a 'stair step' rather than an alphabet sort of thing. The stairs will descend and as no person in any establishment is taking the energy issue seriously except for desperate efforts to restart the bubble/hedge machine, the stairs will descend in monotony punctuated with terror until either the bottom is reached - a 14th century way of life for all Americans - or until the establishment wakes up and starts crafting an alternative strategy.

    This is a war and the first step is to correctly identify the enemy. The second is to engage directly. The simplest and most direct form of attack on this problem is to conserve oil by not using it. Simple - hard, too. But it will be done. Either by planning, discipline and good policy or by the back steps.

    Ivars

    I agree with Feldstein. Dynamics of accumulated capital ( I am not sure if there is any, but the rise in oil prices despite recession suggests there is.)

    GWG

    Another possible scenario for a W shape is that cap and trade legislation is passed which increases the cost of everything, causing the economy to fall back into a steep decline.

    DickF: (Note: this is a sophistry of the worst king --NNB; in reality it is employment that matter)

    Previously, I argued that the recession was likely to be long, so speed would not be of the essence…

    The logic of this statement escapes me. If you actually believe that “stimulus” will create a recovery how can you argue that waiting to inject the stimulus is a good thing? The argument is internally contradictory.

    Let’s look at the argument.

    1. We are in economic decline so we need monetary stimulus to generate a recovery.
    2. But stimulus will have no impact on recovery because the recession will be long even with a stimulus.
    3. The recession will be long so we shouldn’t inject stimulus until the economy begins to start recovery (implying that the stimulus should be injected as the recession enters recovery).
    4. But if the recession begins to recover even before any stimulus is injected then why do we need stimulus?
    5. Internal contradiction - stimulus generates recovery, but recovery must begin before we stimulate.

    There is no way around it. The logic is contradictory. Either stimulus works or it doesn’t. If it works do it. If it doesn’t then drop it.

    Folks, over and over those who believe in this stimulus are making the argument that it is not working. The belief is insane. Supporters are saying yes, it is not working but it will, it will.

    Not only is it not working it is making things worse.

    DickF

    First, it's important to realize that the end-February assessments were based upon early January forecasts completed by the previous (Bush) Administration, and finalized on February 3. When taken in that light, I don't believe the forecasts were that much out of line with private sector forecasts.

    Once again we have contradictory logic. The logic is, the Bush administration created the problem [a position I agree with btw], so since the estimates used by the Obama administration are actually Bush estimates they must be right.

    No, No, No! The Bush administration was wrong on economics and our current recession was started by his disastrous economic moves, but we are looking at the second Bush administration in the Obama administration. They are continuing the same policies as Bush. The only difference is that they are massively larger and they are being structured to give Democrats the ability to pay their supporters with tribute taken from their enemies.

    DickF

    But now to the problem with the analysis. This analysis looks at only one half of the equation. It looks at stimulus as the answer to the recession and it assumes that since most of it will not be injected until 2010 recovery will come in 2010.

    But how and when will we pay for the stimulus? As the stimulus is distributed will it come from tax revenue? So does that mean increased taxes? Axelrod seems to say yes. So if we increase taxes doesn't that counter any effect of stimulus since just mathematically it will with draw as much as stimulus injects?

    How will we pay for the stimulus? Will we borrow from US citizens? Not likely since citizens are feeling the recession more than the government. So are we going to borrow from other countries? China and Japan have pulled back their buying of US debt and Europe is trying to finance their own recession. Borrow? Not likely.

    So that leaves us with inflation. The stimulus will need to be funded with monetary expansion. Right now the currency has found a relatively stable level of value relative to other currencies and to gold, but what will happen when trillions of dollars are injection into the world economy? Inflation saps the strength out of any economy. Inflation throughout history has not only drive the economy to instability but it has driven the economy to political instability. Look at France in the late 1700 where hyper-inflation led to the rise of Napoleon. Look at Germany where hyper-inflation in the 1920s led to the rise of Hitler. Look at Argentina, Brazil, Zimbabwe. We are racing headlong toward economic and political instability unlike anything ever seen in the history of our country, maybe even the history of the world.

    Bob_in_MA

    I think the employment effect of the stimulus bill will be hard to discern, not because it is or isn't a failure, but because most of the effect will be to moderate declines.

    For instance, the stimulus calls for $142B in infrastructure outlays over several years, peaking at $31B in FY2010.

    But state and local spending on construction was at an annual rate of $289B in March, up 45% from 2004 when it was $200B. So without the stimulus bill, and all the state revenue shortfalls, it would be reasonable to assume this spending would fall $50-75B/year. In the best year, the stimulus will make up half of that.

    Add in the fact that private nonresidential construction is likely to fall significantly over the next year or two, and we are just not going to see a noticeable effect on construction employment from the stimulus. It will just be falling less quickly.

    Same with the school aid. Here in my small town, they are laying off something like 5-6 teachers instead of 14.

    That's not to say the stimulus is failing or wasn't well crafted, just that its positive contributions will be difficult to see in aggregate numbers.

     GK

    It will not be symmetrical. That would imply that the second recession will be as severe as the first, which is unlikely.

    In 1980-82, the first was much smaller than the second. The reverse will happen here, resulting in the same 3-year combined recession. The second recession here will be about 8 months, starting in early 2010 and ending at the end of 2010.

    GK

    Again, I ask the all-important question that is under-discussed :

    The 'potential GDP' line : when do we get back to it? 2012? 2013? never?

    Or does the line itself move permanently downward? Getting back to the line will require a calendar year of 8% GDP growth (like we saw in 1983).

    kb

    Really, did anyone expect the impact to be discernable in four months after the bill's passage?

    You mean, besides the Administration?

    Menzie Chinn

    kb: Depends what you think is discernable, in terms of statistical uncertainty. You can't prove that the effect is zero given the noise in the series, and the fact that one needs to take a stand on the counterfactual. By the way, pay attention to footnote 2:

    These estimates, like the aggregate ones, are subject to substantial margins of error. One additional source of uncertainty concerns the impact of the state fiscal relief.

    And recall this report pertains to the Administration's proposal, not HR 1 as passed.

    John Lee Hooker

    @GK :
    for getting back to the 'potential GDP' line we need the next bubble. The next bubble is called "global warming" aka cap-and-trade. Paul Krugman is already lobbying for that, see his blog.
    We will be back soon.

    @kb :
    Menzie wanted to tell you : always read the fineprint (i.e. footnote 2). Esp. in insurance contracts, a very helpful strategy.

    Anon

    Mr. Krugman has some interesting and strong comments about the magnitude of the current stimulus plan.

    http://www.nytimes.com/2009/07/03/opinion/03krugman.html?_r=2

    Alan

    DickF, a couple of comments:

    * So if we increase taxes doesn't that counter any effect of stimulus since just mathematically it will with draw as much as stimulus injects?

    See this rebuttal from Krugman:
    http://krugman.blogs.nytimes.com/2009/04/06/one-more-time/

    Your view, DickF, is the old 'Treasury view'/conservation-of-mass-type argument of the 1930s, which has been criticized by a number of economists.

    * How will we pay for the stimulus? Will we borrow from US citizens? Not likely since citizens are feeling the recession more than the government. So are we going to borrow from other countries? China and Japan have pulled back their buying of US debt and Europe is trying to finance their own recession. Borrow? Not likely

    Again, see Krugman's post:
    http://krugman.blogs.nytimes.com/2009/06/06/wheres-the-money-coming-from/

    Bottom line: the answer to your question: the US government is borrowing more from their OWN citizens than from overseas.

    * So that leaves us with inflation. The stimulus will need to be funded with monetary expansion. Right now the currency has found a relatively stable level of value relative to other currencies and to gold, but what will happen when trillions of dollars are injection into the world economy?

    Your point is theoretically valid, but does not usefully characterize the current state of affairs, which is:

    ***********************
    As I said, your point is theoretically valid, in the sense that it highlights the identification problem inherent in analysis of the stimulus: we need to know whether the public expects the deficit to be inflated away or not, so that we can be confident that we're measuring the 'fiscal multiplier' rather than the slope of the Phillips curve.

    [Jul 5, 2009] Whitney “I call this the great government momentum trade” by Tracy Alloway

    May 12, 2009 |  FT Alphaville

    Meredith Whitney appeared on CNBC Monday afternoon with some insightful comments on the recent rally in banks.

    Via Clusterstock:

    They were overdone all the way into this rally. What happened was the government — I call this the great government momentum trade — the government enabled the banks to have better than expected, better than even the banks could organically deliver, first-quarter earnings. That looks like it could continue into the second-quarter and the third-quarter. The banks rallied from well below tangible book multiples to almost two times tangible book multiples. It was something, even though I said it was going to happen, I couldn’t believe it with my own eyes because the underlying core earnings power of these banks is negligible.

    For fundamental investors you invest on what you know to be the rules of the market. With the government involved no rules of the market apply. … And things that I never imagined that I would see in my lifetime you’re seeing in terms of government intervention. So shorts covered because they couldn’t play, shorts covered after they lost a lot of money because they couldn’t play, and then the long-only guys are grossly underinvested and so they see the rally and they’ve got to reweight and so it’s a crazy positive momentum based on no fundamental improvement. Zero fundamental improvement.

    Last year you had the market impact the economy and this year you’re going to have the economy impact the markets. So however manufactured these earnings are going to be you’re still going to have unemployment come in worse than expected, you’re still going to have consumer defaults worse than expected and you’re still going to have consumers not spend money … More people are going to lose their jobs and have less available credit lines to spend and that’s a ruse (?) that no great government momentum trade can really guard against.

    I will be the first to admit I don’t know the rules, what the government’s going to do. I mean, I think that on a core basis I absolutely would not own these stocks. When the market turns, and I think that stocks are grossly overvalued, when the market turns and how it turns hard and fast investors are going to be furious. The saddest thing is that how this thesis I had would play out is tangible book values would increase because the government bought back agency paper, remember, and relaxed FASB rules, so tangible book values would increase and so you saw money start to come in. Now the long-only money’s coming in and the long-only money came in last year and they got their heads chopped off. You’re going to see the same thing happen. The biggest danger we face here, from a market point perspective, is having the retail investor shut out for a protracted period of time. They just feel abused again and lied to again.

    Disregarding the rather uneven tone of the above (”I saw this coming” but “I admit I don’t know the rules” of the new regime), Whitney is making some good points.

    As she notes, the government is now firmly on the side of the banks, helping them earn vast sums in their fixed income units and relaxing accounting rules to assist their earnings (crucially, banks will be able to earn their way out of the SCAP capital requirements). Investing in banks now is placing your faith in the power of the US government to force through a recovery in the sector.

    If that’s too much for you then you can watch the rest of the CNBC interview, with Whitney’s recommended (non-bank) investments, here.

    [Jul 4, 2009] Robert Reich's Blog

    www.robertreich.blogspot.com

    Someone recently approached me at the cheese counter of a local supermarket, asking "what can I do?" At first I thought the person was seeking advice about a choice of cheese. But I soon realized the question was larger than that. It was: what can I do about the way things are going in Washington?

    People who voted for Barack Obama tend to fall into one of two camps:

    In my view, both positions are wrong. A new president -- even one as talented and well-motivated as Obama -- can't get a thing done in Washington unless the public is actively behind him. As FDR said in the reelection campaign of 1936 when a lady insisted that if she were to vote for him he must commit to a long list of objectives, "Maam, I want to do those things, but you must make me."

    We must make Obama do the right things. Email, write, and phone the White House. Do the same with your members of Congress. Round up others to do so. Also: Find friends and family members in red states who agree with you, and get them fired up to do the same. For example, if you happen to have a good friend or family member in Montana, you might ask him or her to write Max Baucus and tell him they want a public option included in any healthcare bill.

    (I'm back here July 10.)

    dave said...
    If the unprecedented outpouring of public opposition to the TARP did nothing to alter its passage, then nothing short of riots in the streets will do the job now.

    Letters and phone calls to the White House or Congress are wasted efforts, as they are not accompanied by huge checks, as the lobbyists' missives are.

    This is not known as the Best Government Money Can Buy for nothing. The third term of Dubya continues, unswayed by the public.
     

    CTHankster said...
    I agree with the comment saying we need social movements. FDR faced massive unrest--industrial unionists, Communists, general strikes, etc. Similarly, the advances of the 60's were accomplished because the agitation for changed threatened to become unmanageable. For better or worse, liberalism can make no progress without a more, um, boisterous and confrontational Left spurring the process. Where are the anarchists of the anti-globalization movement when we need them?
     
    Cosmic Messenger said...
    What passes for American-style democracy today is an oppressive government state run by Washington insiders corrupted with the same valueless lifestyle destroying us all. It's a scheme that has chosen wealth over constitutional principles. We, as a nation have traded implicit trust for the ineffectual, futility of our egocentric desires. Throwing more money at the economic crisis won't solve the problem. The only way to mend this financial Depression is by fostering genuine, honest leaders again.

    Obama came into office promising change but quickly reverted to the insincere rhetoric of his predecessor. His approach to problem solving is no different than the Bush Congress. Let the influence of free-flowing currency buy a solution for you. If that's the kind of transformation he had in mind then we may be seeing an uprising of our own here in this U.S. soon. The lingering question still undecided is whether it will be passive or bloody.
     

    Chris Kearin said...
    I'm afraid the likely result of the kind of direct action that CTHankster suggests would be to alienate the middle and play into the hands of right-wingers who want to depict everyone on the left as a Marxist terrorist. Maybe in a normal country such things could be productive, but not here. Civil disobedience has its place, but chaining yourself to a courthouse isn't going to accomplish anything.
     
    John Lawrence said...
    In the sixties there was a real social movement. It managed to stop the Vietnam war but not soon enough. It should have ended years earlier. Other than that the movement went nowhere and eventually petered out in food coops that later turned into chiropractor's offices that later became real estate offices. Although there was much talk of changing the system and much adulation of Che Guevarra and other revolutionaries, nothing much came of any of it. The only real hurting issue was the draft, and, once that was over, there was too much prosperity around for anyone to want to continue to change the system. The system seemed to be working quite well.

    Now the system is not working at all well. We have $10 trillion more in national debt than we had in the sixties. We are losing jobs at an incredible pace. We are fighting two unnecessary wars. The states are broke. College graduates are tens of thousands of dollars in debt with paltry job prospects thus insuring defaults on their student loans and ever increasing debt, a good start on a life of indebtedness. Credit card companies use "trick and trap" as their profit model instead of long term ability to pay. Lobbyists run our economy. The health care system is in shambles, but nobody wants "socialized medicine," even though it's proven to be the best system in the rest of the world. Homelessness is increasing as people are defaulting on mortgages right and left.

    Yet there is no rioting in the streets. Why? Because culturally people are still buying into right wing claptrap about freedom and democracy and low taxation. So as the misery index increases, a right wing movement seems more likely than a left wing one. Tea parties seem more fashionable than black gloved fists. Fascism seems a more likely prospect for the US than a socialist utopia. People are more worried about their guns being taken away and denying gays the right to marry than they are about universal health care or universal human rights or about providing jobs for everyone or about guaranteeing everyone a minimally decent basic standard of living. People are more apt to blame the individual for his or her failings than to blame the system.

    So the plight of the US is that the right wing fantasies are being sold more effectively than the left wing ones. The fantasy of individualism and "don't tread on me" is gaining more traction than the fantasy of "we're all in this together". As the US goes down the tubes, even a prolonged recession/depression will likely not get people in the streets demanding a more just and equitable society. Instead people will cling to the American dream that they too will get rich and live in opulent luxury some day. They too will have a private jet and a private yacht and date movie stars, maybe even have a trophy wife. They too will be famous and have a 30,000 square foot home.

    The problem is that Americans by and large have the wrong values. But events, I think, rather than marching in the streets will overtake the situation. As other countries move forward along more progressive and successful lines, US debt problems will overtake us turning the first world into a third rate nation with a huge nuclear arsenal. The US military national security state empire comprising the largest military budget in the world, larger than all other nations combined, and over 700 military bases in virtually every country in the world will collapse. American hubris will then either go into overdrive producing fascism or it will collapse producing a "we're all in this together" spirit. It's not entirely clear what will happen then. But for right now we're still spinning our wheels even with Mr. "Change you can believe in" at the helm.

    Also posted on Will Blog For Food.

    [Jul 4, 2009] How To Buy Friends And Alienate People

    baselinescenario.com

    with 40 comments

    The banking industry is exceeding all expectations.  The biggest players are raking in profits and planning much higher compensation so far this year, on the back of increased market share (wouldn’t you like two of your major competitors to go out of business?).  And banks in general are managing to project widely a completely negative attitude towards all attempts to protect consumers.

    This is a dangerous combination for the industry, yet it is not being handled well.  Just look at the current strategy of the American Bankers’ Association.

    Edward L. Yingling is justifiably proud of his organization’s position as one of the country’s most powerful lobbies.

    His testimony to Congress on the potential new Consumer Financial Protection Agency plainly shows where his group stands.  The most revealing quote, highlighted in the ABA’s own press release, reads:

    “It is now widely understood that the current economic situation originated primarily in the largely unregulated non-bank sector,” he said. “Banks watched as mortgage brokers and others made loans to consumers that a good banker just would not make and they now face the prospect of another burdensome layer of regulation aimed primarily at their less-regulated or unregulated competitors. It is simply unfair to inflict another burden on these banks that had nothing to do with the problems that were created.”

    The premise here is false.  If major banks had really not been involved in the mortgage fiasco, we would not have had to roughly double our national debt-to-GDP in order to save the US and world economy.

    Within the banking community, and presumably within the ABA’s membership, there is serious tension.  The small banks feel – overall with some justification – that the essence of the recent problem was not about them.  But they can’t bring themselves to suggest publicly that the economic and political power of the largest banks should be curtailed.

    Small banks have always had clout in the American political system, particularly when they work through the Senate.  But we have not always had our current kind of crisis.  The executives of these banks lived comfortably in the 1950s and 1960s; their kind of banking was boring, stable, and nicely remunerated.

    It is the changing nature and power of the largest financial institutions – banks of various kinds – that has damaged our system since the 1980s; the rise in financial services compensation is part symptom and part pathogen.  Big banks present the major risk going forward – to both the economy in general and to smaller banks in particular.

    Most banks are “small enough to fail” (seven closed yesterday).  It is absolutely not in their interest to have some banks that are perceived to be “too big to fail” and to ever re-run any version of the last two years.

    The ABA should be discussing and addressing this issue.  Instead, it is making all banks unpopular by opposing sensible legislation aimed at protecting consumers – look at the public relations context provided, for example, by Citi’s recent move on credit cards.

    The ABA’s leadership needs to quickly rethink its approach.

    By Simon Johnson

    Xorox

    Don’t think that your vote counts for much. Your representatives and senators are bought and sold in the beltway.

    Big banks and big business own Washington. Financial institutions have too much influence over legislative activities and any regulation. Ditto for health insurers and drug companies, dominating any movement towards universal health care.

    The revolving door between regulators, big business, and lobbyists is an appalling nightmare for US taxpayers.

    When will the people put a stop to this nonsense?

    Lavrenti Beria

    Xorox,

    Don’t forget foreign policy, specifically Middle East policy. How do you think its possible to produce AIPAC authored, anti-Iranian resolutions in the House with only five or so votes against? Could fear and money have something to do with it do you think?

    The “the people” will “put a stop to this nonsense” when they are willing to stop voting and participate in mass demonstrations and the general strike and not until. Parliamentary means of changing these realities are the stuff of pipedreams. The criminality involved in most of these abuses is so egregious that it has spelled an end to American democracy. Americans should behave in accordance with what’s real, not what they imagine to be real.

    Bayard

    Simon, I find this less than fascinating, that the ABA, a shill of the oligarchs, would choose to speak and act in such a way. What we need is an equivalent opposing force to offset their rhetoric and power.

    And, I don’t see one blooming on the horizon, although, inspite of what one blogger said about 30 to 40% unemployment, the actual rate has climbed to 20 with another 5 in the offing, once California is forced to do business exclusively by IOU’s, and the many other states in similar straits go up in smoke. This is just another stage in the upcoming oligarch meltdown.

    The prop up of the economy is falling short and the piper is awaiting payment. Sometime in the next six months, the next crest of the economic tsunami will hit, and then the firebrands will take to the streets. If the single payer folks are vociferous (and unheard), just wait for the next wave, after the remaining taxpayers see what the Congress is NOT doing to get us back on track.

    I feel for Obama. He picked the right people for the job, but failed to understand that Larry and Tim are not “get tough” guys. They are brilliant, but way to close to the forest to hold the trees at bay.

    I am betting that many of those whose rates have just been raised by CITI are going to either (a) default by not being able to keep up, or (b) default intentionally, as a rebellion.

    By the way, you need to look next at the state bond markets, now that most states are running major deficits, and their bond issues can’t get ratings. They will default, and that chain reaction will be spectacular (they can’t find guarantors with their ratings dropping). And this is also true of municipal bond issuers.

    [Jul 4, 2009] Obama Economic Forecast by Mark Thoma

    The key economic figures in Obama administration are not that different from key economic figures in Bush II administration...
    July 3, 2009

    Spencer at Angry Bear:

    The right is having a lot of fun commenting about the economic forecast by the Obama team being too optimistic. ... I guess they are right, Obama along with everyone else has massively underestimated the damage Team Bush did to our economy.

    [Jul 3, 2009] A different sort of crowding out

    Angry Bear

    rdan

    Money Central presents a dilemma for shareholders in goods and services:

    The old notion that profitable companies with good growth prospects should have rising share prices -- and that failures like GM should be gone, or at least trading in the pennies -- is history.

    Today, a hedge fund investing billions using a quantitative formula can stall a stock; a couple of hedge funds aligned can turn a profitable company into a Dow laggard. Toss in a few short sellers and you have the great Wall Street collapse of September 2008.

    It wasn't always this way. Before the machines and the shorts took over Wall Street, stocks were evaluated by an underlying company's prospects. Buy-and-hold investing ruled the day. Investors such as Warren Buffett and Bill Miller were the models.

    Those fellows are a far cry from this generation's masters of the universe. Traders are in charge now. They rule the market. They dominate volume. That stock you bought because you thought the company was in good shape? It's a pawn in the hands of a computer model or some supertrader like Steven Cohen at SAC Capital Partners or Bridgewater Associates' Ray Dalio.

    To move a security, they don't need to own it. They can have a short position. They can put an order to sell 1 million shares in a dark pool, those anonymous marketplaces that operate outside the walls of the exchanges. They can own options or futures contracts. Buy enough GM puts and watch the price begin to fall under the pressure.

    Obvious, but plays havoc with the investing side of the tax cut and savings equation meme.

    Guest says:

    I agree that there is a lot of stock market manipulation going on now. And it's not all monetary manipulation. There is also a constant stream of propaganda designed to influence investors' expectations of the future.

    But I find your example of GM a little hard to swallow. This company has been loosing money for years. That's why it's so deeply in debt. It wasn't the falling share price that did GM in. It was the money loosing operations and the borrowing that did it in.

    coberly says:

    you could be right. but let me ask

    if you are not describing the internal dynamics of an industry that creates no value.

    it looks from here like American produces less and less of anything people actually use, but the people who sell paper make money on the disequilibrium of Chinese workers making things they cannot afford to buy themselves, at wages they can only live on because their own landlords and grocery stores are priced at that wage level.

    to some extent American workers "profit" from this situation themselves, as they enjoy products produced by cheaper labor abroad.

    but this is an unstable equilibrium, and prone to collapse like a house of cards.

    i would argue, if i had the data, that this has more or less been the case for "capitalism" since 1700 or so, which means either that the American empire could go the way of the Spanish empire, or the whole world may run out of exploitable resources first.

    i realize this is incoherent. but i'll leave it in case those better informed than i am can flesh it out better.

    mcwop says:

    “Bankrupt companies do not always simply trade at zero, Also, remember a short seller must BUY the security back to close their position, which means there is demand for the stock. if I borrowed shares that I must replace, then I need to go to the market and buy those, which gives what might be worthless shares some residual value based on demand from short sellers.

    mcwop replies:

    “Here are some data:

    Stocks of the 20 largest U.S. companies that declared bankruptcy since 1980 rose an average 18 percent one week after filing for court protection from creditors, according to data compiled by Bloomberg and BankruptcyData.com, a Boston-based research firm. The increase diminished to 3.1 percent over a month and turned into a 15 percent loss within three months as the shares began to be removed from exchanges, the data show.

    The gains have little to do with expectations for a recovery. Instead, the shares rally as investors who had wagered on a decline buy the stock back to complete their trades, said John Carey, a fund manager at Pioneer Investment Management. Advances also reflect speculation a company will return money after paying creditors.

    http://www.app.com/article/20090602/BUSINESS/90602034/0/NEWS/Bankruptcy+could+lead+to+short-term+stock+boost+for+GM+shares

    The article linked in this AB blog post is terrible, incomplete, and untrue IMO.

    jeff in indy

    “it certainly changes the definition and make up of the "investor class." those of us w/comparative pennies to throw at the market through mutual funds simply hope the fund managers have a clue and understand nimbleness.

    hence, those of us that now make up the sheeple of the investor class will have re-learn an old/new phrase. . . passbook savings account. i certainly don't begrudge these new masters of the universe, just don't take away the ability to become one.

    [Jul 3, 2009] Charles Hugh smith-Weblog and Essays

    Today we begin with two fascinating reports from readers. We start with correspondent Bob Z.'s report on Las Vegas condos--one of several Ground Zeros for the housing bubble.
    A house is a money pit, but a vacant house is a liability. We have nearly 20 million of these liabilities all over the country and every one of them is looking for cash, whether it be for taxes, insurance, mortgage payments, condo fees, maintenance and repairs or basic standby utility service. With rising unemployment and declining rents, I submit that we are not at bottom yet.

    Those who think the real estate bottom is in should look at real estate markets in Las Vegas, Phoenix or Miami/Fort Lauderdale. In Las Vegas, there is a huge condo complex called Meridian at Hughes Center located 2 blocks from the Strip. 2BR 2BA condos that sold for $540K in fall 2005 were going for about 120K at the beginning of 2009.

    My uncle wanted to invest in a couple of units in January but I told him "not yet." I watched the units drop to $99K around March or April, and thought about buying one, but didn't. Today those 2BR units 2 blocks from the Strip can be had for $75K, or about 15 cents on the peak bubble dollar. Another Vegas complex I follow has units that sold at $191K in 2006 now going for $35K.

    Is this the bottom for Vegas? Well, I lived there for 8 years, and I don't think the bottom is in just yet. We are getting closer, but the bottom will not be in until we see some of these properties going for 10 cents on the peak bubble dollar. I see similar price declines in Phoenix and Fort Lauderdale, and I think those cities are also getting closer to bottom but they're not there yet.

    The reason is simple: We still have rising unemployment and hundreds of thousands of new foreclosures every month. The supply of houses exceeds demand, yet builders are still building new houses!

    This is an economic depression. The difference between this depression and the 1930s is that today we have unemployment payments, welfare payments, Social Security and Medicare. Those government programs are why we don't have armies of hobos wandering around the country and massive lines at soup kitchens.

    But government tax receipts have fallen off a cliff. If we wait awhile, we will see government no longer able to borrow money, at which point it will be forced to print money or cut spending. Either alternative will finally put the lie to Mr. Bernanke's "green shoots" nonsense, and we will see the proverbial stuff hit the fan.

    [Jul 3, 2009] "Hire the Unemployed"

    "Audacity of hope" is for Goldman bankers only...
    Economist's View

    The stimulus package had two components, new spending and tax cuts. Everybody knew that the spending component would take time to put into place, six months or more for a lot of the infrastructure projects, and that meant that we needed something to increase demand and provide a bridge until the new spending comes online.

    Enter the tax cuts that the GOP insisted upon, tax cuts that were a larger part of the stimulus package than I thought justified. These cuts were to come online immediately and stimulate demand until the spending could begin taking up some of the slack later in the year. I would have preferred targeted, non-infrastructure spending that could have been put in place almost as fast as the tax cuts (particularly those that simply require making existing programs more generous), but that type of spending was considered wasteful because it didn't add to our long-run capacity for growth and hence had little chance of being part of the stimulus package.

    The problem was partly bad luck. A crisis hit and we had the bad luck of having an administration that opposed active intervention and though there was a bit of a stimulus attempt through a one time tax rebate, a strategy theory predicts won't do much to help, the real action in terms of stimulating the economy was left to the new administration. So nothing was done, nothing could have been done until the new administration took over, and given the insistence that any new spending be on infrastructure projects with clear benefits, tax cuts were the main hope for an immediate effect.

    So if the policy has failed at this point, it is not the spending component since, fully consistent with predictions when it was enacted, it was going to be months before it could be of any help. What failed is the GOP's insistence that tax cuts be used to provide an immediate boost to the economy. Increasing food stamps, unemployment compensation, payments to help states with declining revenues and increasing demands for social services, payments to help unemployed workers maintain health care, digging (needed) holes, there were many, many other ways to provide more immediate relief and stimulate the economy at the same time, but no, it had to be tax cuts or nothing.

    Finally, I want to note that what we maximize matters. For example, we can maximize GDP growth over the next ten or twenty years, or we can maximize employment over the next few months. Which we choose to maximize has a big effect on the policies we put in place. If we use the stimulus money to maximize GDP and growth - which is essentially what we did - that will have a much slower effect on employment than if we maximize employment directly. The efficiency argument always leads you to maximize output, and efficiency prevailed in the structure of the current package, but I think an argument can also be made that maximizing employment provides social benefits that are just as large, or larger.

    Just noticed this, which makes a surprisingly similar point:

    A Message to President Obama: Stop Priming the Pump, Hire the Unemployed, by Pavlina R. Tcherneva: Many have called President Obama’s stimulus plan a return to Keynesian policy. Some of us who like reading Keynes professionally or for leisure have already been scratching our heads. I have wondered in particular whether the plan isn’t set up to work in a manner completely backwards from what Keynes himself had in mind when he advocated economic stabilization by government.

    There are two things to remember about Keynes’s fiscal policy proposals: 1) government spending was always linked to the goal of full employment... and 2) to achieve macro-stability and full employment, the government had to employ the unemployed directly into public works.

    By contrast, most modern economists believe that 1) there is some natural level of unemployment that includes the structurally unemployed, which governments cannot generally tackle, and that 2) public employment is an inefficient use of public resources.

    So, when the government is called to action, the economic profession has replaced Keynes’s “fiscal policy via public works” with a “leaky bucket pump-priming mechanism.”

    How is the latter policy supposed to work? Instead of employing the unemployed directly, the idea is to generate large enough government expenditures to produce a level of economic growth that would, in turn, gradually reduce unemployment. For example, the government could spend money on various private sector contracts, stimulate different private industries, offer investment subsidies and tax cuts, and increase unemployment insurance payments, in hope that it will boost GDP sufficiently to reduce unemployment to desired levels. This is essentially the underlying logic behind President Obama’s stimulus package. But it is also a bit of a gamble.

    Not all of these injections will be effective because the fiscal stimulus enters the economy through “a leaky bucket”. Some of the money will be lost in transit (because of administrative costs, for example) and much of it will have no direct job creation effects (e.g. the tax cut component of the recovery act). Nevertheless, despite this leaky bucket, the theory goes, sooner or later, large enough government expenditures will produce the kind of growth that would reduce unemployment. ...

    All of this is ... why Keynes never had any “leaky bucket” or “pump priming” idea in mind. For him “the real problem fundamental yet essentially simple…[is] to provide employment for everyone” (Keynes 1980, 267) and the most bang for the buck from fiscal policy would be achieved via direct job creation. This he called “on the spot” employment via public works.

    As I have argued elsewhere, it is useful to think of Keynesian fiscal policy, not as aggregate demand management, but as labor demand management. ...

    Commentators often call this a policy of “make work” but Keynes didn’t advocate digging holes, burying jars with money and digging them out, or any other similarly worthless projects. The key was to marry the two goals: to employ the unemployed directly and to make sure that they do useful things. Once they are put to work on a particular project, Keynes argued, “there can be only one object in the economy, namely to substitute some other, better, and wiser piece of expenditure for it” (Keynes 1982, 146). We might as well ask a very basic question: is there really a shortage of useful things to do?

    If we insist on calling ourselves Keynesians again, and more importantly, if President Obama’s plan for economic stabilization should generate rapid reduction in unemployment, it would help to set fiscal policy straight. Instead of relying on “leaky fiscal buckets” we could return to “labor demand management” a la Keynes that provides immediate employment opportunities to the unemployed via bold and creative public works projects, which generate useful output and services for all.

    [Jul 2, 2009] Stock Market Insider The Week Ahead - Market Insider with Patti Domm -

    When CNBC tells that stocks will be "range bound" the most probable direction is down ;-)

    CNBC.com

    Barry Knapp, Barclays Capital head of U.S. equity portfolio strategy, said he thinks the stock market could stay range bound for a bit longer. He said there could be a move higher with some good earnings improvements and a decent pickup in industrial production, but it's likely to finish the year around current levels. For the most part, he expects to see a weak earnings recovery.

    "We might be in a little bit of a dead spot, between when the economy bottoms out and when it starts to pick up. It might be middle to late third quarter before it starts to pick up," said Knapp.

    [Jul 2, 2009] Enough With the 'Green Shoots' Earnings Will Be Market's True Test, Analyst Says

    tech|ticker

    While the economy may be getting less bad it’s time for corporate America to put up or shut up.    "Some portion of the rally was based, not just on economic stabilization, but the idea growth will follow," Greenhaus says. "If you don’t get that second half of the story it’s going to be very hard to continue to rally equity prices."

    Even if earnings and guidance do surprise investors, Greenhaus believes the days of 3% growth are gone; “that’s a fairly ambitious goal going forward,” he says, predicting a more muted recovery with 1-2% growth for the foreseeable future.

    [Jul 2, 2009] Goldman again

    Posted by Tracy Alloway on Jul 01 11:50. Matt Taibbi’s Rolling Stone article on Goldman Sachs has been making tidal-sized waves in the blogosphere for the past week.

    That’s unsurprising given that it begins with the following unnerving paragraph:
    The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.
     

    It then goes on to accuse GS of helping to inflate no less than four asset bubbles — 1920s equities, internet stocks, mortgages and oil — with their alumni permeating regulatory and federal halls of power to turn America into one “giant pump and dump scam”.

    Unsurprisingly, Goldman was none too pleased with the coverage.

    Here for instance, is GS spokesman Lucas van Praag, refuting some of the claims via Felix Salmon earlier this week:

    . . . Taibbi’s article is a compilation of just about every conspiracy theory ever dreamed up about Goldman Sachs, but what real substance is there to support the theories?  We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance of being a force for good.   . . .
     

    Now, Taibbi has shot back. You can read his full response here, but he’s essentially refuting the claim that his article was biased and that Goldman was not given the chance to tell its side of the story. From a journalistic point of view, we find the following section from Taibbi’s retort particularly interesting:
    . . . Actually I did contact Goldman and gave the bank every opportunity to respond to the factual issues in the article [by sending them a list of questions]. I’m bringing this up because their decision not to comment on any of those questions was actually pretty interesting. . . . I intentionally put a lot of yes/no questions on that list. If the underlying thinking behind any of those questions was faulty, it would have been easy enough for them to say so and to educate us as to the truth. Instead, here is the response that we got:

    “Your questions are couched in such a way that presupposes the conclusions and suggests the people you spoke with have an agenda or do not fully understand the issues.”

    You have to have swallowed half a lifetime of carefully-worded p.r. statements to see the message written between the lines here. That this is a non-denial denial is obvious, but what’s more notable here is that they didn’t stop with just a flat “no comment,” which they easily could have done. No, they had to go a little further than that and — and this is pure Goldman, just outstanding stuff — make it clear that both I and my sources are simply not as smart as they are and don’t understand what we’re talking about. So the rough translation here is, “No comment, but if you were as smart as us, you wouldn’t be asking these questions.”  .

    Ouch.

    [Jul 2, 2009] Point counter point AIG, Goldman and the NYT

    "Now, of course, we have AIG’s counterparty list. And guess who tops it?"

    Mar 16, 2009 | FT Alphaville

    Now, of course, we have AIG’s counterparty list. And guess who tops it?

    Goldman Sachs.

    Goldman is the proud recipient of $12.9bn in payments from AIG and AIGFP. (Specifically, $2.5bn from CDS collateral postings, $5.6bn from Maiden Lane III payments for CDS positions, and $4.8bn in payments related to securities lending. The Maiden Lane III portfolio was, of course, created in December specifically help reduce the burden of CDS collateral postings facing AIGFP proper - it bought the underlying CDO tranches from the CDS counterparties)

    For the record then, it certainly was not the NYT that was “seriously misleading”.

    We wonder whether things might yet get uncomfortable for Goldman. After all, they’re in rather an awkward position: on the one hand, according to their above PR line, they didn’t need AIG’s money at all (it was, to paraphrase, immaterial whether AIG went under or not). And yet, on the other hand Goldman is - gosh - the largest recipient, via AIG, of taxpayers’ money.

    1. elh nyc Mar 18 02:50 Finally. Such a great post. I guess it is finally getting out into the wider media world. Even the WSJ has picked it up : ) Unfortunately, "evil financial people getting big bonuses" is just so much hotter than "Ambac novates contracts at 40; Government pays face." That protection Goldman so had so sagely bought: what exactly did they think it was going to be worth? We had a couple of examples last year of financial institions failing and I think Lehman ended up being about 10c and the Icelandics about 1-2c. So they needed to be pretty sure about their counterparties. There's a little hubris going on.
    2. -- Report User3636985 Mar 17 19:06 And is it such a coincidence that the US Treasury was headed by ex-Goldman CEO Henry Paulson? Or that a number of ex-Goldman executives continue to work at Treasury? Is it fair to say the Mr. Paulson was also seriously misleading in his ideas to bail out firms instead of taking them over outright, letting management go, and selling the firms' assets back to the private sector?
    3. -- Report Benjamin Epstein Mar 17 13:21 Finally somebody is bringing this matter to the open. If GS's hedges against AIG losses were "immaterial" to GS, then GS should return to the US taxpayer immediately the $12B in counter-party payments that they received from the AIG bail-out. It is pathetic that there has not been a word from Washington on this matter. Likewise the media is barely covering this important story that well demonstrates how the US taxpayer has been manipulated into saving the GS aristocracy.
    4. -- Report uchisaiwaiso Mar 17 08:51 I'm with you Singapore Don. I still find it staggering that nobody went harder after GS. The dramatic switch to a financial holding company (FHC) was utter bunkum, but everybody accepted it would miraculously put the company on a rock solid footing (it does nothing of the sort). It was pure media manipulation, in fact. (Same goes for MS). They definitely benefit from a halo effect, even though they were up to their necks in principal investing and classic high leverage HF activities.
    5. Laker Mar 17 00:01 Outstanding work. At this point, I'd be shocked if Paulson and his GS cronies didn't save AIG for the sole purpose of saving GS. As an American taxpayer, I can't tell you how excited I am about the opportunity to pay this off.
    6. Irish Hedge fund guy Mar 16 22:42 excuse me joachim, as someone around in the russia 98 crisis, if I am owed 10bn from AIG & they do not pay.. I am out the cash. Perhaps If I have securitized collateral or some such opaque GS b&*^sh(t but I think it is very self evident how AIG had to be saved to save GS. At least if they were anyway humble
    7. -- Report joachim Mar 16 18:19 sounds like GS were insuring some of their other credit risks with AIG and clearly that insurance would have been ineffective without the bailout. Additionally GS would have had trades with AIG as a counterparty but where GS would have held collateral which may or may not have retained its value. Finally GS may have had insurance against the AIG credit exposure. It does not follow that the GS exposure to AIG was the whole of the $12.9bn as this attributes no value to collateral and hedges. But the payments to GS and others confirm that AIG was a huge counterparty and that was why it had to be rescued. No surprise here.
    8. shadow Mar 16 16:05 Definition of a hedge fund,be long -be short,but never hedged-thats called arbitrage.Please name a hedge fund that hedges itself-that went out the window when they discovered 50:1 leverage by placing bets in one direction!Much more profitable.All student S of the markets understand that Wall Street is a Ponzi scheme,and the biggest players are JPM,GS and AIG.And when everyone is insolvent,whats the value of a hedge?The only hedge fund out there is you and me-but we're called taxpayers!

    [Jul 2, 2009] US private sector shed 473,000 jobs in June, ADP says

    Broad employment is highly correlated to the production cycle...only one third of it is manufacturing jobs. If and when recovery materializes production jobs gains are going to be minimal and you can still lose service sector jobs...
    Posted by Stacy-Marie Ishmael on Jul 01 13:58. Comment.

    US companies cut more jobs than forecast in June, according to data released by ADP Employer Services on Wednesday.

    The ADP jobs report showed a drop of 473,000 private sector jobs on a seasonally adjusted basis from May to June

    [Jul 2, 2009] Unemployment Forecast: Too Much "Hope"

    7/01/2009 | CalculatedRisk

    From David Leonhardt at the NY Times: A Forecast With Hope Built In

    In the weeks just before President Obama took office, his economic advisers made a mistake. They got a little carried away with hope.

    ... Without the stimulus, they saw the unemployment rate — then 7.2 percent — rising above 8 percent in 2009 and peaking at 9 percent next year. With the stimulus, the advisers said, unemployment would probably peak at 8 percent late this year.

    We now know that this forecast was terribly optimistic.

    Here is the January forecast with the actual data ...

     Click on graph for larger image in new window.

    This graph compares the actual quarterly unemployment rate (in red) with the Obama economic forecast from January 10th: The Job Impact of the American Recovery and Reinvestment Plan
     

    There are two possible explanations that the administration was so wrong. ... The first explanation is that the economy has deteriorated because the stimulus package failed. ... The second answer is that the economy has deteriorated in spite of the stimulus.
    Very little of the stimulus has been spent so far, so it is premature to say it failed. However Romer recently was quoted in the Financial Times:
    Ms Romer said stimulus spending was “going to ramp up strongly through the summer and the fall”.

    “We always knew we were not going to get all that much fiscal impact during the first five to six months. The big impact starts to hit from about now onwards,” she said.

    Ms Romer said that stimulus money was being disbursed at almost exactly the rate forecast by the Office of Management and Budget. “It should make a material contribution to growth in the third quarter.”

    So we should see an impact in the 2nd half of 2009 ... and that starts now!

    Selected Comments

    Tim waiting for 2012 (homepage, profile) wrote on Tue, 6/30/2009 - 9:33 pm

    Hope should be optional not standard in Econ Forecasts

    14% UE here we come. 9% I hardly knew thee...

    mock turtle (profile) wrote on Tue, 6/30/2009 - 9:48 pm

    i saw what might be part of the "stimulus" expenditures (not to be confused with tarp and the many fed windows) as i recently drove cross country

    massive road work coast to cost and huge number of wind turbines being assembled in iowa, wyoming and washington state

    i guess that the planned infrastructure improvements will not be enough to stem the financial blood letting

    something more and something different is obviously needed

    couldnt we have public trials and executions of the most notorious bankstas...think of the ticket sales receipts and the sales tax collections!

    kurtyboy (profile) wrote on Tue, 6/30/2009 - 10:02 pm

    Why does DAVID LEONHARDT hate America?

    Kidding, of course.

    But why is anyone wondering about the efficacity of a stimpack that heavily (historically big) favors tax cuts instead of direct stimulus? Whether you are a Keynesian or not, the numbers always tilt in favor of DS over TC when it comes to calculating the multiplier effect of government stimulus. So--why be surprised that the package's impacts are late to the party?

    And for that matter. why be surprised that the effects are not as great as hoped? In this case, the ARRA tried to bridge the philisophical divide of government responsibility with a package that had a "post-partisan" flavor, and will end up only pleasing those with short-term view of this nation's potential for production.

    This is Bush's "soft prejudice of low expectations" applied differently and writ large.

    I hope Ms. Romer takes the time to contemplate how much of her own soul is now mortgaged, without any hope of a loan modification.

    YLSP (profile) wrote on Wed, 7/1/2009 - 1:00 am

    Percentage of outlays spent by stimulus (parenthesis is total obligations, ie how much money given to each dept)

    I excluded depts less than $1B. Figured that was noise (but there were some like DoD who was at 1% spent of $0.95B).

    Dept Education 17% ($45B)
    HHS 72% ($30B)
    Dept Labor 33% ($20.5B)
    DoT 1.9% ($19B)
    SSA 99% ($13B)
    HUD 13.6% ($5.1B)
    EPA 0.3% ($4.4B)
    USDA 66%($3.23B)
    DoJ 21% ($1.73B)

    Granted this seems really small amount for promised $600B (I think $200B of the $800B is actually tax benefits)... but to me it doesn't seem like the idea that most of these funds are going to roll into the economy will help; in fact we've got $13B from Social Security into the economy as well as a lot from HHS... these are actually scary numbers for expenditures... of course I don't know if the Feds outlay it to the states who then account for it and are not actually "spending" it as much as it appears.

    Lucifer (profile) wrote on Wed, 7/1/2009 - 1:47 am

    Corporate Bonds Show Lehman Doesn’t Matter With 9.2% Return
    http://www.bloomberg.com/apps/news?pid=20601087&sid=aLjElB1YB3Pg

    By Bryan Keogh and Cristina Alesci

    July 1 (Bloomberg) -- Nowhere is the recovery in financial markets more evident than in corporate bonds, where Lehman Brothers Holdings Inc.’s bankruptcy is becoming a distant memory.

    U.S. investment-grade company debt returned 9.2 percent in the first half of the year, outperforming Treasuries by 13.7 percentage points, the most on record, according to Merrill Lynch & Co. index data. Corporate bonds also did better than the Standard & Poor’s 500 Index of stocks, marking the first time since 2002 that the fixed-income securities outshined both Treasuries and equities.

    [Jul 1, 2009] Case-Shiller- House Prices Fall in April

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