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Financial Skeptic Bulletin, October 2009

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There are no markets anymore, just interventions

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[Oct 28, 2009] Grantham’s Latest Bon Mots - By Paul Vigna

Oct 27, 2009 | MarketBeat - WSJ

Jeremy Grantham is in a mood. The chief investment strategist at GMO blasts the continued employment of people like Bernanke and Geithner (”like reappointing the Titanic’s captain for facilitating an orderly disembarkation,”) the home-buyer credit (”blatant vote-buying by Congress,”) overpaid executives (”unjust desserts”) and the “well-managed” auto industry. But he’s not surprised by the market rally. “The lessons, if any, are that low rates and generous liquidity are, if anything, a little more powerful than we thought.”

And even amid a “profound” failure of the financial system, and weak public leadership that missed problems like the housing bubble it should have seen, the biggest problem, GMO’s Jeremy Grantham says, is that the banking system has simply gotten too large.

“The only long-term hope of avoiding major recurrent crises is to make our financial system simpler, the units small enough that they can be allowed to fail, and, above all, to remove the intrinsically conflicted and dangerously risk-seeking hedge-fund heart from the banking system. The rest is window dressing and wishful thinking.”

[Oct 21, 2009] John Mauldin Tax Hikes Will Kill the 'Recovery’ Which Isn’t Real Anyway

Yahoo! Finance

The economic recovery currently underway is a statistical mirage, based on easy year-over-year comparisons and inventory rebuilding, John Mauldin, president of Millennium Wave Securities, tells Henry in the accompanying video.

The unemployment rate is closer to 12% when you include people who've been dropped from the survey and the "underemployment" rate - people working part-time vs. full time - is 17% to 18%, "and rising," Mauldin says. "That doesn't feel like recovery."

... ... ...

As for the long-term, Mauldin worries America could repeat Japan's experience of a lost decade (or two), if not the Great Depression itself, citing the risk of policy errors such as trying to solve a debt crisis by issuing more debt.

thomasromancer

There is nothing real about this recovery. It is totally built upon government influx of funds into the markets. Not to mention Uncle Sam is borrowing money from other countries to make us feel like all is well. That practice is going to end soon enough.

[Oct 21, 2009] The US Needs to Get Less Competitive

Jesse's Café Américain

"The whole aim of practical politics is to keep the populace alarmed, and hence clamorous to be led to safety, by menacing it with an endless series of hobgoblins, all of them imaginary." H. L. Mencken

The hobgoblin that is often used by the Wall Street banks is that if this or that reform is introduced, it will lessen their competitiveness, and their craftiest and most clever employees will leave the country to work for foreign banks.

Is that supposed to be a threat? That sounds like a plan. And let them deduct the price of a one way coach class ticket.

It should be painfully obvious by now, that despite his recent crocodile tears and phony fist waving, that Larry Summers and crew Obama are being bossed around by the banks, for whatever reasons that charity might prevent one from saying.

It is time for a real change, in most cases bringing back what was taken apart over the past twenty years.

If you are a bank, and you take deposits and obtain access to the Fed window and FDIC, you should do nothing other than traditional commercial on balance sheet banking. Period.

If you are an investment bank, you are a no better than a hedge fund. There should be strict limits on the quality and levels of the capital which you employ. And your partners should be exposed to the full extent of your losses. Yes, the full extent.

In the markets there needs to be position limits. If you exceed the position you get fined and surrender 100 percent of any gains. If you do it again your trader gets his license suspended. A third time and your trading license is revoked until you can prove you have gotten your internal controls together.

As for naked short selling. Forget about it. If you fail to deliver within 24 hours you are forced to cover on a market order, like a margin call.

If you receive an exemption for legitimate commercial hedging, your position is published with your name on it on a weekly basis. After all, your hedging decisions are based on information which should be disclosed, sooner rather than later.

The timely disclosure of pricing and volume information in any market is public information and should be disseminated to all parties at the same time, without predatory pricing that inhibits access by the average investor. Or better yet, just make the information feed free, and take the costs as a part of doing business as a licensed exchange.

There are criminal penalties on the books for white collar crimes. When corporations engage in fraud, those penalties should apply to the perpetrators within the firm. The current regime of wrist slap fines from the SEC to be absorbed by shareholders makes the risk-reward ratio an incentive for breaking the law. There needs to be a section of the FBI that deals only and specifically with white collar crime, not as a task force, but as part of its organizational structure.

Corporations, including non-profits, foundations and trusts, are not people, and they do not vote. Only voters should be able to contribute to political campaigns. If this creates a financial problem for politicians who rely on millions of dollar to fund elaborate media and public persuasion campaigns, well then, too bad. There is always the option to pursue public campaign funding. They might actually have to say things and stand on a genuine record actually reported by a legitimate news media.

Time to break up the media conglomerates. Period. The news organizations cannot be controlled by a few corporations. There were limitations on news outlet ownership for many years which were repealed. Bring them back. Diversity of ownership brings checks and balances.

And the financial activity of lobbyists should be limited, recorded, and disclosed on a monthly basis, and in detail. You or any member of your staff go to lunch with a lobbyist, the amount which you accept is reported along with the subject matter discussed. You are a registered lobbyist, and all your lobbying related phone calles and text messages become a matter of public record. The public deseves to hear your case as well as their representatives.

The revolving door between lawmakers, regulators, and the businesses with they oversee must be slammed shut for a period of no less than five years. Time to bone up on a trade besides influence peddling, congressman.

Would this prohibit the best minds from serving the public? Are you kidding me? Look at the government in Washington now. If those are the 'best minds' then the US is in real trouble.

If the US wants to get back on its feet, it is going to have to get serious about restoring its liberty and an even playing field for all its people.

This would be a start. Next up, tax code reform. You want a flat tax? I'll give you a flat tax....

[Oct 20, 2009] einhorn-vic-2009-speech

I believe there is a real possibility that the collapse of any of the major currencies could have a similar domino effect on re-assessing the credit risk of the other fiat currencies run by countries with structural deficits and large, unfunded commitments to aging populations.

I believe that the conventional view that government bonds should be "risk free" and tied to nominal GDP is at risk of changing. Periodically, high quality corporate bonds have traded at lower yields than sovereign debt. That could happen again.

And, of course, these structural risks are exacerbated by the continued presence of credit rating agencies that inspire false confidence with potentially catastrophic results by over-rating the sovereign debt of the largest countries.

Now, the question for us as investors is how to manage some of these possible risks. Four years ago I spoke at this conference and said that I favored my Grandma Cookie’s investment style of investing in stocks like Nike, IBM, McDonalds and Walgreens over my Grandpa Ben’s style of buying gold bullion and gold stocks. He feared the economic ruin of our country through a paper money and deficit driven hyper inflation. I explained how Grandma Cookie had been right for the last thirty years and would probably be right for the next thirty as well. I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long-term value as difficult to assess.

However, the recent crisis has changed my view. The question can be flipped: how does one know what the dollar is worth given that dollars can be created out of thin air or dropped from helicopters? Just because something hasn’t happened, doesn’t mean it won’t. Yes, we should continue to buy stocks in great companies, but there is room for Grandpa Ben’s view as well.

[Oct 20, 2009] Einhorn on gold, sovereign risk, and more Blogs  by Rolfe Winkler

Two years ago, when he spoke at the Value Investing Congress, David Einhorn said Lehman was in deep trouble. Turned out it was a good call. Today he gave another keynote at the conference in which he argued the policies of the administration have put us on a very dangerous path, one which has encouraged him to buy physical gold as insurance against sovereign default(s).

Here’s a pdf of the speech. A few highlights below.

On Bernanke and Geithner:

Presently, Ben Bernanke and Tim Geithner have become the quintessential short-term decision makers. They explicitly “do whatever it takes” to “solve one problem at a time” and deal with the unintended consequences later. It is too soon for history to evaluate their work, because there hasn’t been time for the unintended consequences of the “do whatever it takes” decision-making to materialize.

On too big to fail and the true lesson of Lehman:

The proper way to deal with too-big-to-fail, or too inter-connected to fail, is to make sure that  no institution is too big or inter-connected to fail. The test ought to be that no institution should ever be of individual importance such that if we were faced with its demise the government would be forced to intervene. The real solution is to break up anything that fails that test.

The lesson of Lehman should not be that the government should have prevented its failure. The lesson of Lehman should be that Lehman should not have existed at a scale that allowed it to jeopardize the financial system. And the same logic applies to AIG, Fannie, Freddie, Bear Stearns, Citigroup and a couple dozen others.

The administration talks tough about TBTF, but has made very clear they aren’t willing to make policy choices to do anything to proactively break them up. It was very telling when, in a keynote at the Economist’s Buttonwood Gathering, Larry Summers said too-big-to-fail means too-big-not-to-be-regulated. The correct thing to have said, the correct policy that needs to be worked out so that we avoid a re-run of last year’s crisis is “too big to fail is too big to exist.” But don’t take my word for it, take Alan Greenspan’s.

On CDS (bold mine):

I think that trying to make safer CDS is like trying to make safer asbestos. How many real businesses have to fail before policy makers decide to simply ban them?

On arguments that the lesson of 1937-8 is not to withdraw stimulus too soon:

An alternative lesson from the double dip the economy took in 1938 is that the GDP created by massive fiscal stimulus is artificial. So whenever it is eventually removed, there will be significant economic fall out. Our choice may be either to maintain large annual deficits until our creditors refuse to finance them or tolerate another leg down in our economy by accepting some measure of fiscal discipline.

Channeling Stephen “There-is-no-exit” Roach:

As we sit here today, the Federal Reserve is propping up the bond market, buying long-dated assets with printed money. It cannot turn around and sell what it has just bought.

There is a basic rule of liquidity. It isn’t the same for everyone. If you own 10,000 shares of Greenlight Re, you have a liquid investment. However, if I own 5 million shares it is not liquid to me, because of both the size of the position and the signal my selling would send to the market. For this reason, the Fed cannot sell its Treasuries or Agencies without destroying the market. This means that it will be challenged to shrink the monetary base if inflation actually turns up….

….The Fed could reach the point where it perceives doing whatever it takes requires it to become the buyer of Treasuries of first and last resort.

On his gold thesis:

I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked….

….When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the “stimulus” black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The Euro, the Yen, and the British Pound might be worse. So, I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield.

He’s also buying long-dated options on interest rates using derivatives:

Along these same lines, we have bought long-dated options on much higher U.S. and Japanese interest rates. The options in Japan are particularly cheap because the historical volatility is so low. I prefer options to simply shorting government bonds, because there remains a possibility of a further government bond rally in response to the economy rolling over again. With options, I can clearly limit how much I am willing to lose, while creating a lot of leverage to a possible rate spiral.

There’s much more in the speech.

[Oct 1, 2009] Guest Post- “Martin Wolf, the FT’s rebel with a cause, and the future of finance

naked capitalism

A few notable quotes from Wolf:

Cycles of confidence and panic are inevitable in our world of debt, be that debt public or private, domestic or foreign. Credit is extended freely and then withdrawn brutally.

Financial systems are accidents waiting to happen.

The final lesson is that financial liberalisation and financial crises go together like a horse and carriage. It is no surprise, therefore, that the last 30 years have seen waves of financial crises, of which the latest one is merely the biggest.

October

[Oct 31, 2009] VDARE.com 06-12-07 - The Truth Comes Out About Offshoring

June 12, 2007

The Truth Comes Out About Offshoring

By Paul Craig Roberts

On January 6, 2004, Senator Charles Schumer (D, NY) and I scandalized the economics profession and Washington policymakers with our New York Times article, Second Thoughts on Free Trade. We noted that the two conditions on which the case for free trade rests no longer exist in the present-day world and that there was no basis for the assumption that offshoring of US jobs was beneficial overall to Americans.

...Since 2004 I have written a number of articles pointing out that offshoring is really labor arbitrage and that if offshoring had the mutual economic benefits associated with free trade, there would be US employment growth in export and import-competitive industries. Instead, employment in these industries has declined in the US but grown remarkably in Asia. In the 21st century the US economy has been able to create net new jobs only in nontradable domestic services, such as waitresses and bartenders and health and social services. Moreover, the growth in productivity and GDP attributed to the US economy were inconsistent with the stagnant real incomes of Americans. Somehow productivity and GDP were growing strongly, but it wasn’t showing up in the incomes of Americans.

Economists have found it difficult to think about the issues that I have raised.  Economists are taught that free trade is a good thing and that anyone who disputes it is a protectionist in the pay of some industry scheming to raise prices that consumers have to pay. The notion that there could be any problem with free trade is beyond the imagination of most economists.

In addition to their unexamined commitment to free trade, economists disbelieved my analysis because they thought it was inconsistent with statistics indicating high US productivity and GDP growth.  They thought GDP and productivity statistics trumped my use of job data.

All of this may be about to change.  Susan N. Houseman, a good but previously obscure economist with the Upjohn Institute, has discovered a problem in the statistical data that produces phantom US GDP.  Phantom GDP results when cost reductions achieved by US firms shifting production offshore are miscounted as US GDP growth.  Phantom productivity increases occur when gains from moving design, research and development offshore are counted as increases in US productivity.  Obviously, production and productivity that take place abroad are not part of our domestic economy.

Business Week’s June 18 cover story by Michael Mandel [The Real Cost Of Offshoring] explains the problem identified by Houseman.  Economist Matthew J. Slaughter, a proponent of offshoring, says: “There are potentially big implications.  I worry about how pervasive this is.”  Business Week says the implications are big.  The cover story estimates that 40% of the gain in US manufacturing output since 2003 is phantom GDP. 

Most likely that estimate is low.  Consider, for example, that furniture imports have doubled in the past few years (offshored production counts as imports) while US jobs in furniture manufacture have declined 21%. US statistics, however, show that US output and productivity rose even as US manufacturers closed their plants and no new investment went into the industry.

My hat is off to Business Week.  It requires courage for a publication dependent on advertising from global corporations to tell the truth about offshoring.

[Oct 31, 2009] Are things really getting better - GDP Strong return to growth (1) - CNNMoney.com

Where we're headed: The economy returned to positive growth in the last three months after contracting by 3.7% since the recession began. But experts warn that government stimulus programs like Cash for Clunkers contributed strongly to the economic expansion and that the economic recovery is more fragile than the GDP numbers may suggest.

Cathrine Cabiness Tuck:

The GDP and the stock market are obsolete measurements of economic health, especially in the aftermath of the recent global financial crisis. In and of themselves, they only measure how much money large companies are making and how much money households and business sectors are spending. They lend no context as economic indicators, especially when measured against cost of living, standard of living, consumer and national debt and job growth. What good is a rising GDP and a rallying stock market when companies don't use the extra money to create jobs? This is a fundamental flaw in market-driven macroeconomics -- a failure to account for microeconomics.

Harry Tucker:

The current consumption-centric model is totally unsustainable. It we accept that we must consume more this year than last and our individual buying power may not be rising as fast as the amount of increase in consumption, it doesn't take much to work out the math.

I know economists can find ways to twist the math to show that such a model works. However, if such a model worked, we would be spending cash for these goods instead of an ever-increasing amount of credit.

Unfortunately, the government leads the way with spending now and deferring payment until later. While it could be argued that that is the role of government, as leadership goes, so goes the masses.

It is difficult to tell the tax payer to stop spending when the government does the same.

There is also the moral dilemma of want versus need. It is very difficult to feel badly for people who lost their megahome, Esplanade, etc. when many people struggle with knowing the origin of the next meal.

Jeff Puder:

Arron, the DOW is one of the most distorted lens to look at this crisis through. The DOW hit its damn high when behind the scenes the Fed was scrambling to "save the country from the abyss".

When companies slash jobs throwing families on the street, the DOW rallies because the cuts provide all that investors are concerned about: bottomline profits.

You don't think losing 2.25 million jobs a month is going to eventually have an affect on those profits???

Jim Reagan:

I'm not too excited about this either way. The economy has been artificially stimulated. That's what the stimulus was supposed to do. The question is whether it's sustainable. IF it is, then jobs will start to return, but not until 3 or 4 quarters of positive growth, I suspect. If it's not sustainable, and personally I don't think it is as things stand, then within the next two quarters we'll see a contraction again. The gov't can manipulate numbers only so long.

I give Obama credit for stopping or at least slowing the collapse that would have happened if the Republicans had been left in charge. I also believe he needs to change focus now from triage of business failures to focus instead on curing the ill of unemployment. Franklin Roosevelt believed that employment was a basic human right, as long as people were willing to work. I don't think that would be a bad philosophy for Obama, until it is no longer needed.

Facebook User:

The third-quarter increase largely reflected motor vehicle purchases under the Consumer Assistance to Recycle and Save Act of 2009 (popularly called, “Cash for Clunkers” Program).
Current-dollar personal income decreased $15.5 billion (0.5 percent) in the third quarter.
Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter.

The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency. The "second" estimate for the third quarter, based on more complete data, will be released on November 24, 2009.

Jeff Puder:

Rajinder, you hit the nail on the head with your illustration: the debt must be cleared.

The problem is that Obama didn't do that. To complete your illustration, essentially the Fed took out a half dozen credit cards to pay off the one credit card. Yes, you can carry on with life-as-usual for some time as you rack up more debt. But you know how that game ends.

Instead of acknowledging the truth by declaring the banks insolvent, nationalizing them, canceling this toxic debt that will NEVER get paid back and then letting asset prices to fall to values that reflect reality, the Fed instead is going to rape the public to paper over these toxic losses and keep the distorted prices of the bubble era inflated at values not reflecting economic reality.

Rajinder Goyal:

I read through some of the reactions below. While it is understandable that most people are skeptical about these numbers, it must not be forgotten that only nine months ago when President Obama took office, stock markets were tumbling by as much as 500 points a day. While the situation today may not be ideal, its afar cry from how things looked like only a few months ago. 3.5% growth in economy is asolid number that shows that things are on the bend and that there is light at the end of the tunnel. Hope sustains life.

A parallel example should convince the skeptics. If you have a debt of, say, ten thousand dollars, you have to clear the debit before you can show some positive numbers in the savings column. President Obama inherited a very precarious situation, and is, along with his team, the best anyone can. It takes a lot of time to put bcak a building that has been demolished.

Sonny Clark:

While Mr. Obama and his "partners in crime" cater to the fat cats of Wall Street, poverty is on the increase, the unemployment lines are getting longer, homelessness is on the rise, our debt rises, and John Q. Public is all but forgotten. The present administration is nothing more than a continuation of the Washington Brotherhood that has sold this country out for over a half century now.

As long as the American voter re-elects professional politicians to serve in government, we can expect more of the same. Policy and legislation is bought and paid for by the influential, wealthy, corporate America, and the fat cats of Wall Street. Lobbyists own Congress. Wake up and smell the coffee America !!!!!

The term "Global Economy" means "Equalization To The Lowest Level". We're fast approaching third world status. We're borrowing $Billions each day just to keep government running and to fund the "Never Ending" wars in the Middle East. Our currency is all but worthless, the stock market is way over valued, personal and corporate debt is at a shameful level, and tax revenue is decreasing rapidly. "Economic Stimulus" by our government is nothing more than "Debt Paying Debt".

The solution : "Put Americans back to work producing what Americans use and consume". "Stop re-electing professional politicians to run this country". "Wake up America and smell the coffee".

[Oct 31, 2009] US returns to growth with 3.5% rise in Q3 GDP

Tracy Alloway:

Some bad points picked up in here, from Monument Securities' Stephen Lewis:

"The advance report on US GDP for 2009Q3 showed slightly stronger than expected growth. However, the pattern of growth in major components of GDP was less favourable than we had projected.

  1. Private consumption was in line with the forecast and, as expected, depended disproportionately on 22.3% annualized growth in spending on durables. This reflected the 'cash-for-clunkers' effect, which will be reversed in the current quarter.
  2. Government purchases were surprisingly strong. Instead of falling back from what had looked an erratic 14.0% annualized rise in Q2, defense spending increased further, at an 8.4% rate.
  3. Business investment was very disappointing. Though spending on IT was firm, it fell short of what shipments data had indicated, and was offset by a continuing decline in spending on structures. A larger than usual proportion of IT shipments may well be going to exports rather the home market.
  4. Housing investment rebounded more strongly than expected. However, it remained below the 2009Q1 level. This hardly qualifies yet as a V-shaped recovery in the housing sector.
  5. Net exports were estimated as worse than expected. Import volumes grew slightly more rapidly than export volumes as US domestic demand picked up before demand recovered in many of the USA's trading partners.
  6. Inventories fell sharply but not as sharply as in Q2. This remains the component of demand where future revisions are most likely, seeing that the statisticians had only two months' data on which to base their estimate.
  7. The implications for Q4 are worrying. Private consumption will struggle to grow at all in this quarter, defense spending can hardly be expected to maintain its recent rate of expansion, the recovery in business spending looks sluggish at best, the Q3 housing surge looks like a statistical blip and the trend in net exports appears to have turned negative. If the positive 'change in inventories' contribution for Q3 were confirmed, there would be less scope than previously expected for this component to boost GDP in Q4. Overall, US real GDP will do well to score 2.0% growth in the current quarter."

Brick:

Technical note says that only 2 months of data was used for exports and imports of goods where as goldman used the latest shipping figures. There is quite a lot of bad news in the figures as well.

Vermont Trader:

GDP deflator was 0.8% vs. consensus of 1.4%....

thus 60bp of the "beat" was due to lower than expected price increases..

so the actual number missed analysts expectations for growth and inflation...

[Oct 31, 2009] Is the Recession Over (Extended Transition Phase)  By Barry Ritholtz

October 29th, 2009 | The Big Picture

Today, we are going to get what is likely a positive GDP. There are a number of factors that are contributing to the improving data point, not the least of which are the inventory liquidation, and the faster fall of imports than domestic consumption.

We’ll dissect the numbers later this morn, but a positive GDP raises the following question: Is the Recession actually over?

We know that the Great Recession is over — the panic and expectation that the economic world was coming to an end probably ended sometime in March or April.

But is the “regular recession” over?

We begin looking at the NBER definition:

“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.” (emphasis added)

That definition raises an interesting question. If we look at the 5 factors NBER considers — GDP, real income, employment, industrial production, and wholesale-retail sales — its somewhat ambiguous to say unequivocally that the recession is over. We are still losing an inordinate number of jobs (250k+ / mo), industrial production has improved, but is soft, retail sales have been mostly flat, and real income has been negative for a decade.

Perhaps the bimodal definition the NBER uses is outdated: Read literally, their definition suggests that there are only two options, either the economy is expanding or contracting.

It might be worthwhile to consider a third possibility: None of the above. The economy might have reached a state of stasis — a balance where it neither expands nor contracts.

I believe that the NBER was too quick to declare the 2001 recession over. The job loss and lack real income improvement was offset by the economic activity that the ultralow rates caused — in terms of credit driven activity in Retail, Housing, and on Wall Street.

I assume that the NBER believes that normally, the transitional phase of the economy from recession to expansion is quick enough that it needs no specific name or even any definitional recognition.

That might not work so well this time.

Given the current 33.1 hour work week, we might not see a real improvement in employment for years, as firms simply ramp up worker hours towards a fuller 40 hour work week, as opposed to hiring.

Perhaps when the NBER releases their next Memo from the Business Cycle Dating Committee they might consider refining their definition (or at least acknowledging) the current, and somewhat unusual historic anomaly of an Extended Transition Phase.

GDP out at 8:30 am
 

[Oct 30, 2009] What Is Money Part 10 When Money Dies

A little bit too symplistic.  I like the line "If money dies, a lot more than money will die. This includes Bernanke's pension. He knows this. "

GoldSeek.com

Bottom line: "When money dies, so do people." Hyperinflation in a modern urban nation would kill people. I think it would kill a lot of people.

Why? Because we rely on the social division of labor to feed ourselves, heat our homes, and supply everything else that we buy or sell. This requires a highly complex price system. At the heart of this system is money. It would not exist without money.

The free market coordinates the buying selling of billions of products and services. Products are tracked by an identifier called a stock keeping unit, or SKU. In the region around New York City, there are something in the range of ten billion SKUs, according to economist Eric Beinhocker (The Origin of Wealth, 2007, p. 9). This does not count services. The service sector is more than twice the size of the goods sector in the United States.
 

[Oct 30, 2009] Cascading theft … compounding misery

War, the banking system, government and conspicuous consumption conspire to steal away Americans' future.

[Oct 30, 2009] Paul Tudor Jones Says Now Is Time, Place for Gold as an Asset

[Oct 30, 2009] Sudden Debt Bills And Swaps Indicate Great Optimism

yoski:

"Investors and speculators are now so convinced that the economy will rebound strongly in the very near future, and therefore rates will rise, that they want to stay as short as possible duration-wise in their bond portfolios."

Well, that's certainly one interpretation.

Another one would be that no one wants to be holding the bag on long treasuries @ 4%.

Lots of money flooding into commodities these days (gold, oil, etc.) 'cos confidence in ANY paper money is low. it is rather challenging to preserve wealth when there's no secure store of wealth.

[Oct 30, 2009] Lies And Headli(n)es

Today's release of durable goods orders numbers for September was greeted by the following headline over at Bloomberg: US Durable Goods Orders Rise Fourth Time in Six Months in Recovery Sign.

OK, so what are the numbers? Orders increased by a seasonally adjusted 1% from August - not exactly a bonanza, but OK in these hard times - one would think. Not so fast..

Looking at the two positive categories: machinery orders year-to-date are down a steep 29% vs. 2008, even after last month's rise. So, it's not surprising to see a blip up; things like machine tools do wear out. As for defense aircraft... two wars says it all.

After all that is considered, I think the headline is a bit misleading, won't you say?

[Oct 29, 2009] Sprott Surreality Check Part Two Dead Government Walking zero hedge

by Anonymous
on Tue, 10/27/2009 - 13:46
#111977

What I do not understand is this maniacal insistence on the part of financial people, and generally speaking the "right wing" and "libertarian" crowd, to shut down social security. How about, the US government stops stealing social security money to bail out criminal bankers and prosecute crazy wars. The program is running into some trouble because of the recession, but it still mostly finances itself. One can fix it further by means testing and delay of full retirement age if needed.

As far as Medicare is concerned, how about we begin by banning marketing and advertising of prescription drugs, followed by lowering of drug prices by 30%, which is roughly the percentage of revenue that "big pharma" spends on advertising. You might also open medicare up to younger people. It is now a dump of sorts for old folks, who are the primary users of health care. For profit insurance companies get the more profitable younger crowd, while the taxpayer gets the essentially uninsurable end-of-life crowd.

Financiers need to get this through their (apparently) thick skulls. This crisis is a consequence of 30 years long, three pronged attack on labor. Three prongs were: union busting, cheap labor via globalization, and industrial automation without replacement industries. The first two were deliberate attacks, the third is a natural phenomenon of sorts. It was all executed by an alliance of business and government. This attack caused severe loss of income to labor, which was temporarily replaced by a private debt pyramid scheme, called financial deregulation. The deregulation gave private interests legal means to print counterfeit money in a form of credit. The steadily increasing injection of credit caused galloping inflation in selected segments of the economy, which was sold to the gullible public as wealth building. This galloping inflation cause a broad insolvency crisis for consumers, which boomeranged back to hit the counterfeiters themselves.

The way out is to:

  1. Radically downsize financial industry, possibly health insurance industry. These are mostly parasitic rent seekers as of this writing. We are talking forcing bankrupts to disappear.
  2. Flatten income distribution by hook or by crook. One can have many ideas here, it would be best to do it through market forces as much as possible
  3. Start scaling down the wars and military buildups quickly, before these armies start crashing down for economic reasons,
  4. Start redeveloping domestic industries, particularly energy industries, can't continue to import 70% of oil consumption with junk money.

The way out is NOT (NOT,NOT,NOT): to further undermine what is left of safety net for labor. This is crazy talk.

my 3 cents anyway.

by Mark Beck on Tue, 10/27/2009 - 17:14 #112276

The financial types, do not want to shut down SS, many have already contributed. They just acknowledge the fact that in 2010 we will reach parity in SS, every cent taken in will be sent out, pay as you go. Because of the aging population, there after (FY2011) we will need to draw on IOUs which are increasingly worthless.

Let me explain the best way I know how.

When you tax payroll on labor, it has real value, real worth. If you take this tax, this money, and exchange it with an IOU, or debt instrument, there is no guarantee it will maintain value. If for example you purchased gold with the tax money, something separate from your currency, that maintains relative worth, it is an asset and not a debt.

You cannot take true value, tax money on labor (asset), exchange it for debt (Treasury Bond, IOU), then spend the money through the general fund (financing government), and magically maintain the asset. You see, these kinds of money games only occur at the sovereign nation level where normal GAAP accounting rules are violated. Trying to say this is workable in a country with a fiat currency, controlled by a central private bank (FED), with massive amounts of debt is laughable. Most financial people understand this. We are not against retirees getting benefits, but we are obligated to advise our clients on expected future income streams.

reply by Anonymous

Social Security was designed as an economic transfer program. A program financed by labor, for labor, a form of social insurance against pauperization in old age. At the time social security was introduced, most people died around the age of 65. This is no longer true today. Some years ago changing demographic was noted, and labor agreed to be taxed more than necessary to maintain the present day program and build up a surplus, to help pay benefits for some time to come. Full retirement age was raised for younger people (mine is 67 and change, not 65). We can indeed say today that this was a mistake. SS taxes should have been put on a sliding scale, only large enough to pay current costs with some margin for error. The SS trust fund invested in government bonds instead, which may very well become worthless.

Why will they become worthless? Because american business elected to bankrupt its own country. Politicians do not corrupt themselves. Those with money and power corrupt them. US business spent the last 30 years working relentlessly to corrupt the government at all levels for its own advantage, and as a result may have just destroyed one of the greatest countries on earth.

Taxes are too high said business leaders. Deficits do not matter, said learned economists employed at exulted "think tanks", we will grow out of them as long as we cut taxes. Lower my capital gains tax and the investment will explode. Do not regulate our finance, let the market work its magic. Let us employ 200 million chinese peasants working for food, we will replace lost jobs with the "new economy". When deficits exploded and industries melted away, great business leaders corrupted the government again to let them buy out newspapers and television stations, and cranked up the propaganda. Morning in America! When deficits grew larger still, the refurbished mass media said: it is all because of unions and unwed mothers with dependent children. Welfare reform will fix the moral fabric of America!

By the way, how about a Game of Survivor, both in reality and on television. By the way, politicians, we are getting really good at this propaganda game. You do not listen to us, we can always launch a little one against you, you know. Otherwise known as a lobbying industry.

Show me a large industrial company in the US, and I will show you a cost plus military contractor. Couple days before 9/11 2001 one Mr Rumsfeld said he could not find 2.3 Trillion green ones in military accounting.

Show me a large "bank" and I will show you an accounting scam so outrageous that any government schemer looks like a piker. An entirely fraudulent scheme of circular insurance, wrapped in an aura of quantum physics remote genius, the sole purpose of which is to cook the books and lever up (read: issue counterfeit currency in a form of credit, claiming third party insurance as an asset). I could go on, but what is the point.

Mad Max

I assume that the official inflation rate will continue to be cooked so that TIPS don't keep up with reality either.

Anonymous on Tue, 10/27/2009 - 14:41 #112044

Notice that dude wants to come for the Social Security, but nary a mention of the elephant at the table. We need to shut down our military spending. Shutting down social security while continuing to dump massive corn into cold war bric-a-brac in the service of an ossified and imperial foreign policy is not going to get us anywhere we want to be. Better to find a way to live that doesn't run afoul of Dwight D. Eisenhower's "Cross of Iron" speech.

Here's the money shot scene from that speech:

This has been the way of life forged by 8 years of fear and force.

What can the world, or any nation in it, hope for if no turning is found on this dread road?

The worst to be feared and the best to be expected can be simply stated.

The worst is atomic war.

The best would be this: a life of perpetual fear and tension; a burden of arms draining the wealth and the labor of all peoples; a wasting of strength that defies the American system or the Soviet system or any system to achieve true abundance and happiness for the peoples of this earth.

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.

This world in arms in not spending money alone.

It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.

The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities.

It is two electric power plants, each serving a town of 60,000 population.

It is two fine, fully equipped hospitals.

It is some 50 miles of concrete highway.

We pay for a single fighter with a half million bushels of wheat.

We pay for a single destroyer with new homes that could have housed more than 8,000 people.

This, I repeat, is the best way of life to be found on the road the world has been taking.

This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.

These plain and cruel truths define the peril and point the hope that come with this spring of 1953.

This is one of those times in the affairs of nations when the gravest choices must be made, if there is to be a turning toward a just and lasting peace.

It is a moment that calls upon the governments of the world to speak their intentions with simplicity and with honest.

It calls upon them to answer the questions that stirs the hearts of all sane men: is there no other way the world may live?

Hephasteus:

It's not the cost. It's the graft. You realize it costs the US government 400 dollars. not 4 dollars 400 dollars a gallon to supply gas to afghanistan. Now that's a margin.

Anonymous

This is neoliberal nonsense. Read L Randall Wray, Understanding Modern Money for a reality check on how national accounts actually work. Bill Mitchell's blog entitled Stock-flow consistent macro models ( http://bilbo.economicoutlook.net/blog/?p=4870  ) summarizes the principles.

The neoliberal myth is religion not economics. It is perpetrated so that the elite can retain control of the system, as much for non-productive rent-seeking as for profit from production. In this model people who work for a living are the marks.

Anonymous:

From Garet Garett's: The People's Pottage: Ex America,

" No government can acquire power and put it forth by law and edict. It must have the means. A tyrant may issue laws and edicts, but if he lacks the means to enforce them they have no fury. In the ancient case, means might be the direct command of labor, food, and materials. So the pyramids were built. In the modern case, means will be money.

That is why every government in the secret recesses of its nature favors inflation. Inflation provides the means. Under pretense of making money cheap for the people, the government creates money for itself.

When it goes into debt for what it calls the public welfare it first fills its own purse and then, as it spends the money, it extends its authority over the lives and liberties of the people. It suborns them. Their consent is bought. It is bought with the proceeds of inflation."

There are two aspects of inflation, economic (short term) and political (long term).

"In the arsenal of (totalitarian) revolution the perfect weapon is inflation."
 

Mark Beck:

Who is advising Obama??? Obama had the opportunity to issue a strong message to the world in slashing costs in the FY2010 budget. But, he did no slashing what so ever, and switched gears to the health bill initiative. So while Obama is helping me keep a Doctor I already have, the currency becomes worthless.

Its been said before, the current administrations actions, are just rearranging the deck chairs on the sinking Titanic.

Mad Max:

It would appear that Obama is a puppet and Manchurian Candidate of the banksters and other financial elites. All that slick PR in his campaign was just that. It will get more entertaining as his populist, union, quasi-socialist base increasingly comes into active conflict with his bankster handlers. Have you noticed how much "riot control" equipment is being bought up by police departments lately?

[Oct 28, 2009] Grantham’s Latest Bon Mots - By Paul Vigna

Oct 27, 2009 | MarketBeat - WSJ

Jeremy Grantham is in a mood. The chief investment strategist at GMO blasts the continued employment of people like Bernanke and Geithner (”like reappointing the Titanic’s captain for facilitating an orderly disembarkation,”) the home-buyer credit (”blatant vote-buying by Congress,”) overpaid executives (”unjust desserts”) and the “well-managed” auto industry. But he’s not surprised by the market rally. “The lessons, if any, are that low rates and generous liquidity are, if anything, a little more powerful than we thought.”

And even amid a “profound” failure of the financial system, and weak public leadership that missed problems like the housing bubble it should have seen, the biggest problem, GMO’s Jeremy Grantham says, is that the banking system has simply gotten too large.

“The only long-term hope of avoiding major recurrent crises is to make our financial system simpler, the units small enough that they can be allowed to fail, and, above all, to remove the intrinsically conflicted and dangerously risk-seeking hedge-fund heart from the banking system. The rest is window dressing and wishful thinking.”

10 Monday Reads The Big Picture#comments#comments#comments

FIRE hypertrophy is definitely evil, but there is free lunch: when costs are down, lines are usually up...
  1. sharkbait Says:

    Re: Healthcare system wastes up to $800 billion a year

    Compared to the rest of the (developed) world, that number is about right. US spends approx. 16% of GDP on healthcare. Taking 8-10% of GDP for other developed countries, then US spends about 6-8% of GDP too much. GDP=$14T, 6-8%=$0.84T to $1.12T.

    How much is profit for healthcare providers. Limit profits, costs go down. This method works in the rest of the developed world. Take the FIRE lobbyists out of the picture, and soon we would see some real “change”. What a ridiculous system.

    http://www.reuters.com/article/healthNews/idUSTRE5504Z320090601?sp=true

    FACTBOX: Healthcare costs in U.S. vs. rest of world

    Mon Jun 1, 2009 2:54pm EDT

    (Reuters) – The United States spends more on healthcare than any other country in the world but has higher rates of infant mortality, diabetes and other ills than many other developed countries.
    Here is a comparison of the United States’ healthcare costs versus those of selected other countries in 2006:

    UNITED STATES: 15.9 pct of GDP, $6,657 per capita
    BRAZIL: 7.9 pct of GDP, $371 per capita
    CANADA: 9.7 pct of GDP, $3,430 per capita
    CHINA: 4.7 pct of GDP, $81 per capita
    FRANCE: 11.1 pct of GDP, $3,807 per capita
    GERMANY: 10.7 pct of GDP, $3,628 per capita
    INDIA: 5.0 pct of GDP, $36 per capita
    ISRAEL: 7.9 pct of GDP, $1,533 per capita
    JAPAN: 8.2 pct of GDP, $2,936 per capita
    MEXICO: 6.4 pct of GDP, $474 per capita
    SOUTH AFRICA: 8.7 pct of GDP, $437 per capita
    SWEDEN: 8.9 pct of GDP, $3,598 per capita
    RUSSIAN FEDERATION: 5.2 pct of GDP, $277 per capita
    UNITED KINGDOM: 8.2 pct of GDP, $3,064 per capita
    (Source: The World Bank)

[Oct 27, 2009] Guest Post- Global Rebalancing- The G20 and Bernanke Versions

Bonds are down today, across the spectrum...  Paradoxically high-yield fared better then high quality.
naked capitalism

Bernanke makes no mention of exchange rate adjustment, but there is an acknowledgement of the need to increase the US savings rate or the imbalances will grow again. What does this recent talk suggest for the US contribution to global rebalancing and the rebalancing itself?

One, currency adjustments appear to have been ruled out. The G20 didn’t mention them. Bernanke didn’t mention them. The Administration “policy” seems to a mix of the “strong Dollar is in the US interest” mantra and a wink-wink-nudge-nudge policy of benign neglect. Between the perceived need to regain some international competitiveness on the one hand, and the fear that a Dollar depreciation would to weakened demand for Treasuries and higher interest rates on the other, US Dollar policy seems destined to remain non-existent

What Caused the $1.2 Federal Trillion Deficit ? By Barry Ritholtz

 October 25th, 2009

Bruce Bartlett — yes THAT Bruce Bartlett — takes the usual suspects to school. He immolates the phony deficit hawks on the actual causes of the Federal shortfall (hint: Do unfunded tax cuts ring any bells?):

According to the Congressional Budget Office’s January 2009 estimate for fiscal year 2009, outlays were projected to be $3,543 billion and revenues were projected to be $2,357 billion, leaving a deficit of $1,186 billion. Keep in mind that these estimates were made before Obama took office, based on existing law and policy, and did not take into account any actions that Obama might implement.

Therefore, unless one thinks that McCain would have somehow or other raised taxes and cut spending (with a Democratic Congress), rather than enacting a stimulus of his own, then a deficit of $1.2 trillion was baked in the cake the day Obama took office. Any suggestion that McCain would have brought in a lower deficit is simply fanciful.

Now let’s fast forward to the end of fiscal year 2009, which ended on September 30. According to CBO, it ended with spending at $3,515 billion and revenues of $2,106 billion for a deficit of $1,409 billion.

To recap, the deficit came in $223 billion higher than projected, but spending was $28 billion and revenues were $251 billion less than expected. Thus we can conclude that more than 100 percent of the increase in the deficit since January is accounted for by lower revenues. Not one penny is due to higher spending.

Wow, when this guy burns bridges, he sure doesn’t fuck around!

Selected comments:

ironman:

Quick note on Bruce’s numbers – the $1.409 trillion he identifies is partially the result of an accounting change implemented this year, which affects how the government lists the bailouts of AIG, GM, etc. which are now classified as” investments” rather than as deficit-increasing expenditures. Without that accounting rule change, the deficit for fiscal year 2009 (October 2008-September 2009) would be $1.9 trillion.

bsneath:

The investments we should be making are things like 1) eliminating bottlenecks in our transportation system (highways and airports), improving infrastructure to and within our national parks (foreign tourists love them), grants to cities for urban developments (e.g. Inner Harbor, Baltimore – tourist attraction), tax incentives for new technology development (alt energy, health care, etc. and development of domestic energy resources – yes that includes offshore and ANWAR.

As an example, the Feds could bond out a 10 cent gasoline/motor fuel tax increase – implemented over 4 years – and build $150 billion in new highway capacity. It would pay for itself (over 30 years), would be paid for by those who use roads in the future, create a load of jobs and reduce time and fuel costs for motorists, truckers and commercial service workers.

RW:

Bartlett is certainly aware of who the real obstacle is in cutting deficits because it is the same as it has been for the past three decades: The Republican party aided and abetted by ‘conservative’ Democrats (check the deficit numbers under each administration beginning with Reagan if you doubt this).

His project just as clearly is to prod the Republicans away from fiscally irresponsible, neoconservative radicalism and towards real small-government conservatism; he is burning some bridges in an attempt to encourage rebuilding and fend off the growing know-nothingness and crazy.

I doubt he will succeed but wish him luck; the United States needs a strong (and sane) opposition party.

hue:

“If that’s the argument being presented here, this country is even more trouble than I thought.”

we’re f__ked, and have been for a long time. the stealth Great Recession started after the Nasdaq crashed and 9/11, and was masked by low interest rates and the housing bubble. all that’s left is finger pointing.

scepticus:

The deficit cannot be cut while the private sector is de-leveraging and increasing its saving rate. By definition all such saving must show up in an increased deficit if severe deflation and the collapse resulting from it is to be avoided.

Accordingly the debate should be about what to spend these revenues on, not whether they should be spent. IMO they should be spent on projects which leaves the government as the owner of an asset like a power station that can be sold to the private sector when the time is right. This both generates productive new assets and employment for the economy now, while at the same time providing for reduction of the national debt when the private sector demonstrates an appetite for re-leveraging.

olephart:

These deficit numbers are roasted, cooked, sautéed, flame broiled and deep fried. The 2008 deficit wasn’t a mere 400 billion; it was a cool 1 trillion. Likewise 2009 was 1.8 trillion. How could Bush show a series of 200 to 400 billion dollar deficits for 8 years and increase the National Debt by 4.8 trillion? Half of all Federal spending is done with borrowed money.

hue:

the Bush budget numbers were low because they didn’t include the cost of the Iraq war. that was supplemental spending, off budget. my car note is supplemental spending, so i have a 30% more in cash flow every month in Quicken. strangely my bank statement is different.

scepticus:

“left, we need more spending or it won’t work

right, we need less taxes or it won’t work”

Both are valid approaches to accomodating private sector de-leveraging. However when it comes time to pay that deficit back, tax cuts leave the gov with no way of raising the required revenue. SPending on public sector assets which can be sold back to the private sector and which in the meantime generate income does provide a means to pay the debt back when/if recovery arrives.

lw :

IMHO Republicans and Democrats are all pretty much the same. Find me any group of 535 people. Now say you need 60% of them to get something done, so I need 321 folks in the group to go in one direction.

Now offer those 535 people unbelievable amounts of power and prestige if they spend gobs of free money on whatever their hearts desire. No real downside, massive upside for them and their friends/family. Now a few will understand the end result (Ron ahem Paul), but getting 321 to say “SURE!” isn’t hard.

The game doesn’t stop until the free money runs out.

Kort:

http://projects.washingtonpost.com/congress/110/senate/1/votes/172/

Democrats took over Congress in 2006.
Obama was in Congress in 2006.
Congress changes and approves the Budget proposed by the President.
Starting in 2006, these budgets belong to the Democrats (see the link for the 2006 vote…all D voted FOR, only 2 R voted FOR)
Obama didn’t inherit Bush’s budgets—he inherited HIS OWN, the budgets he’s been voting FOR for the past 3 years while his party controlled Congress.

Disclaimer: Ds and Rs are both criminal organizations.
 

Had Enough? Time For A Boycott!

That's a wrong solution. Some of those banks provide credit cards with refundable first 3% for gas and that's useful type of card to have. Independently of whether they are from big bank or small, credit cards are extremely poor method to carry balances in any case. Changes on interest rate are to be expected if defaults increase dramatically, like is the case. 

Have you had it with the scams, frauds, "mark to myth" and lies?

Tired of this sort of garbage - being punished for being responsible?

You may believe that your exemplary behavior shields you from unexpected credit card fees. Sadly, that is no longer the case.

You can stop it.

Yes, you.

All 330,000,000 of you.

Here's how.

Go withdraw all your money and business from the following institutions:

Bank of America
Wells Fargo/Wachovia
Citibank
JP Morgan/Chase

Those four.

Place your business with a local community bank or credit union in their place, and tell the above four institutions to "piss off."

I've resisted doing this, but the idea that banks are now going to try to penalize those who do not carry balances or pay late fees is the last straw.

Hutton- "Mervyn King is right"

JimPortlandOR:

The financial crooks will cry 'this is the biggest part of the economy, and you will destroy it if broken up' without considering that their wail is the best reason for breaking them up and rigidly separating (again) commercial/personal banking from investment banking. They are too big to exist. because they can't be regulated, they are greedy short-sighted scumbags, and they successfully own the political system.

So all the reasons for a breakup are the reasons why they won't be significantly impacted. If necessary they will write the laws such that there is not any impact.

Only a complete collapse would lead to change, and the collapse will not be allowed to happen as long as they control the levers of power. And they do.

More on the "Job Loss" Recovery

2009-10-25 | CalculatedRisk

From Carolyn Lochhead at the San Francisco Chronicle: Experts see rebounding economy shedding jobs

Forget a jobless recovery. The economy may be entering a recovery with job losses.
...
"It's not even a jobless recovery; it's a recovery with more job losses," said UCLA economist Lee Ohanian. "The idea of having essentially no net job creation after a remarkably severe recession is a real pathology for the U.S. economy."
...
Alarms are ringing at the White House and in Congress. But with a mind-boggling $1.4 trillion deficit this year, Democrats have used up their bullets. The word stimulus has such a bad connotation that the term has been banished from new efforts to goose the economy and help workers, such as extending unemployment benefits, sending $250 checks to seniors and a program the White House announced to help small businesses get loans.
As I noted earlier this week, so far the current recovery is even worse than "jobless"; it is a "job-loss" recovery.

This will be hot topic over next couple of months. Maybe the forecasts will be too pessimistic, but without jobs, it isn't much of a recovery.

montas ankle:

I would argue that the economy was way oversupplied with unproductive (or counterproductive) employment for most of the last decade.

This structural readjustment is a necessary evil. Productivity is up for a reason. Large swaths of the 'financial services industry' are dead for a reason.

We will emerge in a better place. It will take a long time.

The Great Malaise continues.

energyecon:

They cannot make it happen - they can feed the tumor of the financial economy and declare a 'recovery' - but the real economy will determine the fate of the country in the end...as it always has.

some investor guy

How about a new metric to determine if there is actually a recovery? GDP minus the budget deficit.

MrM:

This is not you grandfather's recession, and this is not going to be your grandfather's recovery. Instead, it is going to be a precisely targeted recovery, a surgical recovery, with the precious few recovering at the expense of expendable others

X:

The economy seems to have a lot of headwinds: unemployment, contracting consumer credit, and the reversal of all the government stimulus (including everything from the home-buying credit to quantitative easing), and likely higher credit costs throughout the economy (government, corporate, and consumer). In this context, it's difficult for me to understand why so many rule out a "double dip" recession. It seems to me that to avoid a contraction in the midst of all these headwinds, you'd need the underlying economy (excluding the government) to be doing a "V" just to keep growth positive through 2010.

wally:

some investor guy wrote:

Would it make you feel better to know that much of the "wealth" of the "wealthy" is just an illusion?

No, not really. The private jet, the yacht, the big houses...

Rob Dawg:

Hey, let's not be hasty. This time has been different in so many ways maybe we can recover on the back of one time charge led quarterly earning claims of profitability.

Faced with a financial meltdown we've manned up and successfully reformed our banking and credit systems, gotten our fiscal houses in order; personal, municipal, State and Federal. Not only won't we repeat past mistakes we've made sure that even new problems won't arise by virtue of vastly expanded regulator powers. I mean it isn't like we haven't reformed all that was wrong in 2006 so who's to say this time won't be different?

yossarian:

I agree with comments earlier.... this is a massive structural readjustment. Since NAFTA (and earlier), we've believed in the myth of the 'post industrial' economy... in other words, nobody actually needs a job actually producing something.

Zenith sold their TV business to Taiwan, many other factories have been purchased (and moved) by China, etc. All we were supposed to be doing is working in the FIRE economy, flipping houses to each other, programming computers ... being information clerks, in other words.

Almost every idiot 'futurist' book of the last ten years has that same theme.

Ok not James Kunstler, and not the 'Raptured' crowd.... the mainstream knotheads.

Jonathan:

As long as the government keeps funding food stamps and unemployment, things will keep grinding along.

If this starts to become hard to finance, and the government makes a 'one-time' grab on peoples' savings, then start to expect some fireworks.

I'm sure it won't be exactly like Argentina, but it seems that might be a reasonable pattern.

mock turtle:

crazyv,

generally i agree with you about the dems and repubs being the same

but

we gotta be smarter than that

ron paul, alan grayson, dennis kucinich just to name three, are truth tellers and should not be thrown out with the rest of the scum

Jonathan:

As long as the government keeps funding food stamps and unemployment, things will keep grinding along.

If this starts to become hard to finance, and the government makes a 'one-time' grab on peoples' savings, then start to expect some fireworks.

I'm sure it won't be exactly like Argentina, but it seems that might be a reasonable pattern.

Not Irving Fisher:

Has anyone read Mish's post on Citi? Now I understand why they raised my card rate to 29.99% (I have a zero balance). This could be the canary in the coal mine.

gabyjan:

rob dawg

i think with all of the money that has been"made" out of this there will a new middle class.

Those making from 1m to 10m will become the new lower middle class, from 11m to 100 the new middle middle class and 101 m to 999m the new upper middle class. That's my new middle class.

josap:

Over the next several years, as J6P downsizes his life, we will adjust to fewer jobs, lower wages and less than 3 big screen TVs per household.

For that to happen everyone with an underwater mortgage will walk, forclose, file BK. Credit card debt and usage will severly decline. More households will have one earner, kids will have the benefit of a parent at home ( and yes I am female and always have worked. So it may be dad at home).

People will drive cars longer, insist on higher quality goods, shop at WalMart for throw away items. Food will be cooked at home.

If we are very, very lucky this will happen in stages over time. if we are not so lucky this will happen quickly, putting many in poverty. The gov will stay overly involved in finance, pensions, social safety nets to keep people from being homeless and hungry (I hope).

this is just my guess, I have been wrong before.

Rajesh:

 longwaver wrote:

more debt isn't the answer to too much debt

Total debt is falling. Private debt is falling faster than government debt is rising. The government is just slowing (temporarily) the pace that debt falls. Debt will keep falling until income stabilizes and the debt to income ratio becomes 20% below the historical average. This is called 'deflation'.

crazyv:

what we have is the problem of the commons on a global scale. We have to consider whether we have flawed economic models on a global scale. 15 years ago at a conference in DC I made the observation that Free trade was a profoundly racist concepts.

Most people didn't understand what I was getting at -- which was simply the point that the advocates then were arguing (rIcardo) that we could export all the low paying jobs and move our work force to high paying jobs.

My observation then was what makes you think that these 3rd world countries would be content with just the low paying jobs and they wouldn't have the capacity to come after the high paying jobs? Plus it ignore the reality that we as a percentage have just as many people with IQ's that don't permit them to move to high paying jobs.

Low paying/ low skilled jobs are a vital part of the social safety net that can't be covered up with transfer payments.

Back to the problem of the commons -- a lot of countries / companies have done the easy thing take advantage of arbitrage between the US cost structure and the lower cost structure of the less developed countries. In doing so they are in real danger of destroying the "common" i.e the developed economies.

ResistanceIsFeudal:

Rob Dawg (homepage, profile) wrote:

gabyjan wrote:

i sort of agree with you only the womans place is in the home" will become "one paycheck home" and i think that we can forget about roe and wade. we need all the population we can get.

The point will be to widen the asset gap. The dissolution of the middle class is just a start. The next phase will be to establish a tax and income disparity that makes it extremely difficult to make the leap from lower class to upper class by virtue of merit.

With college loans to the middle class, they've already accomplished part of it, at least in terms of the future. IMHO the only good that can come of this mess is a gradual return to the appreciation of quality forced by material want and scarcity... unfortunately it means a lot of pain for many innocent people.

[Oct 24, 2009] Wall St. Is Winning Elizabeth Warren Speechless About Record Bonuses

The question that bother me is where all those money for bonuses are coming from.  Profit of TBTF banks are definitely fake. Markets are zero sum game and  you cannot get so much money from suckers by trading even is you can compulsive gambler as a CEO (like GS has). Underwriting is not that profitable. So what is the real source.
Yahoo! Finance
Elizabeth Warren, chair of the Congressional Oversight Panel, is the rare public official who doesn't mince words.

But Warren admits to being "speechless" at reports of record bonuses on Wall Street.

"I do not understand how financial institutions could think they could take taxpayer money and turn around and act like it's business as usual," Warren says. "I don't understand how they can't see that the world has changed in a fundamental way - it's not business as usual. All I can say right now is they seem to be winning this argument."

In the accompanying video, taped at The Economist's Buttonwood Gathering at Pace University, I asked Warren about Treasury Secretary's claim at the same event that the government has been "remarkably effective" in combating the financial crisis.

"It is not the case people go to bed wondering if there will be an economy in the morning," she quips, but "we still have lot of serious problems."

Comparing the situation today vs. a year ago, Warren observes:

In sum, "all the things going on [a year ago] that were serious, serious problems for the financial institutions seem to me are still serious, serious problems," she says.

Finally, Warren pulls no punches when it comes to her criticism of former Treasury Secretary Hank Paulson for his failure to put any restrictions on or monitoring of the initial TARP funds, and for using the money for something other than "toxic asset relief," as originally intended.

"I have a real problem when we describe to taxpayers their money will be taken and used one way and in fact it's used another way," she declares.

So in the end, Warren did find her voice and spoke quite candidly, a very rare trait among public officials.

taopraxis - Friday October 16, 2009 11:02AM EDT

The excesses of the "super-rich" are just another sell signal. Keep your eye on the macro situation. Plunging GE revenues, as with state tax revenues, tell the real story. One of two things must happen: Either the government must shrink by about half or there will be a massive inflation followed by a currency crisis. There is *no way* we're going to grow out of this, as GE's results make crystal clear. It is mathematically impossible. Eventually, the comforting illusions fomented by bankers trading stock index futures back and forth are going to hit the hard wall of the economy and monetary reality.

... ... ...

Talk is just that...talk. It is meaningless. Change is coming, but the wealthy political class is going to fight it every step of the way. They're going to lose that fight, though, because the tide is going out and they're swimming against it.

NEED A HORSE - Friday October 16, 2009 11:31AM EDT

But wait. There's more. The Sherman Anti-Trust Act makes monopolies and inefficient cartels illegal. What is an inefficient cartel? It's a business that is too big to fail. CitiGroup, AIG, Bank of America, et al were inefficient cartels. Under the Sherman Anti-Trust Act they should have been broken up and sold off. Instead, our wise and wonderful government gave them your money to keep doing the wrong thing. Keep punching them Elizabeth. Good on you.

Terry - Friday October 16, 2009 11:43AM EDT

It's even worse when Goldman, JPM-Chase, MS, Citi, etc. use/d the taxpayer bailout money to pump-up commodities so we all may gain if we ride the market trend but then we all give it back at the gas pump and supermarket. They are screwing us on both ends. I still beleive the answer is in us replacing Congress with some honest citizens. No Senator should be in office more than 2 terms (12 years) and no Congressmen/women should be in office more than 3 terms (6 years) otherwise they do too much harm to us all. VOTE OUT the INCUMBENTS in 2010.

kerkong - Friday October 16, 2009 11:54AM EDT

People in Wall Street remind me of gamblers in Las Vegas. They bet with huge amount of money and profit from the winning games. When they win, they deserve a big salary and bonus. How can you deny a small percentage of a big gain? Unlike the gamblers, when they lose there is no consequence to them personally. When a talent in Wall Street gets paid much much more than a Noble price annually, I don’t see their points of high pay for rare talents.

M - Friday October 16, 2009 12:17PM EDT

Goldman setting aside 16 bil for compensation, 13 of which laundered through AIG. The foreign commenter who called Americans weenies for not engaging in civil unrest is 100% on target. General strikes should have ensued long ago. In the end, you get what you will tolerate.

Yahoo! Finance User - Friday October 16, 2009 12:32PM EDT

TARP achieved its true objective: bailing out Goldman Sachs. Paulson was very upfront about this, for those who cared to listen to him. Paulson never even pretended to care about the common man, so why are people suddenly surprised that TARP only benefitted big banks?

[Oct 24, 2009] Rent-seekers' nirvana By Martin Hutchinson

Why not to pull your money out of Citibank and Bank of America, close credit cards put it in a local bank or credit union.
Asia Times

Goldman Sachs' income from trading and principal investment rose 90% in the third quarter, while allocated remuneration per employee soared 46% to $527,000 in the first nine months of 2009. Good luck to them, but it shows once again that they and to a lesser extent the rest of Wall Street are currently playing a different game to the rest of us. The question is, how best to restore the operation of a competitive free market.

Investment banking has changed radically over the last 30 years, and it's not clear that either regulators or the market fully understand the modern sources of its income. Trading, a fairly peripheral activity 30 years ago, has come to dominate the investment banking income statement, with income arising for investment banks both through acting as intermediary and through "proprietary trading" for their own account.

The immense and unstoppable proliferation of derivatives is the principal factor that has brought this about. After all, total outstanding derivatives contracts at the end of 2008 had a nominal principal amount of $514 trillion, more than 10 times Gross World Product. You don't need to skim very much off the top of a pot of cream that size to make your practitioners very rich indeed. A decade ago, defenders of the derivatives revolution could reasonably claim that the economic value and risk of those contracts was a tiny fraction of the total outstanding. Today, when we have seen multiple examples of credit default swaps paying close to 100% on billions of dollars of obligations, that claim has become laughable; the fraction of risk involved in that $514 trillion isn't as tiny as all that.

The intellectually curious must wonder what purpose all this activity serves. Defenders of derivatives and trading in general mutter the magic words "hedging" and "liquidity" and expect their questioners to fall back abashed. However, there aren't $514 trillion of exposures to hedge; indeed in a $50 trillion world economy, there aren't even $50 trillion of exposures to hedge. Hence - and this is a very conservative estimate - 90% of all derivatives activity serves nobody beyond the dealer community.

The same applies to liquidity; the immense trading volumes daily in the foreign exchange or futures markets do indeed provide liquidity, indeed more liquidity than can possibly be necessary to run the system. Proponents of trading will again say that it is necessary for a large financial institution to make a $1 billion block trade, but why? Surely in a well-run economy, institutions should invest on a long-term basis, not engaging in random short-term speculation.

If a senior institutional investor breaks up with his girlfriend who is CEO of a company, why should the entire resources of Wall Street be deployed to allow him to dump his institution's $1 billion position with one keystroke, rather than making him do so gradually, over a period of time during which calmer and wiser thoughts may prevail. Likewise, there can be no significant systemic value, if a company reports an unexpected loss, in allowing the billion-dollar shareholder with the fastest trigger-finger to dump his position on the market, or on other shareholders who may have less immediate access to information.

If the economic value of hedging and liquidity are modest compared to the galactic amounts of contracts outstanding, or even to the enormous sums earned by trading, then it follows that some pretty large percentage of trading revenues represents nothing more nor less than rent seeking, the extraction of value from the economy without providing any economically valuable service in return. The explosion in derivatives and trading volume can then be seen as a gigantic smokescreen, which has enabled Wall Street to extract larger and larger rents from the remainder of the economy.

That is intuitively sensible. Investment bankers and traders are intelligent, capable people, but an average remuneration of $527,000 in nine months, or $703,000 per annum, for the entire staff of Goldman Sachs including janitors and interns, suggests that some mysterious force is preventing those returns from being driven down to a level for which all but the most senior of Wall Street veterans would happily work. It's not a question of the "social value" of trading, a dubious concept at the best of times. It's a question of what barriers to entry prevent every corporation in America from setting up a derivatives trading department in order to extract some of these extraordinary returns.

The same applies to "proprietary trading" by which modern investment banks deploy large amounts of capital to achieve very high returns. The Efficient Market Hypothesis (EMH) postulates such excess returns to be impossible, since capital would rush to the nexuses where they existed, and drive returns down to an equilibrium level. One need not be a believer in the EMH to agree with its conclusions in this respect; Warren Buffett, the greatest investor in America, has achieved returns only barely above 20% annually in his 50-year investment career. It is unreasonable to suppose that ever greater amounts of capital could be deployed into achieving returns considerably greater than that, year after year, if some artificial barrier to competitor entry was not involved.

There are two barriers to entry that appear to prevent capital from arbitraging away investment banks' trading returns. The first is insider information, not generally the illegal kind about corporate activities but the entirely legal kind about money flows, equally valuable in a trading environment. If you are one of a handful of major dealers in a particular type of derivative contract, or you have a computer set up at the New York Stock Exchange that sees the order flow before competitors, you have insider information that is not available to third parties, just as surely as if you knew the secrets of next quarter's earnings.

The second kind of barrier to entry is that of crony capitalism. In the private sector, this is the way business has always been done; a company's CEO is a close friend of one investment banker rather than another, so gives him preference when there is a transaction to be done. The position becomes much more doubtful when the public sector is involved, as it increasingly is the case in this less and less capitalist environment. If the Treasury secretary is an alumnus of Goldman Sachs, as was Hank Paulson last year, there must be some suspicion at least when bailouts are arranged so that Goldman receives a $13 billion payoff at public expense on credit default swaps issued by AIG, as well as receiving a payoff on credit default swaps issued on AIG, payable only on an AIG default. To put it bluntly: such largesse had not been available to Lehman Brothers.

Similarly, large government-directed contracts that are awarded without full competitive bidding, or advisory work in which the investment bank's government contacts are themselves leveraged, or investment opportunities not available to the general public, are all examples where crony capitalism must at least be suspected even if it can never be proved. With the immensely greater amounts of capital now available to the major Wall Street houses and the death of the "it's not cricket" gentlemanly prohibitions against naked rent seeking, it's not surprising that such profits have multiplied.

The question now arises of how best to reverse this trend. If much of Wall Street's extraordinary profitability is in fact rent, then eliminating it will make the rest of us richer and make the US economy as a whole more efficient, as capital is allocated more optimally. The rent-seeking problem appears to be quite concentrated at the center of financial services; the losses reported by Bank of America and many regional banks suggest that old-fashioned banking is at best only normally profitable.

The first change that is desperately needed, not only to reverse this rent-seeking but in general, is a reversal of US monetary policy. US monetary policy has been far too accommodative now for over 14 years, with the last year being particularly egregious (however understandable the panic last September). That has caused asset values to soar and made leverage altogether too attractive and profitable. Add to that problem the various bailouts and special favors which the Fed and the US Treasury have lavished on Wall Street in the last year, and you can see how rent-seeking got out of hand. The fact that Bank of America cannot make money on home mortgages and credit card lending (having over-expanded in both areas) is no justification for showering benefits on traders at other houses who may have no involvement in those sorry businesses.

A second change that will reduce rent-seeking is a tax on transactions, a "Tobin tax." Set at a low percentage level, this will push the market back towards longer-term investment. It will particularly penalize the high-speed trading operations, which appear to have no significant economic justification beyond rent-seeking. It is here, and not in higher fees paid by deposit takers, that the regulators need to impose a tax on Wall Street to pay for all the bailouts.

A third change needed is a regulation restricting credit default swaps to participants having an "insurable interest" in the credit concerned. There are many economic arguments for allowing lenders to lay off credit risk, thereby managing it more effectively. There are no good arguments for allowing short positions on unrelated entities. Just as the 18th century insurance market discovered that allowing insurance policies on strangers caused the rate of unexpected deaths to soar, so today's economy does not need a bunch of Wall Street traders seeking to making speculative profits from others' bankruptcies. Bankruptcy is a necessary economic mechanism, albeit with a heavy social and economic cost to creditors and employees; it should be used only as a last resort and not as an additional source of chips for Wall Street's casino.

Finally, government needs to get the hell out of the economy. Meddling in the housing market through the absurd Fannie Mae/Freddie Mac guarantees was among the most important causes of last year's disaster. The government-sponsored bankruptcies of General Motors and Chrysler will almost certainly prove to have destroyed the US automobile industry, as the British Leyland fiasco did in Britain. Every time the government meddles in economic transactions, the chance for rent-seeking is created, to the great detriment of the rest of us. Wall Street is supremely good at rent-seeking; it should not be encouraged to pursue this avocation any more than necessary.

Both traders and Wall Street in general perform vital economic functions. That does not mean they should be allowed to multiply the rewards to themselves for doing so ad infinitum. The free market needs to be restored.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at www.greatconservatives.com.

[Oct 24, 2009] Don't Reinflate the Old Bubbles By Steven Pearlstein

October 14, 2009 | washingtonpost.com

"What we're witnessing here is pretty simple: another bubble in financial assets. All that "liquidity" created by the Federal Reserve and other central banks has accomplished its task and prevented a global financial meltdown. But unless they move now to begin sopping up that liquidity, the central bankers run a serious risk of reinflating many of the same bubbles that got us into this mess in the first place.

"Many analysts now look at the economy and conclude that unemployment is still way too high and the threat of inflation still way too low for the Fed to even think about beginning to raise interest rates again. By one calculation, the appropriate federal funds rate today would be something like negative 5 percent. Since that's impossible, the Fed has signaled that it would not only stick by its zero-interest-rate policy for the indefinite future, but also will continue to inject additional money into the financial system by using freshly printed dollars to buy up the debt issued by government-owned Fannie Mae and Freddie Mac.

"The problem is that because we didn't get into this recession in the normal way, the normal analysis and remedies are not appropriate. Slow growth and high unemployment are indeed going to be a big problem over the next several years, but they aren't going to be solved by pumping out lots of cheap money that is used to speculate in stocks, bonds and commodities rather than be invested in the real economy. And if all this speculation has the effect of driving up the price of commodities and driving down the value of the dollars we use for imports, then it is perfectly possible to wind up with high inflation and high unemployment at the same time -- as happened in the late 1970s."

[Oct 24, 2009] 106 bank failures in 2009 - Oct. 23, 2009

Earlier on Friday evening the dubious honor of the 100th failure went to Partners Bank, of Naples, Fla., which had $65.5 million in assets, according to the Federal Deposit Insurance Corp.

[Oct 24, 2009] The US stock market is overvalued by 40% by Neil Hume

Oct 23 | ft.com

Andrew Smithers, of London-based research house Smithers & Co, is not a man who has any truck with nonsense. Particularly when it comes from the mouths of stockbrokers.

In his latest report, The US Stock Market: Value and Nonsense About It, he takes to task those who claim US equities are still cheap:

As we have remarked before, valid approaches to value are disliked by many practitioners as they get in the way of business. As is inherently likely, and as a glance at Chart 1 will confirm, the stock market has been underpriced around 50% of the time. Those who sell shares would rather it were cheap 100% of the time and therefore prefer invalid metrics. The ones used vary from time to time, as those employed are restricted to those which currently give the desired answer that “stocks are cheap”.

Smithers says there are only two ‘valid’ ways to value the market. One is by using a cyclically adjusted PE ratio and the other by using the Q ratio, which compares the market capitalisation of companies with their net worth,  adjusted to current prices.

Whichever technique is used, the answer is the same: the US stock market is overvalued by around 40%.

Smithers explains:

As the valid measures of the US market show that it is currently around 40% overvalued, some ingenuity is needed to claim otherwise. The EPS for the past 12 months on the S&P 500 is $7.51 so, with the index at 1071, it is selling at a trailing PE of 142. This is far higher than it has ever been before, as the previous end month record is a PE of 47. But current multiples are no guide to value; when depressed, or elevated, they need to be adjusted to their cyclical norm.

This is how the cyclically adjusted PE (”CAPE”) is calculated and when its current value is compared with long-term average, using the geometric means of EPS and cyclically adjusted PEs,6 it shows that the market is 37.7% overpriced using 10 years of earnings’ data and 45% if 20 years are used. This method is therefore of no use to those who sell shares, or have made faulty claims about value in the past. The following are among the most common approaches to circumventing the problem this presents. Some produce relatively small distortions, but these can amount to a substantial degree of misinformation when combined.

Of course , that doesn’t mean equity markets won’t keep rising given the tsunami of liquidity that has been unleashed by the world’s central banks. But it should give investors some pause for thought, even if they keep backing the momentum trade.

[Oct 24, 2009] Interest rate swap existentialism du jour by Tracy Alloway

Oct 23, 2009 | FT Alphaville

Those of you who enjoy a good interest rate swap debacle (Traders, Guns and Money-style) are in for a treat.

And Goldman Sachs conspiracy theorists especially.

From Bloomberg:
Oct. 23 (Bloomberg) — New Jersey taxpayers are sending almost $1 million a month to a partnership run by Goldman Sachs Group Inc. for protection against rising interest costs on bonds that the state redeemed more than a year ago.

The most-densely populated U.S. state is making the payments under an agreement made during the administration of former Governor James E. McGreevey in 2003, when New Jersey’s Transportation Trust Fund Authority sold $345 million in auction-rate bonds whose yields fluctuated with short-term interest costs. The agency finances road and rail projects.

“This vividly shows the risk of entering into interest- rate swap agreements,” said Christopher Taylor, former executive director of the Municipal Securities Rulemaking Board in Alexandria, Virginia. “The world’s got to see what stupidity even the sophisticated investors like the transportation fund can get into.”

While New Jersey replaced the debt with fixed-rate securities in 2008 after the $330 billion auction-rate bond market froze, the swap, in which two parties typically exchange fixed payments for ones based on floating interest rates, isn’t scheduled to expire until 2019.

The state paid $940,000 under the agreement last month and a total of $11.4 million since the auction-rate bonds were redeemed. The expenditures come as the fund reaches its borrowing limit and Governor Jon Corzine, Goldman’s former chairman who was a U.S. senator when the contract was signed, seeks $400 million in budget reductions as tax receipts fall.

Of course, this is just the latest incidence of an institution or municipality losing millions on interest rate swaps arranged by major investment banks, with a blow-up in Harvard and Jefferson County, Alabama.

What’s likely to get Goldman conspirators going here though, in light of Corzine’s employment history, is the question as to why this particular interest rate swap has not been cancelled. Just to play devil’s advocate — we’d note that on top of the inevitable exit costs, there may also be a timing issue. Harvard for instance, paid $500m to various banks to extricate itself from its own interest rate swap, at what was perhaps the worst possible time.

Here, in any case, is New Jersey’s explanation:
New Jersey couldn’t reach acceptable terms when it tried to issue variable-rate bonds last year to replace the failed auction-rate securities hedged by the Goldman swap, the Office of Public Finance said in a three-page response to questions about the transaction. It is unfair to judge the ultimate performance of the 16-year agreement until it concludes in 2019, the agency said in the statement.

Nevertheless, in the meantime:
New Jersey saved $9.9 million from 2003 to 2008 by issuing the auction-rate bonds instead of fixed-cost debt, the Office of Public Finance said in a report last year.

The trust fund paid $4.5 million in penalty interest payments when the auction-rate market collapsed and some borrowers’ costs soared. After it failed to put together a sale of a different type of variable-rate bonds, New Jersey then reissued 11-year notes yielding 4.18 percent in August 2008, according to the Office of Public Finance.

Refinancing the bonds cost $2.1 million, reducing the authority’s savings on the transaction to $3.3 million, state records show.

Since then, the fund has paid almost four times that amount on a contract that hedges nothing.

[Oct 24, 2009] Systemic Risk in the Financial System Insights from Network Science - Pew Financial Reform Project by Ross A. Hammond

Oct 21, 2009

This paper looks at systemic risk from the perspective of network structure, and the connectivity links between actors in the financial system.  It notes that network structure may have played a role in the financial crisis in three important ways:  that financial markets may have lacked robustness; that the pattern of network links may have made the system subject to contagion; and that a lack of diversity in networks may have impaired their resilience, or ability to adapt.

Hammond notes that comprehensive efforts to understand systemic risk and undertake reform of the financial system should focus not only on financial actors themselves, but also on the ways in which they are connected. The structure of financial networks shapes the systems' dynamics in important ways, and understanding this structure can provide insights into how to prevent future crises.

View Full Report:

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[Oct 23, 2009] Matt Taibbi - Taibblog – An Inside Look at How Goldman Sachs Lobbies the Senate - True-Slant

Naked short selling is probably one of the most common white-collar crimes in financial industry...

The SEC is holding a public round table Tuesday to explore several issues around securities lending, which has expanded into a big moneymaker for Wall Street firms and pension funds. Regulation hasn’t kept pace, some industry participants contend. Securities lending is central to the practice of short selling, in which investors borrow shares and sell them in a bet that the price will decline. Short sellers later hope to buy back the shares at a lower price and return them to the securities lender, booking a profit. Lending and borrowing also help market makers keep stock trading functioning smoothly.

Later on this week I have a story coming out in Rolling Stone that looks at the history of the Bear Stearns and Lehman Brothers collapses. The story ends up being more about naked short-selling and the role it played in those incidents than I had originally planned — when I first started looking at the story months ago, I had some other issues in mind, but it turns out that there’s no way to talk about Bear and Lehman without going into the weeds of naked short-selling, and to do that takes up a lot of magazine inches. So among other things, this issue takes up a lot of space in the upcoming story.

Naked short-selling is a kind of counterfeiting scheme in which short-sellers sell shares of stock they either don’t have or won’t deliver to the buyer. The piece gets into all of this, so I won’t repeat the full description in this space now. But as this week goes on I’m going to be putting up on this site information I had to leave out of the magazine article, as well as some more timely material that I’m only just getting now.

Included in that last category is some of the fallout from this week’s SEC “round table” on the naked short-selling issue.

The real significance of the naked short-selling issue isn’t so much the actual volume of the behavior, i.e. the concrete effect it has on the market and on individual companies — and that has been significant, don’t get me wrong — but the fact that the practice is absurdly widespread and takes place right under the noses of the regulators, and really nothing is ever done about it.

It’s the conspicuousness of the crime that is the issue here, and the degree to which the SEC and the other financial regulators have proven themselves completely incapable of addressing the issue seriously, constantly giving in to the demands of the major banks to pare back (or shelf altogether) planned regulatory actions. There probably isn’t a better example of “regulatory capture,” i.e. the phenomenon of regulators being captives of the industry they ostensibly regulate, than this issue.

In that vein, starting tomorrow, the SEC is holding a public “round table” on the naked short-selling issue. What’s interesting about this round table is that virtually none of the invited speakers represent shareholders or companies that might be targets of naked short-selling, or indeed any activists of any kind in favor of tougher rules against the practice. Instead, all of the invitees are either banks, financial firms, or companies that sell stuff to the first two groups.

In particular, there are very few panelists — in fact only one, from what I understand — who are in favor of a simple reform called “pre-borrowing.” Pre-borrowing is what it sounds like; it forces short-sellers to actually possess shares before they sell them.

It’s been proven to work, as last summer the SEC, concerned about predatory naked short-selling of big companies in the wake of the Bear Stearns wipeout, instituted a temporary pre-borrow requirement for the shares of 19 fat cat companies (no other companies were worth protecting, apparently). Naked shorting of those firms dropped off almost completely during that time.

The lack of pre-borrow voices invited to this panel is analogous to the Max Baucus health care round table last spring, when no single-payer advocates were invited. So who will get to speak? Two guys from Goldman Sachs, plus reps from Citigroup, Citadel (a hedge fund that has done the occasional short sale, to put it gently), Credit Suisse, NYSE Euronext, and so on.

In advance of this panel and in advance of proposed changes to the financial regulatory system, these players have been stepping up their lobbying efforts of late. Goldman Sachs in particular has been making its presence felt.

Last Friday I got a call from a Senate staffer who said that Goldman had just been in his boss’s office, lobbying against restrictions on naked short-selling. The aide said Goldman had passed out a fact sheet about the issue that was so ridiculous that one of the other staffers immediately thought to send it to me. When I went to actually get the document, though, the aide had had a change of heart.

Which was weird, and I thought the matter had ended there. But the exact same situation then repeated itself with another congressional staffer, who then actually passed me Goldman’s fact sheet.

Now, the mere fact that two different congressional aides were so disgusted by Goldman’s performance that they both called me on the same day — and I don’t have a relationship with either of these people — tells you how nauseated they were.

[Oct 21, 2009] The Crash of 1929

Originally produced in the mid-1990s, this film remains the most authoritative account of the Crash of 1929, and includes rare testimony from the people who worked on Wall Street at the time

[Oct 21, 2009] Microsoft's Ballmer Sees Risk of Second U.S. Downturn

[Oct 21, 2009] Guest Post: Congressmen Grayson, Clay and Miller Introduce CFPA Amendment to Help Reduce Looting By George Washington of Washington’s Blog.

Congressmen Grayson, Clay and Miller are introducing an amendment to the Consumer Financial Protection Agency bill:

Today we will offer the “Financial Autopsy” amendment. The Grayson/Clay/Miller amendment is essential to attacking the root problem of consumer bankruptcy and foreclosure because it requires the CFPA to do a financial audit of products that have caused the highest rates of bankruptcy and foreclosure annually. Not later than March 31st of each calendar year, the CFPA will list these anti-consumer products, submit their conclusions on why these products “fail” consumers, the companies and employees that underwrote these products, and authorizes the CFPA to take action to restrict these products.

Financial Autopsy Amendment:

- Requires the CFPA conduct a “Financial Autopsy” of each state’s bankruptcies and foreclosures (a scientific sampling), and identify financial products that systematically led to a large number of bankruptcies and foreclosures.

- Requires the CFPA report to Congress annually on the top financial products (the companies and individuals that originated the products) that caused consumer bankruptcies and foreclosures.

- Requires the CFPA take corrective action to eliminate or restrict those deceptive products to prevent future bankruptcies and corrections

- The bottom line is to highlight destructive products based on if they are making people “broke”. Thank you for your consideration, we hope you will join us in supporting this amendment.

Sincerely,
Alan Grayson Wm. Lacy Clay Brad Miller

Is this a good amendment or a bad amendment?

It is a great amendment.

Why?

Instead of trying to pass a one-size-fits-all bill prohibiting certain specified conduct, it will force an annual analysis of what financial products are sticking it to the consumer.

Remember, credit default swaps didn’t bring down the economy because they are toxic while all other financial vehicles are pure as the driven snow. CDS brought down the economy because they were the choice du jour of the looters.

If we outlaw CDS (which I have argued for in the past), then the looters would create some other instrument for looting.

The Grayson/Clay/Miller amendment would help to force an annual review of the tool-of-trade of the rip-off artists.

Note: Given the huge incentives for financial “innovation”, the armies of lawyers, mathematicians and other footsoldiers employed by the financial giants, the pressure that the “too big to fails” to earn their way out of the hole, and the rapidity with which imbalances in the modern financial system can build up when alot of people are making the same kind of trade, an annual review is probably not enough.

So my only suggestion for Congressmen Grayson, Clay and Miller is that the amendment require:

(1) Annual reviews generating formal written reports

Plus …

(2) Monthly informal reviews. If a review reveals a large number of bankruptcies or foreclosures caused by a specific type of financial product, this would trigger a formal report

Trust me . . . the boys can still cause the economy to thoroughly crash if their actions are not examined for a year at a time.

Call your congressional representatives and demand that they support the Grayson/Clay/ Miller amendment.

Update: Karl Denninger has some additional suggestions here.

[Oct 21, 2009] John Mauldin Tax Hikes Will Kill the 'Recovery’ Which Isn’t Real Anyway

Yahoo! Finance

The economic recovery currently underway is a statistical mirage, based on easy year-over-year comparisons and inventory rebuilding, John Mauldin, president of Millennium Wave Securities, tells Henry in the accompanying video.

The unemployment rate is closer to 12% when you include people who've been dropped from the survey and the "underemployment" rate - people working part-time vs. full time - is 17% to 18%, "and rising," Mauldin says. "That doesn't feel like recovery."

... ... ...

As for the long-term, Mauldin worries America could repeat Japan's experience of a lost decade (or two), if not the Great Depression itself, citing the risk of policy errors such as trying to solve a debt crisis by issuing more debt.

thomasromancer

There is nothing real about this recovery. It is totally built upon government influx of funds into the markets. Not to mention Uncle Sam is borrowing money from other countries to make us feel like all is well. That practice is going to end soon enough.

[Oct 21, 2009] Express Your Outrage At Showdown In Chicago

Mish's Global Economic Trend Analysis

Those wishing to express outrage can do so at Showdown In Chicago on October 25-27.

Showdown is a series of demonstrations when thousands of Americans - retirees, farmers, workers, homeowners, renters, students, clergy, and small business owners - come together on the streets of Chicago to demand a banking system that puts the American people first and a Congress that makes it happen!

Dean Baker, Co-Director of the Center for Economic and Policy Research, says Won't You Please Come to Chicago?

Those disgusted by the bank bailouts, and the bankers who brought us this recession, will have a chance to make their views known when the American Bankers Association has its annual meeting in Chicago, October 25-27. A large coalition of labor, community, and consumer organizations are organizing a protest at this "Showdown in Chicago"

A big turnout at this event can make a real difference. Just to review the scorecard, most of the country is still suffering the fallout from the bankers' irrational exuberance of the housing bubble era. The Congressional Budget Office (CBO) and other forecasters expect the suffering to endure for years to come.

The unemployment rate is about to cross 10 percent, with an additional 9 million workers only able to find part-time work. CBO projects that unemployment will not return to normal levels until 2014. Almost 200,000 people are losing their homes every month through foreclosure. Tens of millions of people who had expected a comfortable retirement just saw most of their wealth disappear with the collapse of the housing bubble. State and local governments are being forced to lay off school teachers and fire fighters under the pressure of enormous budget deficits.

But not everyone is suffering. Thanks to the bailout programs put in place last fall, most of the country's major banks are back on their feet. In fact, in the most recent quarter, bank profits hit a new record high as a share of all corporate profits.

And the banks are sharing their wealth. Many of their top executives and high performers will be getting bonuses this year worth millions of dollars, in some cases the bonuses will be in the tens of millions.

In the meantime, in elite Washington circles people are busy making plans for a national sales tax so that the government can limit the fiscal damage caused by the bankers' recession

To summarize: the bankers wrecked the economy with their greed, ran off with taxpayer dollars in a massive bailout, and now plan to raise taxes for the rest of us. If that picture doesn't sound quite right, then go to Chicago.

This is a case where the divisions are not left-right, but of the elite against everyone else.

A bill that would require the Fed to disclose what it did with more than $2 trillion in loans to banks and other financial institutions was originally co-sponsored by Ron Paul and Alan Grayson, one of the most conservative and one of the most progressive members of Congress. Due to public pressure, it now has more than 270 co-sponsors.

This is exactly the sort of alliance that gets the elite worried.

Reining in the power of the financial industry will be a long hard fought war, but it is one that must be fought. President and Nobel peace prize winner Barack Obama may not have been able to bring the Olympics to Chicago, but everyone who wants to retake our country from the banks can bring their backside there on October 25th.
 

On the off-chance you are not outraged at anything please read Where The Hell Is The Outrage? for some ideas.

[Oct 21, 2009] The US Needs to Get Less Competitive

Jesse's Café Américain

"The whole aim of practical politics is to keep the populace alarmed, and hence clamorous to be led to safety, by menacing it with an endless series of hobgoblins, all of them imaginary." H. L. Mencken

The hobgoblin that is often used by the Wall Street banks is that if this or that reform is introduced, it will lessen their competitiveness, and their craftiest and most clever employees will leave the country to work for foreign banks.

Is that supposed to be a threat? That sounds like a plan. And let them deduct the price of a one way coach class ticket.

It should be painfully obvious by now, that despite his recent crocodile tears and phony fist waving, that Larry Summers and crew Obama are being bossed around by the banks, for whatever reasons that charity might prevent one from saying.

It is time for a real change, in most cases bringing back what was taken apart over the past twenty years.

If you are a bank, and you take deposits and obtain access to the Fed window and FDIC, you should do nothing other than traditional commercial on balance sheet banking. Period.

If you are an investment bank, you are a no better than a hedge fund. There should be strict limits on the quality and levels of the capital which you employ. And your partners should be exposed to the full extent of your losses. Yes, the full extent.

In the markets there needs to be position limits. If you exceed the position you get fined and surrender 100 percent of any gains. If you do it again your trader gets his license suspended. A third time and your trading license is revoked until you can prove you have gotten your internal controls together.

As for naked short selling. Forget about it. If you fail to deliver within 24 hours you are forced to cover on a market order, like a margin call.

If you receive an exemption for legitimate commercial hedging, your position is published with your name on it on a weekly basis. After all, your hedging decisions are based on information which should be disclosed, sooner rather than later.

The timely disclosure of pricing and volume information in any market is public information and should be disseminated to all parties at the same time, without predatory pricing that inhibits access by the average investor. Or better yet, just make the information feed free, and take the costs as a part of doing business as a licensed exchange.

There are criminal penalties on the books for white collar crimes. When corporations engage in fraud, those penalties should apply to the perpetrators within the firm. The current regime of wrist slap fines from the SEC to be absorbed by shareholders makes the risk-reward ratio an incentive for breaking the law. There needs to be a section of the FBI that deals only and specifically with white collar crime, not as a task force, but as part of its organizational structure.

Corporations, including non-profits, foundations and trusts, are not people, and they do not vote. Only voters should be able to contribute to political campaigns. If this creates a financial problem for politicians who rely on millions of dollar to fund elaborate media and public persuasion campaigns, well then, too bad. There is always the option to pursue public campaign funding. They might actually have to say things and stand on a genuine record actually reported by a legitimate news media.

Time to break up the media conglomerates. Period. The news organizations cannot be controlled by a few corporations. There were limitations on news outlet ownership for many years which were repealed. Bring them back. Diversity of ownership brings checks and balances.

And the financial activity of lobbyists should be limited, recorded, and disclosed on a monthly basis, and in detail. You or any member of your staff go to lunch with a lobbyist, the amount which you accept is reported along with the subject matter discussed. You are a registered lobbyist, and all your lobbying related phone calles and text messages become a matter of public record. The public deseves to hear your case as well as their representatives.

The revolving door between lawmakers, regulators, and the businesses with they oversee must be slammed shut for a period of no less than five years. Time to bone up on a trade besides influence peddling, congressman.

Would this prohibit the best minds from serving the public? Are you kidding me? Look at the government in Washington now. If those are the 'best minds' then the US is in real trouble.

If the US wants to get back on its feet, it is going to have to get serious about restoring its liberty and an even playing field for all its people.

This would be a start. Next up, tax code reform. You want a flat tax? I'll give you a flat tax....

[Oct 20, 2009] einhorn-vic-2009-speech

I believe there is a real possibility that the collapse of any of the major currencies could have a similar domino effect on re-assessing the credit risk of the other fiat currencies run by countries with structural deficits and large, unfunded commitments to aging populations.

I believe that the conventional view that government bonds should be "risk free" and tied to nominal GDP is at risk of changing. Periodically, high quality corporate bonds have traded at lower yields than sovereign debt. That could happen again.

And, of course, these structural risks are exacerbated by the continued presence of credit rating agencies that inspire false confidence with potentially catastrophic results by over-rating the sovereign debt of the largest countries.

Now, the question for us as investors is how to manage some of these possible risks. Four years ago I spoke at this conference and said that I favored my Grandma Cookie’s investment style of investing in stocks like Nike, IBM, McDonalds and Walgreens over my Grandpa Ben’s style of buying gold bullion and gold stocks. He feared the economic ruin of our country through a paper money and deficit driven hyper inflation. I explained how Grandma Cookie had been right for the last thirty years and would probably be right for the next thirty as well. I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long-term value as difficult to assess.

However, the recent crisis has changed my view. The question can be flipped: how does one know what the dollar is worth given that dollars can be created out of thin air or dropped from helicopters? Just because something hasn’t happened, doesn’t mean it won’t. Yes, we should continue to buy stocks in great companies, but there is room for Grandpa Ben’s view as well.

[Oct 20, 2009] Einhorn on gold, sovereign risk, and more Blogs  by: Rolfe Winkler

Two years ago, when he spoke at the Value Investing Congress, David Einhorn said Lehman was in deep trouble. Turned out it was a good call. Today he gave another keynote at the conference in which he argued the policies of the administration have put us on a very dangerous path, one which has encouraged him to buy physical gold as insurance against sovereign default(s).

Here’s a pdf of the speech. A few highlights below.

On Bernanke and Geithner:

Presently, Ben Bernanke and Tim Geithner have become the quintessential short-term decision makers. They explicitly “do whatever it takes” to “solve one problem at a time” and deal with the unintended consequences later. It is too soon for history to evaluate their work, because there hasn’t been time for the unintended consequences of the “do whatever it takes” decision-making to materialize.

On too big to fail and the true lesson of Lehman:

The proper way to deal with too-big-to-fail, or too inter-connected to fail, is to make sure that  no institution is too big or inter-connected to fail. The test ought to be that no institution should ever be of individual importance such that if we were faced with its demise the government would be forced to intervene. The real solution is to break up anything that fails that test.

The lesson of Lehman should not be that the government should have prevented its failure. The lesson of Lehman should be that Lehman should not have existed at a scale that allowed it to jeopardize the financial system. And the same logic applies to AIG, Fannie, Freddie, Bear Stearns, Citigroup and a couple dozen others.

The administration talks tough about TBTF, but has made very clear they aren’t willing to make policy choices to do anything to proactively break them up. It was very telling when, in a keynote at the Economist’s Buttonwood Gathering, Larry Summers said too-big-to-fail means too-big-not-to-be-regulated. The correct thing to have said, the correct policy that needs to be worked out so that we avoid a re-run of last year’s crisis is “too big to fail is too big to exist.” But don’t take my word for it, take Alan Greenspan’s.

On CDS (bold mine):

I think that trying to make safer CDS is like trying to make safer asbestos. How many real businesses have to fail before policy makers decide to simply ban them?

On arguments that the lesson of 1937-8 is not to withdraw stimulus too soon:

An alternative lesson from the double dip the economy took in 1938 is that the GDP created by massive fiscal stimulus is artificial. So whenever it is eventually removed, there will be significant economic fall out. Our choice may be either to maintain large annual deficits until our creditors refuse to finance them or tolerate another leg down in our economy by accepting some measure of fiscal discipline.

Channeling Stephen “There-is-no-exit” Roach:

As we sit here today, the Federal Reserve is propping up the bond market, buying long-dated assets with printed money. It cannot turn around and sell what it has just bought.

There is a basic rule of liquidity. It isn’t the same for everyone. If you own 10,000 shares of Greenlight Re, you have a liquid investment. However, if I own 5 million shares it is not liquid to me, because of both the size of the position and the signal my selling would send to the market. For this reason, the Fed cannot sell its Treasuries or Agencies without destroying the market. This means that it will be challenged to shrink the monetary base if inflation actually turns up….

….The Fed could reach the point where it perceives doing whatever it takes requires it to become the buyer of Treasuries of first and last resort.

On his gold thesis:

I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked….

….When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the “stimulus” black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The Euro, the Yen, and the British Pound might be worse. So, I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield.

He’s also buying long-dated options on interest rates using derivatives:

Along these same lines, we have bought long-dated options on much higher U.S. and Japanese interest rates. The options in Japan are particularly cheap because the historical volatility is so low. I prefer options to simply shorting government bonds, because there remains a possibility of a further government bond rally in response to the economy rolling over again. With options, I can clearly limit how much I am willing to lose, while creating a lot of leverage to a possible rate spiral.

There’s much more in the speech.

[Oct 20, 2009] Munchau Next Crisis Coming Sooner Than You Think

naked capitalism

RueTheDay:

People REALLY need to read Minsky, and I mean the original, not the internet bastardizations. What’s happening now vindicates his theories every bit as much as the crisis did. Asset prices easily get disconnected from the discounted present values of the income streams they provide, and the level of asset prices are key to the level of investment in new capital projects, which in turn drives output and employment.

Vinny G.:

Indeed, indeed, the next crisis is nigh at hand. Behold, it is descending upon us already, like a thief in the night!

You need to be prepared. So, once again, here’s Dr. Vinny’s 5-easy step prescription for your continued health and well being:

1.) A residence outside of the US and Western Europe

2.) 2+ passports

3.) Enough physical gold and silver to survive for at least 20 years

4.) A high quality blue-ray recorder and digital cable service, so you can record in high definition the collapse of the evil western world as we know it

5.) A stockpile of high quality coffee and a decent cappuccino machine, so you can maximize your viewing pleasure of the recordings made in point (D) above.

Now, if you have not already covered items (1) through (3) above, may I politely ask, “What is wrong with you?”

Vinny G.

gruntled:

The System seems incapable of dealing with the after-effects of previous bubbles without blowing new ones. This process reminds one of that definition of insanity that goes something like “… doing the same thing over and over and expecting a different outcome.” Meanwhile, the Wall Street makes off like bandits, the middle class shrinks even further, and the country is in deeper debt…

This surely cannot go on forever.

Vinny G.:

These bubbles do resemble the process of addiction, where relapse is part of the very definition and diagnosis of the disorder.

Unfortunately, addictions are not an easy thing to treat. Take an alcoholic, for example. The physiological withdrawal from alcohol (although painful and potentially dangerous) clears up in a matter of days. However, the psychological addiction lingers on for a lifetime. Every time such a “recovering” addict passes by the bar where he used to hang out, the cravings will return. Every Friday evening rolls around (when he used to do most of his drinking), the cravings will return. And, most importantly, every time one of his old drinking buddies calls, the cravings will return. In order for this person to truly prevent relapse, he needs to end his contact with his drinking friends, needs to take a different route back home (avoiding the bar where he used to hang out), and needs to fill his Friday evenings with non-drinking activities such as going to see a movie or two.

The same is true about our society which is addicted to easy credit, excessive consumption, and an arrogant attitude of entitlement. The booze pushers here are Wall Street, so we need to cut them down to size, and we need to get them out of our face so we don’t have to listen to their lies and empty promises day in and day out. Then we need a radical change in lifestyle. No more credit, no more keeping up with the Johnses, no more getting a new car every 3 years, no more 3000 square feet homes for a family of 3. It is possible, but it takes work. And, first and foremost, it takes putting Wall Street in its place.

Just a few thoughts from a guy who dealt with a lot of addicts.

Vinny G.

Vinny G.:

If I may add to my analogy between addiction and our economic system above:

The fundamental question that any addict must answer is the following: “Is it worth going through all the trouble of kicking the addiction, losing your current friends, changing your lifestyle, just not to drink anymore? Is it worth doing this, especially considering that that is the only thing you know how to do well?”

The answer is emphatically “Yes!” In the long run the life of any “recovering” addict will be infinitely better. His relationship with his wife will improve immensely (assuming she did not already leave him, as she should have, years ago), his children and grandchildren will now not be afraid to hang around him, and his relationship with the rest of the family will improve immensely. Additionally, his legal standing will improve (no more DUIs or spending the night in jail after a bar fight). The money that used to be spent on booze can now be spent on more constructive and useful things. His health will also improve dramatically, with the probability of dying of liver disease or ending up with dementia decreasing radically. And, his mental stability will improve for the better — no more alcoholic mood swings, no more unprovoked explosions, and a dramatic improvement in self-esteem. All these are good things.

The same type of improvement can occur at national level if we change our economic model to one that is not based on financial addiction. An America without a Wall Street driven economy will no longer need to get into mindless wars, it will not be hated or despised by most of the world, and will be able to provide decent health care and education for its people, rather than paying off massive bailouts to the crooks that caused the problems to begin with. We can then rebuilt this decaying infrastructure, enjoy a prosperous lifestyle anchored into reality rather than phony credit, and most importantly, we will be able to live in peace with the rest of the world.

[Oct 20, 2009] The Next Financial Crisis

The New Republic

What will that collapse look like? The bubbles this time will likely appear abroad. Parts of Asia and Latin America, a tiny fraction of the size of the U.S. economy, are experiencing large capital inflows, low interest rates, and the beginnings of a major boom. Countries with intact banking systems and access to global capital markets will lead the next speculative wave. The United States will be pulled in--probably soon enough that we will all be surprised by a supposedly robust recovery, fed by continued low interest rates and loose credit. We all know these episodes end in tears, but they can be spectacular while they last.

Just like in the late 1920s, most central banks--the Fed among them--will undoubtedly wait a long time to raise interest rates. Inflation remains low, and bankers will surely argue that financial-sector fragility means we should be cautious. It would take a tremendous political battle to stop the next bubble; who wants to take away the punch bowl in the midst of a perceived boom? By the time the Fed and other central banks get around to tightening monetary policy, it will already be too late.

Based on what we have seen over the past two decades, the cost of the next collapse will invariably be steep. Since the early 1980s, the Fed has gone back to its origins as the bailout machine for the financial sector. The only difference is that this sector has become much larger since 1907 or 1913. Back then, it accounted for around one percent of GDP. Now it is closer to 8 percent. The cost of bailouts--the current one and those to come--has skyrocketed as a result.

[Oct 20, 2009] Munchau Next Crisis Coming Sooner Than You Think

naked capitalism

Wolfgang Munchau has a solid, thoughtful piece at the Financial Times which argues that the widely applauded rallies in stock and commodity markets are already looking very much like bubbles, and the efforts to contend with them (either directly, or as a result of the need to start reining in liquidity) is likely to kick off another crisis.

That much had been said in various ways in other venues, although Munchau does offer valuation data to back up his views. The more novel part of his argument is that instability is the inevitable result of an overly-large financial sector, and the result is bigger and bigger swings in output (meaning GDP growth) and prices.

Ouch. And the two scenarios he sets forth are not pretty either.

From the Financial Times:

On the surface, this looks like 2003 and 2004 when the previous housing, credit, commodity and equity bubbles started to inflate, helped by low nominal interest rates and a lack of inflation. There is one big difference, though. This bubble will burst sooner.

So how do we know this is a bubble? My two favourite metrics of stock market valuation are Cape, which stands for the cyclically adjusted price/earnings ratio, and Q. Cape was invented by Robert Shiller, professor of economics and finance at Yale University. It measures the 10-year moving average of the inflation-adjusted p/e ratio. Q is a metric of market capitalisation divided by net worth…

…they both tend to agree on relative market mispricing most of the time. In mid-September both measures concluded that the US stock market was overvalued by some 35 to 40 per cent. The markets have since gone up a lot more than the moving average of earnings….

The single reason for this renewed bubble is the extremely low level of nominal interest rates, which has induced people to move into all kinds of risky assets…

... ... ...

Now, I agree there is no prospect of a significant rise in inflation over the next 12 months, but the chances rise significantly after 2010.

Once perceptions of rising inflation return, central banks might be forced to switch towards a much more aggressive monetary policy relatively quickly – much quicker than during the previous cycle. A short inflationary boom could be followed by another recession, another banking crisis, and perhaps deflation. We should not see inflation and deflation as opposite scenarios, but as sequential ones. We could be in for a period of extreme price instability, in both directions, as central banks lose control.

This is exactly what the economist Hyman Minsky predicted in his financial instability hypothesis.** He postulated that a world with a large financial sector and an excessive emphasis on the production of investment goods creates instability both in terms of output and prices.

DoctoRx

The brilliant Brit money mgr Jeremy Grantham lowered his fair value estimate for the S&P 500 to about 880 at least a month ago, if I remember correctly.

This is a world where the most important traded commodity, oil, with stable patterns of usage, dropped more than 75% in about 7 months last year. How can this be in even a semi-rational world?

These markets are either loony or manipulated. Perhaps they are just all derivatives moved around by OTC instruments that we know not of.

I do think that we are in uncharted waters. Prices of all financial instruments could move in almost any direction and amplitude from here over the next months and the Big Finance guys would find a way to explain why prices deserve to be even more in the same direction.

Siggy:

I’m uncertain as to whether the size of the financial sector really matters. That is, in and of itself, size may not be a driving force, rather, it may be a critical symptom of that which is the driving force.

It is my view that the attraction of Wall Street is that it is where the money is. Well, it is where the money can be had without great physical toil. It is the nurturing place for a kleptocracy. It is a place that needs draconian regulation to prevent it from destroying the greater society.

The reason we will soon be visited by another fiancial crisis is that the first, or perhaps current and ongoing one, has not yet been corrected. The Fed, the Treasury, the Administration, the Congress, and the Public have not yet come to agreement that it is the money supply that is the problem. In particular it is the credit component of the money supply that is especially problematical.

A fiat currency in union with fractional reserve banking is the engine of the excess credit that has been created and which credit supports asset price bubbles we have and are still experiencing. To solve that problem, we have thrown what is effectively borrowed money at the problem which is, in itself, borrowed money. How one borrows ones way to a stable economy is a propostion that no one has explained.

There is no painless solution to this problem. What we need to discuss and agree to is a process that extinguishes that debt which cannot be serviced. Converting debt to equity, for example is one of several approaches that might be applied, complete write off is another. Too Big To Fail is a canard that needs to be sent to the dust bin. If the liquidation of a givien institution engenders financial chaos, that may well be what has to occur if there is be any genuine stabilazation and improvement in economic activity.

[Oct 20, 2009] Sudden Debt It's The Banks (Plus Kissinger On The Dollar And China)

If you are wondering what lead the recovery of broad stockmarket indexes, look no further than the chart below (click to enlarge). A comparison of relative performance between S&P 500 (yellow line) and the KBW bank share index (black line), it shows that banks rose almost three times faster, since the market's nadir in early March 2009.

The reason for such outstanding performance is quite simple: Washington's credo of "too big to fail", i.e. trillions in public bailout money. Once it was fully understood just how far the Fed and Treasury were willing to go to prevent "our crowd" finance from going under (sorry Bear, sorry Lehman you weren't "in"), the rebound happened almost instantly.

The Chinese do not trust America to carry out the great political affairs of the planet well. ...the Chinese, before this financial crisis, regarded us as serious and reliable people in the fields of finance and the economy. They trusted our model and wished even to imitate it. The violence of the crisis, the irresponsibility shown by the great institutions of Wall Street much surprised and shocked the Chinese. We deeply disappointed them.

....Today, they have accepted their losses, but they will never again trust us in financial matters. This is the great change. As they are pragmatic people, they understood it was necessary to manage this crisis in co-operation with us, so as to limit the damage to the real economies of our two countries. They take into account that a very large majority of their immense monetary reserves is in dollars and that their exports of consumer goods to America remain vital to the health of their manufacturing industries. The Chinese leaders managed this crisis in co-operation with their American counterparts during the last twelve months, and they will continue to do it. But nothing will be like before.

[Oct 20, 2009] Krugman on Sick Banks, Bad Policy Choices, and Team Obama’s (Misplaced) Anger

Too early to tell but the suspicion grows that Obama has abandoned hopes for a transformational presidency, reenergized discredited right-wing of Republican Party (Bush-Cheney-Rove people), and placed his own chances to be reelected at risk. Some people say that he demonstrates "the terminal emptiness of politics as usual"
naked capitalism

So why is the Administration so angry? It isn’t that there is no reform. There was never any intent to have real reform.

The Administration has been an absolutely shameless backer of the banksters’ interests (and John Dizard remarked that central banks had gone from being vestal virgins to camp followers, so they are now in good company).

It is the industry has become such pigs that they are making a joke of even the bogus reform put forward. They are so confident of their mastery of the gameboard that they are refusing even to go along with token concessions necessary to preserve appearances.

To put it more simply: The Executive Branch does not like being revealed as being a puppet of the banking industry. But it made this Faustian bargain, it has no one else to blame.

[Oct 20, 2009] Nader on Obama A Frightened Man Very Disappointing Tech Ticker

Yahoo! Finance

Here's a sample of what the famed consumer advocate and former Green Party presidential candidate says of Obama in the accompanying video:

Nader's main gripe is that Obama has "turned his back on the very people" who voted him into office, imploring the President to invite representatives of consumer, environmental and worker groups to the White House -- "as they elbow their way between the hordes of corporate execs, speculators and criminals that have received invitations there."

taopraxis:

If War is Peace and Peace is War, then Peace Prize, War Prize, whatever...Is there a Banker's Puppet Prize?

Yahoo! Finance User
I am one of the lefties who voted him in office (and donated hundreds to his campaign). I am furious at Obama's support of the financial oligarchy and recently dropped my democratic party registration. I will never vote for the lesser of two evils again.

[Oct 20, 2009] Robert Shiller We Could Have Another Housing Boom But I Doubt It

"We're going to continue to see more up months but I kind of think it's more likely to fizzle out,"

Oct 19, 2009 | finance.yahoo.com

The strength of the recovery in the housing market has surprised a lot of people, including Yale Professor Robert Shiller.

"This is historic," Shiller says of the recent snapback in the Case-Shiller Index. "It's V-shaped. We've never seen it before. That makes it hard to know from statistical basis what it portends."

Shiller admits to having two conflicting instincts on how this plays out:

So what is Shiller's forecast? "We're going to continue to see more up months but I kind of think it's more likely to fizzle out," he says.

In other words, more short-term gains but long-term pain for housing.

[Oct 19, 2009] Current Market Boom Can't Be Trusted Robert Shiller Says

An interesting comment made Shiller in the interview: "We are the same people we were five years ago. There is still irrational exuberance".
Yahoo! Finance

Are we on track for a repeat of irrational exuberance?

With the stock market up more than 50% since March and the Standard & Poor's Case/Shiller Index on the rise for the last three months, it's a worry, says Yale Professor Robert Shiller. "Somehow we got into this really speculative mentality and I don't think we're out of it yet."

Given the current economic environment, "these booms [in the housing and stock markets] that we're seeing now can't be trusted to continue," Shiller tells Tech Ticker in the accompanying video, taped at last week's Buttonwood Gathering. (Click here for part one of the interview.)

The author of Irrational Exuberance and Animal Spirits characterizes the stock market rally as an "amazing rebound" without much historic precedence, "you have to go back to the Great Depression to see such a turnaround in the stock market."

According to his cyclically adjusted P/E valuation model - stock price divided by average 10-year earnings - stocks are overvalued today, but "not massively overvalued." 

The market's rebound isn't likely to be derailed by valuation in the short term, Shiller says, but if one looks to the classic bear market rally of 1933-1937 as a guide, stocks may eventually crater as they did then.

Selected Comments

Wall Street up & Main Street down.I have not seen any recovery on Main Street. Unemployment, foreclosures & small businesses closing.

Yahoo! Finance User :

In complex adaptive systems, it is impossible to predict the future.

tom:

market up over 50% and no good fundamentals..no earnings..no jobs..delinquent credit..no loans being made..take money off the table before the 3 legged stool falls...the emperor is naked! run...dont walk and start taking profits...

Wehrmeister2000:

I do believe that theory that the bust can be postponed by the artificial pumping of more printed money into the economy. Just remember who is doing this folks. B.H. Obama. There is a price to be paid. Inflation will eventually kick in when all this funny money is chasing what is a dwindling pot of goods and services. The Democrats are trying to carefully craft when the pain comes. If they succeed, it will be delayed until after the 2010 Elections. Personally, I think they can delay it with the smoke and mirrors only past the 2009 elections right around the corner. This *Inflation* bubble *could* pop before that, and it *should*, but there is some truth to 'irrational exuberance' and even I am taking cautious advantage of the current conditions, with an eye to jump all the way out *immediately* when (not if) the market finally turns south. I lost 6% last year, because I had set stop loss points to divest at and had the discipline to follow them. I missed the March Madness, but am still up about 13% with only a moderate risk for this year. I'll ride the curl, and dive off before the surf crashes on the reef. Cowabunga!!!

Thomas

Transparency is such an overused word.

[Oct 17, 2009] Death of Muddle Through

Mish's Global Economic Trend Analysis

The US government is on an unsustainable path. Deficits are soaring and the Obama administration is planning massive tax hikes.

Moreover, businesses have little reason to hire already because of massive overcapacity. Add increasing health care costs to the list of reasons for businesses not to hire.

Given that government spending crowds out private investment, these policies all but assures that unemployment is going to remain high for a long time as noted in Structurally High Unemployment For A Decade.

Killing The Goose

Last week in Thoughts on the Economy: Problems and Solutions I listed the problems and some of the solutions facing the economy. It was a discussion between John Mauldin and I about his weekly E-Letter Killing The Goose.

John and I agreed on many, but not all solutions. I would also like to add something I have proposed before, killing the Davis-Bacon prevailing wage act.

Muddle Through Where Art Thou?

Back in 2002, the usually optimistic Mauldin proposed the economy would somehow manage to "Muddle Through".

However, because of the unsustainable path we are on. John has changed his mind. Please consider these excerpts from Muddle Through, R.I.P?

I defined a Muddle Through Economy in the past as one of slow growth (in the area of 1-2%) and a slack employment environment, such as we had in 2002 and the early part of 2003. In early 2007, I suggested we would return at some point to such an environment at the end of the recession I was predicting.

However, gentle reader, never in my wildest dreams did I think we could be
looking at government deficits of $1.5 trillion dollars and actually budgeting future
deficits of over $1 trillion as far as the eye can see. And there is real reason to think that under current plans, $1 trillion deficits are optimistic.

Look at the graph above from the Heritage Foundation. They suggest that current policy would bring us closer to a $2 trillion deficit by 2019. And that assumes nominal growth that is north of 3% and unemployment dropping back below 5% in reasonably short order.

Japanese Disease

Some readers wrote this week telling me I am far too worried about a rising government deficit. Right now we are at roughly 42% of debt to GDP. In 1989, at the
start of the lost decades, Japan had a debt-to-GDP ratio of 51%. Now it is at 178%, and the world has not come to an end for them. In fact, they are running massive government deficits today and plan to do so for a long time. Why, I am asked, can’t we be like Japan?

In 1989, private Japanese debt (businesses and consumers) was at a debt-to-GDP
ratio of 212%. Now it is at 110%. And the total of both government and private debt is roughly the same (within 5%) of where it was 20 years ago. Along with running large trade surpluses, private debt has been exchanged for government debt. Savings have fallen from the mid-teens to about 2% today, as the country is rapidly aging and now using its savings to live on. And how much has all that government spending helped the country?

Before I answer that, read these paragraphs from Hoisington Asset
Management’s latest letter (last week’s Outside the Box):

“The federal government’s promise to extricate the U.S. economy from this
recession involves more spending (increasing public debt) and more subsidies for
consumers, such as car rebates and home buying incentives (more private debt). In other words, more debt is supposed to solve the problem of over-indebtedness. The truth is that this policy merely indentures its citizens further without providing any income for repayment of debt.

“This means there is no long term income benefit from stimulus programs.
According to the latest academic research, the most recent $800 billion stimulus plan will boost economic activity in the short run, but will surely depress economic activity over time. The government problem is complicated by the fact that the tax multiplier is 3, meaning that a 1% change in taxes will change GDP by about 3% over time. More recent research (Barro & Redlick, September 2009, "NBER Working Paper 15369") suggests that a 1% cut in the marginal tax rate would raise GDP in the ensuing year by 0.6%. With the deficit rising due to a zero spending multiplier, the tendency will be to try to raise taxes to pay for this higher level of expenditures, which will further depress aggregate spending and output.”

For all intents and purposes, Japan has had no growth for almost two decades.
Their nominal GDP is where it was 17 years ago, and the number of employed people is at 20-years-ago levels. An aging population has masked their unemployment problems, as older citizens retire. Their savings went to government debt. Taxes were raised numerous times. Since government deficit spending has no long-term multiplier effect, growth has been nonexistent. (By the way, that research about multiplier effects has also been done by Christina Romer, the chairman of the current President’s Council of Economic Advisors, and further explored by European economists. There is general agreement on these facts.)

Large government deficits choke off the very investment that we need to create
jobs. In the name of doing good, the unintended consequence is to make it more difficult for small businesses to start up and create jobs. And we all know that small business is the engine for job creation.

The New Muddle Through Economy

This is not a prescription for a return to normal growth. We are headed for a New
Normal that is less than what the market currently believes. Unless the deficit comes
under control at some point, we face the real prospect of catching Japanese Disease and suffering yet another lost decade. Can we Muddle Through? We have no choice but to do so. But it will not be fun. It will not be long-term 2% growth and employment going back to 6% any time soon. Can we reverse the course? With a different attitude and leadership in Congress, maybe we can. But it won’t happen next year, and it’s unlikely in 2011.

I am afraid we will have to put my old friend Muddle Through, as I previously
defined him, back in his box for a while.

Japan Rethinks A Dam

In light of the above discussion of the Japanese Disease (something I have talked about on many occasions as well), please consider Japan Rethinks a Dam, and a Town Protests.
 

The clatter of construction machinery still fills this forested mountain gorge, where legions of men in hard hats busily pour concrete, clear hillsides and erect a huge, unfinished bridge whose concrete supports tower over the valley floor like crucifixes in an immense graveyard.

It seems an apt analogy. Japan’s new government has suspended the $5.2 billion Yamba Dam being built here and turned this valley four hours north of Tokyo into a symbolic final resting place for the nation’s postwar order, which relied on colossal public works spending.

The Democratic Party government of Prime Minister Yukio Hatoyama has chosen this dam as the first of 48 national government-financed dams that it wants to scrap, worth tens of billions of dollars.

Japan had around 60 large dams under construction in 2005, making it the world’s fourth largest dam-building nation, according to The International Journal on Hydropower and Dams, despite having a land area smaller than California’s.

Decades of pouring concrete have been widely blamed in Japan for cluttering rural areas with needless dams and roads to nowhere. They have also saddled the country with the developed world’s largest national debt — nearly twice its $5 trillion economy. Mr. Hatoyama’s party has vowed to replace Japan’s postwar “construction state” and the jobs it created with something closer to a European-style social welfare system.
 

That my friends is exactly what public work stimulus projects do on average. Now Obama wants to gut public schools, rewire them, and make them energy efficient. At what cost? At what benefit?

Expect other infracture projects as well. Some may be useful, many won't. The money has to come from somewhere and that somewhere is higher taxes, a cheapening of the US dollar, or both.

Such infrastructure projects did not work in Japan and they will not work here.

Did Muddle Through Ever Work?

For many years it seems like muddle through worked. Indeed on average it did. But averages are deceiving. From 2003 through 2006 if you worked in real estate in any capacity the odds are you did well. If you worked in manufacturing the odds are you didn't.

If you lived in Chicago or Seattle you did better than average. If you lived in Detroit, Toledo, Akron (or Michigan or Ohio in general), things seemed more like a depression.

On average Florida muddled through. But in 2005 people were camping out overnight in lines praying to have the chance to buy a condo. Today it is ground zero of the residential real estate bust.

Factor in the bonuses proposed at Goldman, and other financial institutions. One might conclude on average we are still muddling through.

Yet, there are vast sections of the country where Muddle Through did take place on a more even keel. My hometown of Danville, Illinois muddled through, at least on the surface.

The real estate boom and bust completely passed Danville by. Is that muddling through? I can easily make a case it is. Yet beneath the surface towns like Danville are in slow decay with no source of jobs, homes in general decline, and an aging as well as shrinking population.

In the bubble areas there was a wildly uneven boom, on the back of cheap financing and poor economic policies but that was never the road to a sustainable muddle through. Now the Obama administration, just as happened in Japan, and the Great Depression before that, has taken a bad situation and vowed to make it worse.

In the meantime we have unheard of corruption and influence peddling in DC, hell bent on maintaining policies of the Bush Administration that will make the rich richer, and the middle class poorer.

So muddle through is now on the back burner. The reality is muddle through only worked on average anyway, and the averages were very deceiving.

Charles Walters: New Wealth and the Productive Economy

Jesse's Café Américain

Here is an essay that explores the historical concept of "New Wealth" and what we call 'the productive economy.'

For us, there is a real place in the general economy for lawyers, bankers, merchants, and those who enable the organization and distribution of 'new wealth.'

It is a matter of balance. When one segment dominates the other destructive imbalance results.

As communication and information technology improves, and behavioural persuasion becomes more sophisticated, the organizers and oligarchists can extend their domination to ever larger portions of the world population. The control of currency and commerce are almost as important as military power to the maintenance of empire. The Fall of Rome was as much an artifact of technological shortcomings, despite significant advances and innovations in the prime of the empire, exacerbated by a general weakening of governance through a corruption of leadership.

This essay is offered as a stimulus for thought and is not intended as a general endorsement of this author or his organization.

Enjoy your weekend.

THE PRIMACY OF NEW WEALTH
By Charles Walters

So 2008 is gone, leaving in its wake the end of an era conceived in iniquity, nursed along in delusion with religious propitiation to the capricious god called high finance. As promised in these newsletters and other editorials, we have already started making drastic adjustments in our political and institutional arrangements. A fuller version of the entire story is contained in my semi-autobiographical, fully historical novel, A Beast of Muddy Brain, which was released at the recent Acres U.S.A. Conference in St. Louis.

Usually the passage of an era is viewed in terms of leaders and military people who hog the pages of history. This is not the case with Beast. Here the nearly century-long story unfolds as the life of a single farmer and his family.

In this column, however, a small part of the story brought into focus by recent events lays out a few lessons found in unopened books.

Military Industrial Complex

By the time Dwight D. Eisenhower warned of a military-industrial complex in his farewell address, the complex was already a reality. Ike wanted to say, "Congressional-industrial- military complex," but his advisors convinced him to delete any reference to the "honorable ones," this in spite of their penchant for both hidden and open bribery.

The military-industrial complex was in fact launched February 27, 1947, in the White House cabinet room. The cast of characters included Secretary of State Dean Atchison, a few congressional leaders, including Republican Senator Arthur Vandenberg. The product of that meeting was the replacement of the republic with a national security state and a public policy of waging "perpetual war for perpetual peace," the last phrase a Gore Vidal quote. The first of these became characterized as cold. It became hot in Korea and tepid in terms of scale into the now present.

It was Senator Vandenberg who in effect told Harry S. Truman he could have his militarized economy if he employed the canard that the Russians were on the way. This dark secret was dressed up as the Truman Doctrine, war being the engine of credit used to save Greece, Turkey, then Europe and the rest of the world from the nearly prostrate Soviet Union.

Mark that date --- February 27, 1947. Align it with the buildup drive to pass new farm legislation and the full implementation of the new-fangled Bretton-Woods Agreement. Bretton Woods has already been described fully in this column (October 2008). The infamous farm act of 1948-1949 (the Aiken bill) has been the subject of commentary as long as this paper has been published.

The 80th Congress

Truman called the 80th Congress the worst in history. And yet its action in the matter of the Aiken bill fit hand in glove with the destruction of the simple and obvious system mandated by the U.S. Constitution. The end result that swung from the neck of the nation like a dead albatross was a provision called "60 percent of parity."

The military-industrial complex decreed that the nation's commissary could be maintained by underpaying agriculture by 40 percent, thereby releasing millions from the farms for factory work, military factory work included.

In perhaps another 50 years, economists may rediscover the awesome truth that a steady decline in farm income translated into a steady decline in national income, the ratio being 1 for agriculture, 7 for national income --- a ratio fixed by the state of the arts.

The shortfall in farm and national income became so uncomfortable during the second Eisenhower term, an injection of $72 billion was decreed for the military-industrial (and now university) complex status quo for agriculture. By the time rumblings that formed the National Farmers Organization became evident in 1955, hogs were selling for 10 cents a pound, corn 10 cents a bushel. War was ever triumphant in those days. There was a Communist under every stone, as is the case now with terrorists. Loyalty pledges were demanded, and neighbors were invited to fink on each other. By the mid-1960s, some 2,400 farms were closed down each week, the land and other assets being transferred into "a few strong hands."

What Was Wrong?

What indeed, was wrong with this equation? Agriculture --- Farm Bureau, agribusiness and academia excepted ---appealed to physics in its role as a new wealth industry and commonsense while institutional arrangements were being dismantled, and new ones constructed that were suitable to finance, esoteric manipulations, and a dream as old as Genghis Khan --- one world. Representative government of, by and for the people is now no more than a footnote in history. Only corporate America and a compliant military have true representation in Congress, the bribe is that powerful, whether paid in the dark or openly as an obscene fee for a speech while either in or out of office. The two-party vote has become so repugnant hardly half those eligible even bother with the exercise.

The Source

"The land is the source or the substance from which wealth is drawn;" wrote Richard Cantillon in Essai sur la Nature du Commerce en General, and he continues, "the work of man is the form which produces it, and wealth in itself is nothing other than food, commodities and the amenities of life."

Cantillon's treatise described the source of new earned income at a time when John Law ruled the economy of France. Cantillon and Law clashed, chiefly over the real character of money.

Law established the Banque Generale in 1715 and had it converted to a state bank three years later. His every move was designed to drive raw materials prices down while he, John Law, furnished substitutes to repair the deficit. In his own way, he developed a war against poverty, created make-work projects such as digging a canal at Briare, and he took steps to make Paris a seaport town. All tolls were abolished so that the grain trade could be "freed." Import duties were reduced on oil, leather, tallow and wines so that free trade could furnish France with cheap imports. Commodities fell in price. And new money issues were constructed by the Banque Generale, which simply monetized collateral. It took this economy only two years to explode.

After the dust settled, about the only thing left was Richard Cantillon's Essai, the masterpiece that reached the purity of theory in one lesson and limited itself to the possibilities of life in the next.

New wealth is not easily comprehended in a society addicted to wealth on the gaming table, at the end of a stock trade or embodied in currency created out of thin air by institutional arrangements that no longer ask the questions of a child: Where does it come from? Where does it go? The transition from the simple business equation to some idea of earned income at the national level that can emerge as national profits (social surplus) and savings leaves most people and most economists bewildered. They see the CEO who walks off with, say, $10 million after scuttling his company as wealth, and so it is in terms of the individual. But he has left in his wake disturbing exchange consequences and no direct effect on buildup of national profits and savings. The parasite creates no new wealth, and usually debilitates new wealth creation, because the predator merely transfers money from one pocket to another, and in terms of physics creates nothing.

There are close to one million lawyers in the United States. They transfer a great deal of money from their clients and victims into their own coffers. This transfer is called earnings. It adds to national income, but it adds nothing to national profits and savings.

Wal-Mart is said to be the largest corporation in the nation if not the world. Bentonville billionaires are now a part of American legend. Yet Wal-Mart produces no new national wealth. Like the baseball game or the professional football contest, it transfers the money called wealth by talk show hosts from one pocket to the next, but the net effect of these enterprises is to enable new wealth industries to fabricate things like baseball bats from lumber, helmets and gear from plastic --- all sourced from raw materials --- to stimulate economic activity, but adds little or no national profits and savings for stable investment.

To find the source of new wealth, we are required to examine new wealth industries.

Financial services are not new wealth creators. Quite the contrary, they make the stable dollar a relic of yesteryear because in the main they create money, but do not create the interest required to make this super-grift appear real. The grift called debt may enable instant gratification, but it also transfers the wealth of a nation into the hands of a few. That is why the interest mill delivers nations into convulsions at regular intervals in history.

In turn, debt is enabled by anything less than broad-spectrum distribution of landed resources and money income. Further, as new wealth industries are deprived of parity earnings, either instant depression or deferred depression (deferred by debt) must follow in the fullness of time.

Those French philosophers of the 18th century not only reasoned well, they forecast the inevitable as the court and its syncophants installed debauchery as public policy. Finance based on debt creation has replaced the court in our day, purchased the Congress and trapped the American worker into virtual indentured servitude. Finance now bills itself as a prime mover, not as a grim reaper that inevitably destroys the simple and obvious system gifted posterity by the Founding Fathers.

What, then, are the new wealth industries on which national solvency depends?

New Wealth Industries

It can be seen that even the making of a lead pencil involves a staggering complement of services, know-how, sales efforts, even advertising. The only part that meets the test of new wealth is the raw material component --- the lumber, the graphite, the ink for printing, all of which invite a look at nature's gift. Depending on the state of the arts, the raw materials component in products for the sales floor use up to eight times more labor than raw materials. Therefore we speak of new wealth industries as those that require a heavy raw material input.
Food to stoke the metabolic furnace of human beings comes first. It takes some 2,000 calories a day to feed a hard-working human being. That is why agriculture is the largest new wealth industry, accounting for fully 70 percent of the raw materials used to operate the economy.

Fuel, minerals, lumber, gravel, fossil fuels, fish all together account for approximately 30 percent of the raw materials used to run the economy.

The lumber used to make that No. 2 lead pencil may be a small component in the manufacture of the end product, but it is most important because along with graphite it accounts for the lion's share of national profits and savings possible based on the pencil's fabrication. People taking in each other's laundry can create employment, transferring money wealth from one pocket to the next, but that trade-off is strictly neutral in creating the profits and savings needed for sound investment and sound expansion.

Is Labor Primary?

The answer is "yes" --- but that "yes" has a codicil.

The only source for national profits and savings is the raw material input as monetized by the agency of price. That is physics speaking, once you trace those profits and savings back to their origin. That is why national profits and savings rely on new wealth industries.

It is hard not to belabor the point. Take the baseball stadium that Chamber of Commerce types chest-thump into being at the taxpayer's expense, usually with the declaration that a home team generates so-and-so much income. At the local level, it is made to look that way. But from the plane of observation called national profits and savings, the game creates nothing except the few dollars involved in bat, glove and paraphernalia manufacture and the little titanium used to mark base lines.

It is labor that enables the use of raw materials. It is labor that harvests the lumber, mines the minerals, catches the fish, grows the crop. Producers, processors, and an improved state of the arts all are essential. The apparatus of economy pyramids into national income, but not national profits and savings. The policeman, the fireman, we require their service, and their salaries help that pyramid called national income stand on its raw materials base. All facilitate civilization. But they create no national profits or savings. That chore is left to the food they eat, the clothes they wear and the gift from the planet traced to raw physical product.

The Attack

Why, then, do civilizations try to cut the legs from under the source of new wealth? It may seem an assault on the intelligence of the reader to point out that the worldwide scramble is for the control of raw materials, food included. This much stated, we have to wonder aloud why public policy always seems to cut off the nation's legs at the knees by underpricing all of agriculture and many of its other raw materials. In modern times we exacerbate this delusion by ignoring the values embodied in recyclables. The above expresses itself in food's role in energy transfer from the sun to plant to human metabolic necessity. The cycle has to replicate itself daily, monthly, annually!

Finance and debt appear to be prime movers, but they cannot substitute for national profits and savings based on raw materials without engineering convulsion at regular historical intervals.

We now know that interest doubles a debt very quickly. At 10 percent, the doubling time is seven years; at 7 percent, it is 10 years. It is interest that builds a collapse position in 80 to 90 years.

The Fed will be 100 years old on December 23, 2013.

This article is reproduced from Acres U.S.A. The Voice of Eco-Agriculture Volume 39, Number 1, January 2009.
AcresUSA.com

[Oct 18, 2009] Why the Dow Broke 10,000, and Why You Should Still Watch Your Wallet

October 14, 2009 | Robert Reich's Blog

How did the Dow break 10,000 when the rest of the economy is in the toilet?

  1. Corporate earnings are up -- mainly because companies have been cutting costs. Payrolls comprise 70 percent of most companies' costs, which means companies have been slashing jobs. In the end, this is a self-defeating strategy. If workers don't have jobs or are afraid of losing them, they won't buy, and company profits will disappear.
  2. Federal borrowing has filled the gap that consumers and businesses created when the latter began to reduce their debt. Federal debt, in other words, has kept the economy from tanking. Can't keep up forever, though.
  3. With such horrid employment numbers, Wall Street figures the Fed will keep interest rates low for some time, and continue to flood the economy with money. That's good news for the Street because it means money stays cheap -- and with cheap money the Street can make lots of bets on almost everything under the sun and moon. As a result, the Street's earnings are way up. But this, too, is temporary. At some point the Fed is going to worry about inflation and a falling dollar.
  4. Investors of all stripes want to get in early and ride the wave. Pension funds, mutual funds, and other institutional investors figure the bull market has more oomph in it because, well, other investors will jump in. Think Ponzi scheme. Nice for now, but watch out if you're one of the last in.

In other words, this is all temporary fluff, folks. Anyone who hasn't learned by now that there's almost no relationship between the Dow and the real economy deserves to lose his or her shirt in the Wall Street casino.

[Oct 18, 2009] Offices- See-Through Buildings in LA

On a national basis, Reis' forecast is for the office vacancy rate to peak at 18.2 percent in 2010 (currently 16.5%), and for rents to continue to decline through 2011.

[Oct 18, 2009] Why the market doesn't fall The big money needs a winner in '09 by Tom Petruno

October 15, 2009 | Los Angeles Times

After a seven-month rally the stock market ought to have plenty of excuses to pull back, or to at least stop rising for a while. Yet the Dow Jones industrials were back above 10,000 on Wednesday for the first time in a year.

Frustrated bears -- who believe that rebounding stock prices are way ahead of economic reality -- may be overlooking one basic reason why the market is holding up so well: Big money managers badly want this year to finish out a winner after the devastation of 2008. And a winner is what they've got working, if something doesn't come along to screw it up.

So with the economic and corporate-earnings data in recent months generally pointing to things getting slowly better instead of worse, many money managers have simply been reluctant to sell -- which is why the few market setbacks since June have failed to snowball beyond mid-single-digit percentage losses in major indexes.

The fear is that if you sell you'll be left behind. That's exactly what has happened to many or most investors who have let go of stocks in the last seven months, with share prices up 50% or more.

Now, as trader Dave Rovelli at brokerage Canaccord Adams put it, "Whenever we get any significant selling, the bids pile in." That further reinforces the idea that it's too early to exit the market.

"People are interpreting everything positively," said Doug Kass, head of hedge fund Seabreeze Partners. He thinks the optimists are wrong, and that stocks are headed lower.

But positive interpretation of the economic and profit backdrop is what happens in (and drives) a bull market. Investors look for an excuse to hold on, if not to buy. And the market's failure to accommodate calls for a sharp "correction" in prices brings more antsy money in from the sidelines. It helps the bulls' cause that cash now earns nothing.

I've lost track of the number of money managers who've told me that they believe the market can easily rally into the end of the year. Some element of that is wishful thinking, but it can become self-fulfilling.

Most big investors, however, also see a reckoning in 2010. Many expect the economy to struggle to stay in recovery mode next year. There also is universal concern about the federal budget deficit, a potential new wave of home foreclosures, and the risk of inflation if the Federal Reserve doesn't begin to tighten monetary policy.

But if optimism extends only to the end of 2009, the logical question is: When do portfolio managers start taking some money off the table, anticipating a rougher ride for the market in 2010?

They can't all just wait until New Year's Eve. Yet for now, many fund managers' retort to advice to lighten up on stocks is this: "You go first."

-- Tom Petruno

Tab Cocovillea

Not to chime in with negative outlook set, but anyone with skin in the game right now knows that market manipulation by White House backdoor buddies like Goldman Sachs is the only thing elevating this market right now.

[Oct 17, 2009] Is the Recession Over

Rikky Says:

improving is an overused term during this crisis. if last year i made $100 million and this year i made $10 million then next year i made $14 million that’s a 14% “improvement”. there is no ‘going back’ since the us consumer is incapable of taking on an additional $25 trillion in debt and the government can’t play hide the sausage forever. i believe going forward we’ll continue to see structural high unemployment in the USA (8-9%) coupled with increasing propaganda on the positives from TPTB all while the vast majority of Americans continue to suffer via death by a thousand cuts.

Winston Munn:

An Asian recovery decoupled from U.S. and European demand? Doubtful. In the meantime, the U.S. continues on its merry way to becoming….

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/25/AR2009032502226.html

rww:

The “new orders” data is pretty impressive.

But it could be a case of industry falling for the hype, preparing for an uptick in demand that doesn’t materialize.

david:

Isn’t it reasonable to assume that manufacturing dipped SO low, that it had to increase just to fill in some of the backlog from the huge dip, even without any new demand coming into the stream?

Correct me if I’m wrong.

Steve Barry:

Here’s the reset chart if you don’t find it in that website

http://www.cycleprooutlook.com/Charts/SP500/OptARM-AtlA_Resets_0908.jpg

wunsacon:

Steve,

Hope you saw:
http://www.calculatedriskblog.com/2009/10/uncertain-housing-outlook.html
http://www.calculatedriskblog.com/2009/10/citi-conference-call-comments-on-impact.html

It seems to me that the shadow inventory and delay-in-recognizing-losses will continue through Q1.

Also, just to play devil’s advocate…

What if the Fed keeps buying Treasuries and counterfeit assets in return for real cash — for “as long as it takes” to establish full employment again? Yeah, they say they’re going to wind down those purchases. But, that’s because they haven’t acknowledged the reality according to Steve Barry. When they’re faced with a second wave of foreclosure, won’t these same lobbyists and authorities respond with another dose of the same policies? And each time the Fed gives away money, that money has to go somewhere.

As for the deficit it creates, people and business and governments have been talking about it for decades. But, they don’t “care” enough to do anything about it. They have to be *forced* to act. In the case of the US, our only real constraint to printing is the price of oil.

VennData:

The global equity markets survived quite will without the marginal worker for generations.

Globalization simply means there are, sadly, a few more of those globally marginal workers in the US (and, of course, a bunch of non-productive ex-real estate “professionals.”) But it’s the high-income discretionary spenders who dominate the consumption side of GDP and it always has been.

Looking for a few hundred thousand people to move from unemployment (transfer payments) to employment (low wage) isn’t going to mean a hill of beans for worldwide corporate profits. The same goes for residential real estate prices (they’re down to flat) yet profits, production, spending etc… are rising.

So stop thinking the “trailers” you’re seeing are anything other that a mis-characterize the ugly movie ahead. The first-tier central bank’s coordinated interest rate hikes are coming to a theater near you.

constantnormal :

Looking at the set of countries that have “emerged from recession” — Taiwan, China, India, Japan, S.Korea, France, … and the US — I notice that a significant fraction of that set are nations to which we have outsourced significant amounts of either manufacturing or labor over the past 30 years.

How much of the US “improvement” is due to profits from economic activities occurring in those nations, which can be viewed as “empty calories”, in that they neither build investment nor strengthen this nation?

Or does the D in GDP exclude those profits by definition?

Also, if we do experience some backsliding in 1H2010 due to the stimulus being either inadequate or less-than-optimally applied — for instance, looking at how India has backslid the past 4-5 months, if we were to experience a similar phenomenon, might we not slide into the infamous W? After all, its not like we are well above the 50 score, either in magnitude or duration (and I have no clue what the margin for error is here, but I can easily see if being larger than the amount we are up by).

I think the single item that continued recovery (such as it is, with the consumer retrenching and the financial infrastructure under continued assault from foreclosures and unemployment a continuing and growing problem) depends on, is the pushing down of the US dollar to make our domestic products more competitive. I see this as a form of protectionism, and doubtless foreign nations see it this way as well. In addition to being increasingly reluctant to lend significant amounts of money to the Treasury, I expect the drum-beat of pressure to move away from the US dollar as a medium of international trade will intensify, moving us further and further into unstable waters.

The odds of an unpleasant surprise are increasing. Faster than the odds of recovery are increasing I cannot say, as the magic 8-ball keeps telling me “Don’t Count On It”.

Thor:

Not sure I agree with the “emerging markets are leading the way” statement.

I’m amused that a group of smart people look at these graphs, read this blog entry, and swallow the data coming out of China as factual. You should all be smarter that that! As an example . . . who here knows how China calculates it’s unemployment numbers?

scharfy:

This recession will be over when the bulk of our population is involved in productive labor. Try as they might, the powers that be will not be able to lead us back to a debt fueled consumption based economy. Unfortunatley, the US is no longer the low tax, business friendly nook of the world that it was 50 or even 20 years ago. So, while entitlement obligations, war costs, bailouts and deficits on the rise, actual labor friendly economic reform has become an impossibilty. Our government has checkmated our people, I mean they have needs, man!!!! Real manufacturing jobs will just not enter the marketplace under current conditions, would you open a factory in the US?

Currently, the media seems to be using JPM, Citi, and Goldman earnings as a proxy Leading Economic Indicator.

After that, the S&P 500.

So hold your breath and hope for good financial earnings and high stock prices.

Slowly, but inexorably, the emerging markets will be less affordable for Americans as the dollars value recedes.

We will actually have to trade them “Good ans Services” for their products, not dollar denominated debt.

Sad thing is, all the pieces are here. We have a large, educated(relatively) populus, plenty of natural resources, and powerful military. Those geniuses in DC just have to let the ponzi game die its natural death, and not enlave us to it.

JusTryinTaMakeIt:

It’s hard to see how the recession is over when federal tax receipts in September were 20% below 2008:

http://www.mybudget360.com/government-tax-receipts-down-20-percent-year-over-year-wall-street-banks-earning-billions-the-unsustainable-economic-course/

And state receipts seem to be following a similar path:

http://globaleconomicanalysis.blogspot.com/2009/10/state-revenue-drops-most-since-1963.html

In the second quarter national sales tax receipts were 9.5% below 2008. That would indicate to me that consumption was 9.5% below last year! Maybe those upward slopes in the graphs you presented reflect “less bad” conditions. They clearly don’t represent improvements over prior peaks!

[Oct 17, 2009] State Revenue Falls Most Since 1963 on Incomes, Sales

Oct. 15 | Bloomberg

U.S. state tax collections tumbled the most in almost half a century in the second quarter as the economic recession curbed levies on incomes and sales.

The 16.6 percent plunge was the biggest since at least 1963, the Nelson A. Rockefeller Institute of Government said today. For the 12 months to June 30, the fiscal year for most states, revenue declined 8.2 percent, or $63 billion, about twice what states got from the $787 billion U.S. economic stimulus package, the institute said.

[Oct 17, 2009] Marshall Auerback Claims of Financial Reform Victory You Can't Reform Vampires and Zombies

Obama clearly believes the BS fed to him by Jamie Dimon. I guess we should not be surprised; the President taught at the University of Chicago, after all, and clearly seems to have imbibed some of the Chicago School's free market ideology, and the unspoken assumption that free, unfettered markets are the optimal state. Anything else is a distortion or a rigidity. That of course fails to address the problem of fraud, which my colleague, Bill Black, has tirelessly sought to highlight.

[Oct 17, 2009] New Report- Conservative Republicans Are Delusional Paranoids

FireDogLake (hat tip reader John D). We need new terminology. Traditional conservatives will not doubt take offense at being included with the extremists. But the underlying phenomenon is pretty scary.

the majority of the GOP base, harbor a well-developed, consistent, peculiar worldview about President Obama and his “hidden agenda” for the country. Armed with “facts” from conservative media, these individuals, fully 2/3 of the Republican Party at this point according to Democracy Corps estimates, believe that the President has been installed by powerful interests to enact socialist policies, violate the Constitution and destroy America. Independents and even GOP-leaning moderates exhibit none of these characteristics, making life difficult for GOP leaders who must choose between support inside the party and support in the country.

[Oct 17, 2009] Wealthy Ramp Up Their Spending, So All Must Be Well «

October 15, 2009 | naked capitalism

The economy must be better, because the rich are spending more. I have to wonder how much of the increase in spending is the result of direct benefit from financial services industry subsidies (ie, people working for large financial firms spending more because they are confident they will have a good to great bonus this year) versus indirect (people feeling better because their stock portfolios have recovered somewhat).

From Bloomberg:

Spending in the U.S. on luxury goods and services spurted 29 percent in the third quarter from the previous three months, as consumers with the highest incomes unleashed pent-up demand, according to Unity Marketing.

Spending among 1,067 consumers with average annual income of $228,800 rose to $18,826 each in the three months ended in September from $14,554 a quarter earlier….

The increase was driven by consumers with the highest income levels, starting at $250,000 a year….The wealthy curbed purchasing earlier this year because of Wall Street job cuts, lower home values and volatile financial markets.

“No question that this quarter’s spending increase is good news for luxury marketers,” Danziger said in a telephone interview today. “Many affluent consumers returned after sitting on the sidelines for a year. However, the richest are few in number, 2.5 million households, so competition will be fierce to win their attention.”…

Gains in confidence among luxury consumers, meanwhile, slowed, Unity Marketing said.

The researcher’s luxury confidence index rose 1.6 points to 75.9, after jumping 18.6 points to 74.3 in the previous quarter. That index peaked at 113.2 at the end of March 2006. Its low was 40.3 in September 2008. It started at 100 in January 2004.

[Oct 17, 2009] Is the Recession Over

The Big Picture#comments

Steve Barry:

Hardly over IMO…we now have record federal deficit…record total credit per GDP…record foreclosures and many more in the pipeline per Cyclepro:

“US banks were hit hard by the subprime default meltdown. But an even bigger default opportunity awaits during summer-fall of 2010 and another larger wave in 2011. These are the Option-ARM and Alt-A rate resets. Combined, these are as big (in dollar volume) as subprime was last year. 2009 is simply the mortgage default scenario taking a breather. This is a lull while the news media is scrambling to find evidence of a non-existent recovery. The 2010 and 2011 reset waves should have a much bigger impact on banks than the subprime bomb.

The subprime event hit when banks were weak, but not yet crippled. Now many are crippled from it. FDIC bank failures are increasing. As we go through the 2010 wave with option ARM and Alt-A resets the banks will be hit while they are weak and undercapitalized. With almost no time to recover, the 2011 wave will hit and an even weaker banking system will be hit harder yet. It could result in a knockout. The Alt-A mortgage holders may not be as weak as sub-prime, but the option ARMs are just as weak. It does not matter, the dollar amount of these mortgages are similar to subprime in overall magnitude and much larger on a per-mortgage basis.

If residential mortgage defaults were not potentially damaging enough, there is also the commerical real estate loan defaults looming large. By analogy, the Option-ARM/Alt-A events are like large waves on an open sea — the commercial event is like a rogue swell that is substantially larger than the two residential events.”

http://www.cycleprooutlook.com/Charts/SP500/Outlook.htm

Marcus Aurelius:

The “subprime” crisis is a misnomer and unfairly places blame on those coming in at the boom of the housing market for problems created by a cast of entrenched money interests. Already, prime mortgages have defaulted in record numbers, and the resets (Option-ARM and Alt-A) the Cyclepro article you cite are still hanging over our heads. CRE is also set for major collapse. The banks are fine.

We never had a subprime crisis. We had systemic criminality in our banking, ratings, insurance, investment and financial industries (as the banks are at the root of it all, and as they are the largest beneficiaries of the crimes committed, I’ll put it all on them). We had a silent coup.

wunsacon

Steve,

Hope you saw:
http://www.calculatedriskblog.com/2009/10/uncertain-housing-outlook.html
http://www.calculatedriskblog.com/2009/10/citi-conference-call-comments-on-impact.html

It seems to me that the shadow inventory and delay-in-recognizing-losses will continue through Q1.

Also, just to play devil’s advocate…

What if the Fed keeps buying Treasuries and counterfeit assets in return for real cash — for “as long as it takes” to establish full employment again? Yeah, they say they’re going to wind down those purchases. But, that’s because they haven’t acknowledged the reality according to Steve Barry. When they’re faced with a second wave of foreclosure, won’t these same lobbyists and authorities respond with another dose of the same policies? And each time the Fed gives away money, that money has to go somewhere.

As for the deficit it creates, people and business and governments have been talking about it for decades. But, they don’t “care” enough to do anything about it. They have to be *forced* to act. In the case of the US, our only real constraint to printing is the price of oil. Everything else we can start manufacturing again. Even oil has a replacement, if we would move ahead with the Pickens Plan.

Quelle Suprise! Banking Profits Might Be Due to Big Government Subisdies!

This looks more and more like "manufactured in Washington" rally. "I regard much of this rally as a similar open secret, except how this is being carried out is a mystery (is this mere trader opportunism and brute force that looks like collusion, with the perps secure in the knowledge that the government won’t act against rule violations, since the outcome serves their interests, or something more deliberate?)"
naked capitalism
The reason for the tart headline is that this view should be conventional wisdom by now (well, it is among folks who understand financial services, but not in the wider world). And it should have been widely commented on when first and second quarter bank earning came out,. Instead the meme was “isn’t it wonderful those banks we thought were dead are actually making money!” No one wanted to look to closely and ascertain that the pretty profits were the result of government props, not sounder fundamentals. The one who came closest to saying the truth was Meredith Whitney, who described the earnings as “manufactured” (recall the role of AIG swaps unwinds in 1Q results) but added that the banks could keep it up for another quarter or two.

The New York Times story warm up indicates that comparatively few are in on the role of the government support in the supercharged profits. The price provides a short recap and notes that the Federal aid is contributing to lofty bonuses:

It may come as a surprise that one of the most powerful forces driving the resurgence on Wall Street is not the banks but Washington. Many of the steps that policy makers took last year to stabilize the financial system — reducing interest rates to near zero, bolstering big banks with taxpayer money, guaranteeing billions of dollars of financial institutions’ debts — helped set the stage for this new era of Wall Street wealth.

Titans like Goldman Sachs and JPMorgan Chase are making fortunes in hot areas like trading stocks and bonds, rather than in the ho-hum business of lending people money. They also are profiting by taking risks that weaker rivals are unable or unwilling to shoulder — a benefit of less competition after the failure of some investment firms last year.

So even as big banks fight efforts in Congress to subject their industry to greater regulation — and to impose some restrictions on executive pay — Wall Street has Washington to thank in part for its latest bonanza…

Not all banks are doing so well. Giants like Citigroup and Bank of America, whose fortunes are tied to the ups-and-downs of ordinary consumers, are struggling to turn themselves around, as are many regional banks.

It is admittedly a high level treatment (for instance, it does not enumerate the various types of support, but does make clear it extends well beyond the TARP) but delivers its message in a clear, matter-of-fact, and unqualified fashion.

Some economists and bloggers have been on this theme (the extent of the subsidies and the lack of quid pro quo for the taxpayer) for quite some time, and their drumbeat continues. One salvo comes today from Jesse in “How Goldman Sachs Leveraged $70 Billion in Government Money For Record Profits.” While this is admittedly close to conspiracy theory, most investment professionals I know regard the latter phases of the stock market rally with great suspicion (too much end of day tape painting, too many heavy handed short squeezes, continued thin volume, and suspicious moves on indexes when they near levels that are significant to technicians). That of course begs the question, “If the market is being manipulated, how and by whom?” When I worked with the Japanese, it was widely known that the Japanese securities firms manipulated the markets and the politicians were tipped off early and bought stocks the brokers were about to ramp (look, if I as a mere gaijin heard about it, it was hardly secret). Yet when it came out in the Japanese media years later, it was treated as a huge scandal. I was and am perplexed that a widely-known practice could be treated as such a remarkable event. I regard much of this rally as a similar open secret, except how this is being carried out is a mystery (is this mere trader opportunism and brute force that looks like collusion, with the perps secure in the knowledge that the government won’t act against rule violations, since the outcome serves their interests, or something more deliberate?)

On the wonky/policy end of the spectrum, Willem Buiter continues to be Not Happy about the wondrously bank-friendly regimes that have been put in place. He provided some commentary from Nobel prize winner János Kornai on one of his ideas, that of soft versus hard budget constraints (Buiter had invoked the idea in a post earlier in the week).

The problem is that the concept is important, but this (established) turn of phrase does not slip swimmingly off the tongue. A hard budget constraint means when you run out of something (dough, usually, but it could be other scarce resources) you are stuck. No magic fairy dust to rescue you. Kornai explains:

To simplify matters, a contrast is often made between the soft and the hard budget constraint. In fact there are grades between these two extremes. The budget constraint that corporate decision-makers sense may be very soft, moderately soft, quite hard and so on, depending on their subjective awareness of the probability of rescue….

Let us turn for a minute to the dawn of capitalism. A debtor unable to pay was threatened by the debtors’ prison. Business failure in the early period of capitalism was more than a fatal material blow, for it ruined the bankrupt’s moral reputation. The budget constraint in those days was still absolutely hard. The perilous results of loss and indebtedness forced entrepreneurs to be extremely cautious.

But the historical development of property relations and the credit system gradually brought essential changes. The principle of limited liability became legitimated, and joint stock companies based on that new principle appeared. At the same time, the hitherto close connection between the material and moral position of decision-makers and the financial state of their companies became weaker.

As property and management separated, so the relation weakened between the individual destiny, income and reputation of the managers making the practical business decisions on the one hand, and the presence or absence of financial destinies of their companies, on the other. Successive legislation on business failure provided some protection for firms caught up in a spiral of debt. These changes and others not mentioned here contributed to a steady softening of the budget constraint….Early capitalism rewarded success richly and punished failure fiercely. As time went by, the rewards not only remained, but in several countries increased dramatically, while the penalties became lighter. That disproportional change has weakened the incentive for business to pursue efficiency and adaptability to change. It encourages irresponsible decisions on borrowing, investment and expansion.

The one bit I find troubling with Kornai’s discussion is he conflates soft budget constraints with socialistic regimes, namely the sort he saw in Hungary in the late 1960s, when companies were urged to adopt “market socialism” but that meant that if the manager did well, the company got a bonus, but if the company produced a loss, no matter, the state would fund the shortfall.

But this is not a function of socialist systems per se; it took place in all the examples that George Akerlof and Paul Romer cited in their classic 1994 paper on looting, and included the Chicago School free market experiment in Pinochet’s Chile, which resulted in a plutocratic land grab. To put it more simply, “socialized losses” can occur:

Note that Korzai stresses that rescues per se are not bad things, provided they are made judiciously and infrequently:

Softness of the budget constraint cannot yet be said to apply in a singular case where a firm in deep financial trouble is bailed out. The syndrome appears if such rescues occur frequently, if managers can begin to count on being rescued. We face here a mental phenomenon, an expectation in decision-makers’ minds that strongly influences their behaviour.

It isn’t hard to imagine that with a clear “no more Lehmans” policy in force in the US, UK, and EU, that banks are very well conditioned by now to expect a rescue if they screw up.

Separately, even the Times manages to undercut the pointed message of its story on source of bank profits with another story today: “All This Anger Against the Rich May Be Unhealthy.” A cultural aside: since the early 1800s in England, there was a distinction between the deserving and undeserving poor. Someone who was able to work but didn’t was undeserving (there were other ways the line might be drawn, but that was one of the most consistent). We see that carried through today (when talking about those over their heads in debt, some readers like to demonize them all as profligate, while others jump in and point out how, for instance, medical expenses can push a lot of people who had lived reasonably within their means into debt pronto. Again, it’s a “deserving v. undeserving” distinction.

Given the row over the suspect level of pay in certain areas of finance, it may be time to apply that notion to the upper end of the food chain more formally. Most people have no problem with self made men and women making a lot of money; heck, that’s the American dream. The fact that the “if you are rich, you must be deserving” Calvinist assumption is beginning to be questioned is positive; we just need to be careful not to replace old stereotypes with new ones.

craazyman:

Financial Rapists

“Words are the nodal points of numerous ideas, and are therefore predestined to ambiguity.”
-Sigmund Freud, The Interpretation of Dreams

“Poets are the unacknowledged legislators of the world”
-Percy Bysshe Shelly

The technical argument for why firms that leverage beta using the taxpayer’s balance sheet are looters is clear to anyone who remotely understands global finance and central banking. I suspect it’s also clear, at some level of mind and intellect, to the some of the people doing the looting. To many of the shallower and more reptilian minds involved — which constitute no doubt a dissapointingly large percentage — it admittedly is probably not. Power and profits, to them, are the only moral justifications needed. As both are no doubt, at some level of inarticulated but instinctively accepted reasoning, deserved.

Financial looting is not now constrained by law, by regulation, or at the individual level, by a sufficiently powerful moral conscience. The easy justification for it is that it is somehow socially necessary to “save” the system. And that the skills involved are “worth” the price paid by society — which includes near-zero interest rates for savers and widespread fiscal and monetary disorder that innervates democracy and sickens spirit of the people.

Yet society, in fact, is probably lucky that folks with skills such as these can “come to the rescue” and “reboot the economy” for the benefit of all. So states a certain “wisdom”, no doubt.

“Looting” is a reasonably violent word that conveys with some degree of accuracy what these men and women are doing. But it’s a word that implies an anonymity of both perpetrator and victim in the context of this usage, with an inneffectual abstraction that lacks semiotic power. It flies through the cinema of the mind like an invisible gust of wind, unarrested and un-stilled by any imagery that is sufficiently shocking and provocative of moral reasoning.

The language of political and social change needs a more muscular power and an imagery that arrests and convinces at an unconcious level — this is a prerequisite for a broader social turn of collective consicousness. Certainly the banksters and their lobbyists rely on this aspect of language in their own dealings with politicians and academics, and the political and economic establishments are complicit in the acceptance of a veritable thesaurus of synonyms that defang “looting” into “providing liquidity to markets”, “intermediating capital flows”, “compensating talent”, “creating efficiencies”.

A more effective phrase that describes the legally permitted looting of the taxpayer is “financial rape”. The imagery is stark and unambiguous, the metaphor is truthful at a structural level, and the notion of a personalized victim and a heinous and brutal action is uncomfortably and effectively conveyed.

The wife who sees her wealthy bankster husband as a “rapist” is likely to be pitched headlong on an uncomfortable path of self-reflection. The man who wonders in some corner of his mind if he really is a “rapist” may be more amenable to contemplation and enlightened regulation. A society that defines privatized gains and socialized losses as a form of “rape” may be more willing to demand the political and regulatory changes needed.

The word is not so hysterical as to immediately lose it’s descriptive legitimacy, as are the frequent description of political enemies as “Nazis”.

No, rape is a good and accurate word. And when firms counterfeit credit, inflate profits falsely, blow themselves up, get bailed out by taxpayers, pay bonuses with taxpayer monies and laugh in your face — they are raping you and they are “rapists” at an elemental level.

And so the good men and women, the MBAs, CFAs, the gentle yoga class going, bottled water drinking, organic food eating, marathon running and symphony going worker bees in the brutal corners and principal trading desks of the financial industrial complex — Yes, you are “rapists”. And you, central bankers, academics, bailout lobbyists and regulator enablers. You are aiding and abetting financial rape.

You don’t like that word, do you? It makes you get angry and squirm a bit.

Yeah, that’s the point.

Now think about it. And imagine what if feels like for the person underneath you, while you’re doing it to them.

Mish's Global Economic Trend Analysis

Before you get your broker on the phone or start trading that dormant online brokerage account, take heed of this warning from Mike “Mish” Shedlock, the blogger behind MISH'S Global Economic Trend Analysis: "Five years from now, I think its quite likely the Dow is not going to be much more than 10,000," he says.

Why so negative?

"We've still not solved any of those structural problems" in the housing, banking and debt markets, that caused last year's crisis, he claims.

Shedlock's advice: ignore the euphoria, and "take some chips off the table. Now's just not a good time to be invested."

The Problems in the Banking Sector Are Only Half Way Over

 October 9, 2009 |  THE PRAGMATIC CAPITALIST

According to the IMF the problems in the banking sector are far from over.  In their latest Global Financial Stability Report they find that the economy is improving, however, the risks to the banking sector remain.  They also conclude that any hiccup in the real economy would reverberate thru the banking sector and further intensify the weakness in the broader economy:

“The immediate outlook for the financial system has improved markedly since the April 2009
Global Financial Stability Report (GFSR) and extreme tail risks have abated. Financial markets have rebounded, emerging market risks have eased, banks have raised capital, and wholesale funding markets have reopened. Even so, credit channels are still impaired and the economic recovery is likely to be slow.

A key question addressed is whether the financial system can provide sufficient credit to sustain an economic recovery. Recently, bank balance sheets have benefited from capital-raising efforts and positive earnings. Nonetheless, there are still serious concerns that credit deterioration will continue to put pressure on banks’ balance sheets. Our analysis suggests that U.S. banks are more than halfway through the loss cycle to 2010, whereas in Europe loss recognition is less advanced, reflecting differences in the economic cycle.”

The IMF estimates that banks have taken less than HALF of their total writedowns to date.  While commercial banks have already written down $1.3T the IMF estimates that banks have another $1.5T to writedown.  Of these writedowns, the U.S. is slightly further along than their Asian and UK counterparts.  This is similar to what McKinsey recently reported.

James said:

Even earning 100 million dollars a day in trading like GS was a while ago, though it seems like a lot to us, doesn’t touch 1.5 trillion dollars. It would take 15,000 days or a little over 41 years if they were earning 100 million dollars EVERYDAY including weekends…I know 100 million isn’t how much the whole banking sector makes everyday but it just goes to demonstrate just how massive 1.5 trillion dollars is.

DaveInDenver said:

The problems in the banking sector are way less than halfway over. They’ve already marked back up most of their toxic assets AND can anyone please quantify the derivatives exposure at these banks…can anyone quantify off-balance-sheet issues?

The devil you know is nothing compared to the devil you don’t and to make a claim that we’re halfway thru this implies you know the answers to the 2 issues above. If you do know those answers, you are the only one on earth.

Fed's Kohn: Economic Outlook

Kohn was one of Greenspan cronies...

10/13/2009 | CalculatedRisk

Angry Saver

This guy Kohn is a piece of work. He and the other Fed governors failed to supervise banks and the credit system. They willfully allowed greedy, bastard wall streeters to poison the system with fraudulent credit. And their solution is to devalue real savings in an idiotic attempt to inflate the value of fraud.

I'm certain this will be even less successful at creating widespread prosperity than when Greenspan encouraged people to take on more risk after the dot.CON bust.

Devaluing real saving is not only immoral it is unCONstitutional. It's a clear violation of property rights. Illegal seizure.

Angry Saver:

Kohn should be fired immediately and charged with high crimes against the people of the United States. Same with Bernanke.

Allowing so much bad debt to poison the system is paramount to treason. It is perhaps the greatest crime ever commited against this country.

Angry Saver:

Tens of millions of American families are facing foreclosure and bankruptcy as a result of Kohn's incompetence. And Kohn believes repeating Greenspan's policies of pushing people back towards risky and toxic Wall St. assets is the solution.

Kohn's incompetence and idiocy rise to such an obscene level that it is reasonable to assume his actions were/are purposeful nefarious acts against the people of the United States.

ResistanceIsFeudal:

The social conscience:

  • 1996: "It Takes A Village"
  • 2009: "It's Rape and Pillage"

rich:

The really astonishing thing is that since March 9, more than $4 trillion has flowed into the U.S. stock market.

But not one net dime of that is from retail investors. That includes mutual funds, ETFs, variable insurance programs, most retirement plans, all 529 plans, and most dividend/distribution reinvestment programs.

Also, this has happened in such a short time, and in a market environment, that you can't attribute much of the $4 trillion to new institutional cash. We know pension funds and endowments haven't been growing, and hedge fund assets are stable at best.

It's all leverage. $4 trillion of leverage. The market's more leveraged now than a year and a month ago.

ghostfaceinvestah:

The usual mishmash of opinions (everyone has one, right?).

By Steve Kerch

Despite signs of stabilization at the end of 2009, next year could prove treacherous for the housing and mortgage markets as a variety of woes could rekindle the falloff of the last two years, according to mortgage-industry veterans speaking at the Mortgage Bankers Association annual convention in San Diego Tuesday.

**"I'm a firm prophet of the 'W' shaped recovery. Housing is going to go down again in the first quarter of 2010," **said Steve Horne, chief executive of Wingspan Portfolio Advisors, a firm that facilitates loan modifications. "The real healing won't begin until all these nonperforming loans start trading in earnest, until we get these borrowers back on their feet."

David Lowman, CEO of Chase Home Lending, also thinks the mortgage market could run into trouble early next year, especially if the Federal Reserve ends its purchases of mortgage-backed securities, a strategy that has artificially supported liquidity and kept mortgage rates at historic lows.

"A lot does depend on how long the government keeps its buying up," he said. "Rates are at all-time lows, but once the buying stops we're going to come to a pretty hard stop. We're likely to see a much smaller mortgage market after the second quarter and later in 2010."

"We still have a crisis in the number of people who can't pay their mortgage, and we haven't seen the peak of that yet. It's going to weigh on us for several years," he said.

The official economic forecast from the MBA isn't so gloomy. Jay Brinkmann, the trade group's chief economist, predicts sales of both new and existing homes will rebound strongly in 2010 as mortgage rates remain relatively low, although mortgage originations will fall as refinancing activity falls by more than 40%.

"Housing starts will be up, but they will still only be half of what they were at the peak in 2007," he said. "And sales will be up, but they will remain concentrated in the lower end of the market. There are still strains on the McMansion market."

Despite the uncertainty of what will happen when the Fed pulls its support from the mortgage-securities market, Brinkmann said mortgage rates should still be relatively low in 2010, gradually moving up to just over 5 1/2% from just under 5% today.

"There are some green shoots - fewer houses on the market, rising sales and stable prices in some markets. But the environment is fragile right now," said Barbara Desoer, president of Bank of America Home Loans and Insurance.

Among the other issues the mortgage industry still must wrestle with: the uncertain fate of government-sponsored mortgage agencies Fannie Mae and Freddie Mac, pending regulatory changes that are still under debate and a growing unease over the soundness of the Federal Housing Authority, which has come to dominate the mortgage-origination market in the wake of the financial crisis.

"There is liquidity on the sidelines, but there is so much fear out there," said Daniel Crockett, CEO of Franklin American Mortgage, a Franklin, Tenn.-based mortgage banker that operates in 48 states. "It's going to be a couple of years of a really tough environment."

The bigger concern may be unemployment, which Brinkmann predicts will hit 10.2% by mid-2010. The continued bad news on the job front is sure to push delinquencies and foreclosures to new records next year.

"We're just getting into a lot of prime-mortgage resets, so we're a long way from the bottom. For short sales we're looking at another two or three years of strong activity," said Jim Satterwhite, chief operating officer of National Quick Sale, a Jacksonville, Fla.-based company that negotiates short sales on homes that are valued less than what they are mortgaged for.

"Some markets have seen better price stability, but they are not going up yet. But it will still be two or three more years before housing even starts to appreciate in some other markets," he said.

 

Pearlstein Don't Reinflate the Old Bubbles Hoocoodanode

pdk:

An OT link/excerpt:

While congratulating the recipients, it is also necessary to ask if the economics Nobel prize has run its course now, as the peace prize appears to have. The latter, at least, has the fig-leaf that it is not intended for rewarding past achievement but only current effort. And the simple truth about economics is that being a social science which pretends to be a physical science, its findings are contextual and therefore not of inter-temporal applicability. They are also not spatially neutral because cultures play a very important role. And if now the Nobel Committee is endorsing the idea that the market is not the only institution that leads to efficient outcomes, one wonders what is left of economics as we knew it. So if the stuffing has been taken out of modern economics with its ersatz proofs couched in mathematics and its econometric fetishes, what is the Prize worth intellectually?

Economists will disagree, but the time may have come to change the periodicity of the prize from annually to twice in a decade so that the Committee does not end up awarding a million dollars merely because it has them and someone has to be given it. There simply isn’t enough meaningful economics research going on to merit an annual award. If this is not possible, the prize in the remaining eight years of a decade — 2010 is good starting point — can be given posthumously to economists such as Alfred Marshall, John Maynard Keynes and Joan Robinson, not to mention David Ricardo, William Jevons, Leon Walras, Antoine Cournot, Robert Malthus, Frederic Bastiat, Eugene Bohm-Bowark and why, even Karl Marx, whose analysis wasn’t very far from that of Prof Elinor Ostrom. The backlist will serve till 2020 at least, and better still, the money can be given over to a charity that manages common properties in their names. Whatever the method of change adopted, the current farce must stop.

The Hindu Business Line : Economising Nobel

Pearlstein: "Don't Reinflate the Old Bubbles"

10/13/2009 | CalculatedRisk

From Steven Pearlstein at the WaPo: Don't Reinflate the Old Bubbles

What we're witnessing here is pretty simple: another bubble in financial assets. All that "liquidity" created by the Federal Reserve and other central banks has accomplished its task and prevented a global financial meltdown. ...

Many analysts now look at the economy and conclude that unemployment is still way too high and the threat of inflation still way too low for the Fed to even think about beginning to raise interest rates again. ...

The right policy response is for the Fed to begin withdrawing some of this extraordinary monetary stimulus even as the rest of the government steps up its effort to stimulate the real economy. That means more money for extended unemployment benefits; more aid to the states so that they can maintain the most vital public services; and more money to expand mass transit, state college and university systems, efficient energy production and basic scientific research. ...

What would surely not be good policy, by the way, is to extend and expand the current tax break for first-time home buyers that is set to expire at the end of the year, as many in Congress are now advocating.

It is tricky to balance monetary and fiscal policy. It appears the next stimulus package will include an extension to the inefficient first-time home buyer tax credit, and will not include some of the items Pearlstein suggests.

Jonathan:

CR, I prefer 'deferred' to 'prevented'.

A share price collapse will take out a bunch of tier 1 capital right?

/nosnark

CalculatedRisk:

Jonathan, it seems like the politicians are determined to make it is difficult as possible to get out of this mess. The goal of any stimulus is to target employment (unemployment). The housing tax-credit does not qualify - and actually could damage the economy more than help.

I'm not sure about "deferred" as opposed to "prevented", but it is still very possible to screw this up big time. I can't believe how financial reform has been shoved to the sidelines (except for consumer protection). Geesh ... it is frustrating.

mock turtle:

scone wrote "

"They" aren't making bubbles. It's an inevitable, mechanical effect of the system, like water "searching" for the sea. The process is mindless. That's why it's dangerous."
dead cente

scone:

creating growth in total global savings that exceeds the world's desire to invest. - pr

There is no limit at all to the desire of humans to "get rich. " Doesn't matter how much they already have. The West is a mature market and we are cheerfully bubbling away, along with the rest of the world. It won't stop once China starts to slow up. In fact, it could get worse as they try to make up for their lack of real growth with more financial engineering.

Eric:

With that in mind, why not let the eCONomy deflate back to it's 2001 level?

Because that's not going to get the Congress-critters re-elected in 2010.

patientrenter:

CalculatedRisk wrote:

it seems like the politicians are determined to make it is difficult as possible to get out of this mess

Well, I know it seems that way, but they are not evil, so that is not their primary purpose. If making it as difficult as possible is not their conscious intent, then what does explain the hopeless economic inefficiency of their actions? In other words, can we deduce their motivations from their actions?

I am interested in what people think. Noob, who sounds like he knows a thing or two about this, may have said that it's all about acting to maximize the sum of political contributions (that can then drive your campaign) and your populist political appeal (so you can get the votes instead of your opponent when your marketing campaign reaches the voters).

In this case, we have practically all of FIRE contributing and lobbying furiously for loan bailouts and asset reflation, and homeowners watching to make sure their local rep votes for home price supports to the max. That's maybe 1/4 of all the contributors to Congress and 3/4 of all the voters.

Angry Saver:

Because that's not going to get the Congress-critters re-elected in 2010.

Eric,

Sad, but true. Generally, the poor don't vote, but the poor that do vote are easily divided by propaganda.

 

CPI: Owners' Equivalent Rent Declines for First Time Since 1992

2009-10-15 | CalculatedRisk

From the BLS: Consumer Price Index Summary

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent in September, the Bureau of Labor Statistics reported today. The increase was less than the 0.4 percent rise in August. The index has decreased 1.3 percent over the last 12 months on a not seasonally adjusted basis.
And on rents:
The increase occurred despite declines in the indexes for rent and owners' equivalent rent, the first decreases in those indexes since 1992.
The decrease in OER was at an annual rate of 1.7%. And rents will continue to fall for some time.

Also, it is now official, there will be no increase in Social Security benefits next year (see: Social Security: No Increase to 2010 Benefits or Maximum Contribution Base)

Goldman Sachs- “A Bunch of Clever Thugs”

Who cares about “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” if you can take couple of million bucks as a bonus...

Chance T. Gardener:

While Goldman certainly has considerable PR concerns, what continues to matter most is whether they have committed some (or all) of the acts that articles like Taibbi’s allege. If I were Goldman, I would actually want to play the PR angle because it confines our interest to nebulous fretting over whether to like or dislike Goldman. If they lose the PR battle, they may still win the war by directing our attention away from two fundamental questions:

1) Have the firm’s former employees, many of whom have held or now hold influential government positions, unduly influenced a government policy that favors Goldman Sachs?

2) Has Goldman done anything to violate the law?

Unlike the PR angle, both of these questions could be verified by a process that takes seriously the claims made by a growing chorus of reporters. This process is important because the integrity of our economic and political systems are implicated by it.
 

Rikky:

this is all going to end badly, of that there should be little question.

Lets step back for a minute and assess our situation:

  • Tens of millions of Americans are out of work and are draining their life savings to pay for basic necessities.
  • Millions of American have lost their dream of owning a home where they can raise their families.
  • Millions are losing their access to credit for the next 7 years.
  • One half of an entire generation that is coming of working age cannot find jobs.
  • The Dollar will (and now it must) continue to fall in order to balance a horribly distorted economy. This will have the effect of increasing the costs of basic goods (selective inflation) thus further reducing the real incomes of the average American.
  • The human pain and suffering is simply going to continue to increase as more and more people run out of support from savings, family or the government.
  • Property crime and theft is and will continue to increase as more and more people become desperate (our county & municipal jails literally are repidly becoming debtors prisons)

And yet in this environment, investment banks stand to pay the highest bonuses ever.

I agree fully with Barry that with respect to fixing the disfunctional financial markets, bonus provisions are not the issue that we should be focusing our energies on . Rather these bonuses are the most visible symptom of a very sick and diseased patient. In a truly “free market- capitalist system”, for these bonuses to exist, they would need to be the result of outstanding performance and return on investment capital in the real economy, not in the trading pits. I hope a cure is found in time.

As a word of caution, please beware of Goldman Sachs’ next clever foray called “Cap & Trade”. If you strongly believe in global warming, then please advocate for a carbon tax with offsetting corporate tax rate reductions in order to give industries the incentives to switch and conserve. On the other hand, if you wish to encourage additional opportunities for the investment banking community to trade markets and make their bonuses, C&T is the way to go.

call me ahab:

Justin says-

“hitting home-runs is easy if your being told what pitch is being thrown…’

good analogy- sums it up in a few words

The Curmudgeon:

How ’bout “Handouts for Hogs”?

We can’t have aging, balding, fat middle-aged doctors, lawyers, accountants, architects, dentists, etc., without a fantasy toy for recapturing the joy of youthful abandon such that they can create the illusion of time standing still. Sort of like with the Fed and money printing. Without it, whither goes those “animal spirits” that makes Goldman rich?

bsneath:

some_guy_in_a_cube Says:
October 15th, 2009 at 9:26 am

x said “Trading *is* their basic business.”

So in essence they are government sponsored and financed Hedge Fund?

Yep, who said capitalism was fair?

Mannwich Says:

October 15th, 2009 at 10:51 am
@bsneath: That’s disguised as a “commercial bank”. Gotta love it.

 

The Middle Class on the Precipice

Harvard Magazine January-February 2006

The data can be summarized in a financial snapshot of two families, a typical one-earner family from the early 1970s compared with a typical two-earner family from the early 2000s. With an income of $42,450, the average family from the early 1970s covered their basic mortgage expenses of $5,820, health-insurance costs of $1,130 and car payments, maintenance, gas, and repairs of $5,640. Taxes claimed about 24 percent of their income, leaving them with $19,560 in discretionary funds. That means they had about $1,500 a month to cover food, clothing, utilities, and anything else they might need—just about half of their income.

By 2004, the family budget looks very different. As noted earlier, although a man is making nearly $800 less than his counterpart a generation ago, his wife’s paycheck brings the family to a combined income that is $73,770—a 75 percent increase. But higher expenses have more than eroded that apparent financial advantage. Their annual mortgage payments are more than $10,500. If they have a child in elementary school who goes to daycare after school and in the summers, the family will spend $5,660. If their second child is a pre-schooler, the cost is even higher—$6,920 a year. With both people in the workforce, the family spends more than $8,000 a year on its two vehicles. Health insurance costs the family $1,970, and taxes now take 30 percent of its money. The bottom line: today’s median-earning, median-spending middle-class family sends two people into the workforce, but at the end of the day they have about $1,500 less for discretionary spending than their one-income counterparts of a generation ago.

What happens to the family that tries to get by on a single income today? Their expenses would be a little lower because they can save on childcare and taxes, and, if they are lucky enough to live close to shopping and other services, perhaps they can get by without a second car. But if they tried to live a normal, middle-class life in other ways—buy an average home, send their younger child to preschool, purchase health insurance, and so forth—they would be left with only $5,500 a year to cover all their other expenses. They would have to find a way to buy food, clothing, utilities, life insurance, furniture, appliances, and so on with less than $500 a month. The modern single-earner family trying to keep up an average lifestyle faces a 72 percent drop in discretionary income compared with its one-income counterpart of a generation ago.

Regina:

Great article! Elizabeth Warren has hit the nail on the head.

I am well-educated (2 MS degrees), did not live extravagantly, and have lost my job several times as a middle-to-senior level executive in major large companies. The job losses were due to downsizing. But each time I lost a job, I was losing a lot of money since it took me awhile to get the next position. I have no pension. I had always saved but with the stock market crash of 2000 and now the financial crisis, a 401K is now a 201K or less.

It is not only middle class families that are hurting; single middle class people are hurting too. Our jobs are all going overseas - first it was manufacturing, retail, now technology. What does America make anymore? We cannot be “knowledge workers” as Clinton said in the 1990s. All boats are not rising.

My financial fallout has happened. The political fallout must occur.

Jan

Ms. Warren is correct with her findings. One slip and everything you have acquired is gone.

Too many people are forced to live on the edge because of bad governmental polices. Our country needs to get back to sound principals that work for the betterment of people.
 

[Oct 14, 2009] Much Ado About Nothing $23B: Goldman Sachs Bonus

October 14, 2009 | Barry Ritholtz

Its time for the quarterly hand-wringing amongst the populace regarding the over-sized bonuses at Goldman Sachs. This Q, its a mere $23B.

SINGER:

To the extent that these GS bonuses are directly related to the items you listed as things to get upset about, I disagree.

This is the question: Would theses $23B in GS bonuses exist to be paid if:

1) No TARP;

2) No bailout of AIG counterparties;

3) No influential GS lobby in Congress;

4) No gifting of hundreds of billions by governments to TBTF’s;

5) No obscene influence and conflict ridden relationships b/w GS and the Executive branch (Treasury);

6) Future risks of the bonus worthy performance had to be taken into account????

If the answer is that these $23 B in GS bonuses would exist even without the above, then I agree we shouldn’t be mad at the bonuses.
 

[Oct 14, 2009] Why Sky-High CEO Pay Is Bad Business - How To Fix Executive Pay - Harvard Business Review

Additional info:

[Oct 14, 2009] Andy Xie: For Economic Stimuli, a Revolving Exit Door

Andy Xie discussing the central banks, their options and lack thereof, going forward. He sees 2% growth, 5% inflation-- more or less a long term stagflation.

[Oct 14, 2009] Bill Moyers Journal . Watch & Listen PBS

SIMON JOHNSON: Well, the final end of the last vestige of Glass-Steagall came in just now in August. Unnoted, but I think very significant. Goldman Sachs, you remember, was an investment bank, a securities company. Not allowed to be a commercial bank; didn't have access to the Federal Reserve and this ability to tap into the money supply of the country. Until September of last year, when the crisis broke, they were allowed a very short notice to convert to being a bank holding company. This was what saved Goldman Sachs in my opinion. Also Morgan Stanley. Which meant they could stay in the securities business. And they could also have access to the Federal Reserve. In August, just now, they converted to what's called a financial holding company. That may seem like a technical detail to you, but this means they can borrow from the Fed, at essentially zero interest rate now.

They can invest in, I mean, as far as we can see, from the outside, looking at their portfolio, anything they want, including, you're going to love this one, they just bought some stock, big chunk of stock in a Chinese automotive company. Okay? So, that's your money, that's your Federal Reserve, financing a highly speculative investment. And if it goes well, they get the upside. And if it goes badly, that's another one for us.

BILL MOYERS: Well, and this is what we were talking about earlier, the system. I mean, President Clinton's Secretary of Treasury, Robert Rubin helps eliminate Glass-Steagall. And then leaves the government and goes to work for? Citicorp?

SIMON JOHNSON: Well Rubin's a fascinating character. He ran Goldman Sachs, he went into the Clinton White House, then he became Secretary of the Treasury, and it was on his watch that, first of all, Glass-Steagall began to really seriously crumble, and then it was completely swept away- replaced, abolished, really. And then, of course, Rubin goes on after he leaves Treasury, to be the senior guru type figure at Citigroup. And Citigroup is absolutely epicenter of everything that's gone wrong with our financial system.

BILL MOYERS: And wasn't it Robert Rubin the mentor, the guru to both Tim Geithner and Larry Summers?

SIMON JOHNSON: Absolutely. Both Geithner and Summers advanced to senior positions in the Treasury under Rubin was instrumental in bringing Larry Summers to be President of Harvard, after the Clinton Administration. And according to published new report, he was absolutely key person in making sure that Tim Geithner first went to a senior job at the IMF, and then became President of the New York Fed. And there are unconfirmed reports that Robert Rubin was an essential advisor to then candidate Obama in fall of last year, with regard to who he should bring on board as the leadership team on the economic side.

MARCY KAPTUR: And you know, looking at it from the heartland, when I look at Wall Street and all their connections into Washington, and I've been at it a while now, it's very disheartening to me, because I know they don't care about us out there. We're flyover country for them. And they're just out to make money.

And I have seen people that I worked with in the Carter White House, who were associated what the bond industry of Wall Street, use their access and create for themselves a money path that today has led them to head organizations like Black Rock, and get private contracts with the Federal Reserve. The over $2 trillion, we don't know how much that the Federal Reserve has extended at this point.

BILL MOYERS: And Black Rock is?

MARCY KAPTUR: Black Rock is an institution that has gotten the major contract of the Federal Reserve to do the mortgage workouts. And my question is, the very people involved in Black Rock, who've gotten these confidential contracts with the Federal Reserve, they were involved on Wall Street in creating the instruments in the first place. So how do we know that they are not covering up their own crime?

BILL MOYERS: So, Simon, what happens now? If we're going to avert a depression and the next calamity, what needs to be done?

SIMON JOHNSON: Well, I think you have to keep at it, Bill. I mean, that's the lesson from previous generations of Americans, who have really confronted entrenched power like this. You have to keep at it. And you mustn't be satisfied. When the Administration says, 'Okay, we fixed it. Don't worry. We did some technical tweaking on capital requirements, for example, in the banks.' You have to say, 'No, that's not true. Let's look at what's happening, let's follow it through.'

The muckrakers of today are absolutely essential, I think, to really pushing these banks. And revealing what they're doing. And by the way, Bill, it's going to I think it's going to be a long haul. I think that the economy will start to recover. We'll get some jobs back. It's going to be very painful for a lot of people. But other people's attention is going to drift. It's a three, five, seven, maybe twelve year cycle. But when it comes back, it will come back with a vengeance. And it will be even, I think, even more devastating, in all likelihood, than what we just saw.

BILL MOYERS: How do we get Congress back? How do we get Congress to do what it's supposed to do? Oversight. Real reform. Challenge the powers that be.

MARCY KAPTUR: We have to take the money out. We have to get rid of the constant fundraising that happens inside the Congress. Before political parties used to raise money; now individual members are raising money through the DCCC and the RCCC. It is absolutely corrupt. It's good people.
 

[Oct 14, 2009] promise-broken

 The poor man inherited a total mess. But now he is surrounded by wrong people and became part of the problem.

No. 24: End income tax for seniors making less than $50,000

"Will eliminate all income taxation of seniors making less than $50,000 per year. This will eliminate taxes for 7 million seniors -- saving them an average of $1,400 a year-- and will also mean that 27 million seniors will not need to file an income tax return at all."

No. 234: Allow five days of public comment before signing bills

To reduce bills rushed through Congress and to the president before the public has the opportunity to review them, Obama "will not sign any non-emergency bill without giving the American public an opportunity to review and comment on the White House website for five days."

No. 240: Tougher rules against revolving door for lobbyists and former officials

"No political appointees in an Obama-Biden administration will be permitted to work on regulations or contracts directly and substantially related to their prior employer for two years. And no political appointee will be able to lobby the executive branch after leaving government service during the remainder of the administration."

No. 505: Create a $3,000 tax credit for companies that add jobs

"During 2009 and 2010, existing businesses will receive a $3,000 refundable tax credit for each additional full-time employee hired."

No. 508: Allow penalty-free hardship withdrawals from retirement accounts in 2008 and 2009

"Obama and Biden are calling for legislation that would allow withdrawals of 15% up to $10,000 from retirement accounts without penalty (although subject to the normal taxes). This would apply to withdrawals in 2008 (including retroactively) and 2009."

[Oct 14, 2009] FOMC Minutes- "Considerable Uncertainty" about Economic Growth when Fiscal Stimulus Wanes

"Overall, the economy was projected to expand over the remainder of 2009 and during 2010, but at a pace that was unlikely to reduce the unemployment rate appreciably."
There are several key points here:

digalert:

FOMC translation: we'll continue buying MBS (bailouts) to restore bank stability (no jail time) and resume honest practices. The consumer remains cautious (because they've been screwed) and may return (dependent on how fast we hit them with taxes) to normal spending. Later we will gather to meet (sing koombaya) to discuss further tools (scams) for the economy.

scone:

Andy Xie discussing the central banks, their options and lack thereof, going forward. He sees 2% growth, 5% inflation-- more or less a long term stagflation.

Andy Xie: For Economic Stimuli, a Revolving Exit Door

black dog:

The virginia sales tax decline tells me one thing. If the big retailers are able to maintain sales or face only slight decrease then small businesses are taking the brunt of the shortfall.

Look for a lot of layoffs/closed businesses/vacant CRE after the first of the year as the 2 year downturn grinds the last of the cash/credit from small players.

[Oct 14, 2009] Diana Farrell And The White House Theory Of Bank Size « The Baseline Scenario

  1. No one has mentioned the role the big banks play in covert economic “foreign policy.” Namely, destroying emerging economies and crippling other economies. How will the U.S. destroy the emerging Chinese economic threat without the big banks? No one wants to talk about the real reasons big banks exist, and Simon of all people should be aware of this.
  2. Marie Antoinette:

    I suspect we are feeding and training our own sumo banks to get into the ring with China’s and Europe’s sumo banks for the throwdown of the millennium.

    And no, I’m not entirely joking (wish I were).

  3. Silke:

    I wish you were, too but I am afraid the sumo image is one of the possible scenarios – but why is the international angle so little reported on?
    because if it were described in detail the pitchforks would come up? because one of the possible scenarios is that a huge sell-out of American valuables has been pulled through while everybody danced to the tune “all the world is constantly getting richer”

  4. StatsGuy:

    It is critically important to separate the “benefits” of size. Notably, there are two:

    1) Economies of scale

    2) International competitiveness

    It is quite likely that, in a general context, banks are far beyond the size where they have hit diminishing returns for economies of scale. In other words, the whole world would be better off if the whole world limited size of banks.

    The issue of international _competitiveness_ is entirely different. The question here is whether a single country would be better off if that country unilaterally restricted banking size while the rest of the world did not – and the notion of “better off” includes the notion of economic/military security (i.e. control over the domestic economy).

    In that sense, an individual country may opportunistically seek advantage by subsidizing their banks – and make no mistake that allowing national banks to grow in size to the point where they are TBTF is an implicit subsidy. This is because large banks, with an implied national backstop because they are “systemically important”, will be able to get credit (e.g. sell bonds) at a lower rate because they are enjoying a subsidized and asymmetric risk/reward proposition. Because of the intense competitiveness of finance, and the limited domain of real competition (rates, service, and what else?), subsidized risk = subsidized cost of business = market share gains.

    In this context, the real defense of large banks is a defense of a deliberate trade policy in which countries identify geopolitically “important” sectors, and target them with subsidies. The US has – clearly – identified finance as a geopolitically important sector, and given it favorable treatment. Given the status of the US dollar internationally, this may be a better explanation of the real meaning behind “benefits of size”.

    That’s not to say this strategy will not backfire eventually. Indeed, it may have already backfired – not only have we suffered the downside of covering excessive lending risk, but owning the reserve currency has also created a multi-decade cycle of dollar overvaluation due to currency exports that have effectively subsidized overconsumption and underproduction in the US. (As the Euro cuts into the Dollar’s share of foreign currency reserves, it will get to experience more of that albatross…)

    I’m still not hearing a credible argument that the benefits of TBTF (i.e. international competitiveness) outweigh the social cost of TBTF (i.e. disenfranchisement / state-capture).
    Master of None

    October 13, 2009 at 3:36 pm
    Reply
    I am not arguing that they do… not at all.

    I am saying that the reason the current Administration is defending big banks is _not_ because they really believe in economies of scale for big finance. Rather, it’s because they believe that supporting big banks is necessary because _other_ countries are supporting big banks. It is, in effect, a trade policy.

    I am not arguing they are correct that the strategic (economic and political) value of supporting that sector against a de factor trade subsidy outweighs the immense costs.
    StatsGuy

    October 13, 2009 at 6:07 pm
    Reply
    And, to be clear, I am not arguing that the stategic importance motivation is the real reason (rather than the quite obvious capture of the political process). It is simply the best (real) argument they have.
    StatsGuy

    October 13, 2009 at 6:10 pm
    Reply
    That kinda reminds me of what Yakkis said about big banks being instruments of “covert economic foreign policy”.

    Maybe they’re like weapons of financial mass destruction. The US need to have some because other countries have some too.

    I think we should all feel safer that they exist. If the Chinese don’t behave, we’ll unleash Goldman Sachs upon them.
    bungalowbill

    October 13, 2009 at 10:40 pm
    Reply
    I wish they would. Then they could take their giant blood-sucking squid tentacles out of us for a few minutes.
    Yakkis

    October 14, 2009 at 12:10 am
    Yakkis has a point… consider the US embargo of Iran, in which one of the more effective implements was curtailment of business with an Iranian bank:

    http://www.iranfocus.com/en/iran-general-/us-embargo-against-iran-bank-not-a-violation-imf-10422.html

    NPR had a storyt his morning which interviewed Iranian businessmen alleging that even while the US was implementing the embargo, Swiss/French/Italian banks (who would have guessed?) were sending representatives to Iran to help Iranian businessmen work-around the US embargo through European relationships and shell companies.

    Moreover, it’s important to also recognize that the _single most effective tool_ at opposing international terrorism has been going after their funding, and in doing so the US has much more leverage with US based banks than (for example) Swiss based banks.

    So why would a sitting President give up such powerful foreign diplomacy tools if he thinks he can control those tools and make them do his bidding?

    The key argument, really, is whether the administration really can keep their hounds under control. Recent history (as in, the past 12 months) seems to disagree. The next question is whether the US and EU can come to some terms about working together to control their finance sectors (particularly in the realm of making them serve national security interests). On that dimension, I’m afraid, the recent history of our European allies is not at all supportive.

    So from the Administration’s perspective, they aren’t willing to give up those weapons. But as SJ notes, they far underestimate the danger of keeping those weapons around, especially since they are inherently hostile to the political party currently in power.
    StatsGuy

    October 14, 2009 at 9:19 am
    (short version of a longer comment I’m not going to retype)

    I agree with Yakkis…

    The US embargo of Iran, and especially of Sepah Bank, is a good example of why the US may think big banks are strategically important.

    http://www.treasury.gov/press/releases/hp220.htm

    Even with big banks that are globally dominant, enforcing such sanctions has only imposed a modest cost on Iran – largely because of European usage of this as an opportunity to expand market share.

    The gamble on the Administration’s part is that they can control this beast. In other words, I will concede that banks are useful on the stage of international diplomacy and national security – indeed, constricting financing may have been our most successful effort at hindering Al Qaida – far more effective than the Iraq War. The question is whether we really can ever safely contain, control, and use big banks without them turning on us.

    per SJ’s “bite the hand” comment, I suspect the answer is no. But that does leave us in an international bind, because clearly our European counterparts do not always share our foreign policy objectives.

    Even so, the cost to our economy of the political capture and the impediments this has created to writing decent regulation (even with such an intense media spotlight) is really damning evidence.
    StatsGuy

    October 14, 2009 at 11:00 am
    StatsGuy: “indeed, constricting financing may have been our most successful effort at hindering Al Qaida – far more effective than the Iraq War.”

    Not to get too far afield, but doing what they wanted us to do (get out of Saudi Arabia) probably had something to do with that. The Iraq War — really, wars, since we won the first one –, has probably done more than anything to fan the flames of jihad against the U. S., by providing a causus belli.
    Min

 

[Oct 13, 2009] Thoughts on the Economy- Problems and Solutions

Mauldin: Unemployment is likely to continue to rise and last longer than ever before. We have to take care of the basic needs of those who want work but can't find it. Unemployment insurance should be extended to those who are still looking for work past the time for benefits to expire, and some program of local volunteer service should be instituted as the price for getting continued benefits after the primary benefits time period runs out. Not only will this help the community, but it will get the person out into the world where he is more likely to meet someone who can give him a job. But the costs of this program should be revenue-neutral. Something else has to be cut.

Mish: Can we deal with 15 million volunteers? Somehow I doubt it.

Mauldin: We have to re-think our military costs (I can't believe I am writing this!). We now spend almost 50% of the world's total military budget. Maybe we need to understand that we can't fight two wars and support hundreds of bases around the world. If we kill the goose, our ability to fight even one medium-sized war will be diminished. The harsh reality is that everything has to be re-evaluated. As an example, do we really need to be in Korea? If so, why can't Korea pay for much of the cost? They are now a rich nation. There are budgetary fiscal limits to being the policeman for the world.

Mish: Bingo. We can easily slash our military budget by 70% and still be the most powerful nation in the world. Moreover, it is time to declare the war in Iraq and Afghanistan over, pack our bags and leave. Gradually, over the next 5-8 years we should bring home all our troops from literally every county they are stationed.

This chart shows the absurdity of our spending.

Chart courtesy of Global Issues - World Military Spending.

By the way that chart does not include the latest increase in the US military budget. Please consider US lawmakers pass 680-billion-dollar defense budget bill
 

The US House of Representatives passed a 680-billion-dollar defense authorization bill on Thursday that includes funds to train Afghan security forces and more mine-resistant troop carriers.

Lawmakers defied President Barack Obama's veto threat and approved 560 million dollars to continue work on an alternative engine for the F-35 fighter jet built by General Electric and British manufacturer Rolls-Royce.

The compromise legislation would also raise military pay by 3.4 percent -- half a percentage point higher than Pentagon recommendations -- and assign 6.7 billion dollars for mine-resistant armored vehicles known as MRAPs, which is 1.2 billion dollars more than the administration had proposed.

Nearly $700 billion dollars of "defense" spending. The amount needed for actual defense is 20% of that at most, and more likely 5%. Balancing the budget is easy if you start here.

Mauldin: Glass-Steagall, or some form of it, should be brought back. Banks, which are subject to taxpayer bailouts, should not be in the investment banking and derivatives-creating business. Derivatives, especially credit default swaps, should be on an exchange, and too big to fail must go. Banks have enough risk just making loans. Leverage should be dialed down, and hedge funds selling what amounts to naked call options in any form, derivative or otherwise, should be regulated.

Mish: What we need to do is get rid of the Fed, FDIC, and fractional reserve lending. Regulation has failed every step of the way. Regulation created Fannie Mae, Freddie Mac, and the Fed. Regulation by the SEC anointed Moodys, Fitch, and the S&P as debt rating companies. We do not need more regulation, we need less regulation, a sound currency, and no Fed. Regulation is clearly the problem, yet the cries for still more regulation come from nearly every corner save the Austrian economists.

Mauldin: Let me see, is there any group I have not offended yet? But something like I am suggesting is going to have to be done at some point. There is no way we can continue forever on the current path. At some point, we will hit the wall. The fight between the bug and the windshield always ends in favor of the windshield. The bond market is going to have to see a credible effort to get back to a reasonable deficit, or we risk a very difficult economic environment. The longer we wait, the worse it will be.

Mish: "Is there any group I have not offended yet?" Yes. You failed to offend those on public pension plans. Not to fear, I did that myself in Five Major Pension Problems - One Simple Solution.

Unsolvable Problems

 


There is a solution of course, it's just not one that anyone wants to hear: The correct plan is to kill all unnecessary services, fire all the government workers and privatize everything remaining.

That is a choice the Washington Post failed to mention. Moreover, it's the only thing that reasonably works.

Mauldin: It is not going to be easy to persuade a majority of Americans that we need to do something now. More realistically, we are going to probably have to begin to experience a crisis of some type to get politicians motivated to do something.

We are not going back to normal, although it is likely we will see some form of Statistical Recovery. But we cannot get complacent. Somewhere out there is the real potential for another crisis, which will dwarf the last one. You will not want to be long much of anything when it happens, except hedged or liquid investments. Though admittedly, this could go on for a long time.

Mish: Obama, Geithner, Congress, Bernanke, the Fed, central bankers in general, and foreign governments are all in the process of rearranging the chairs on the deck of the Titanic right now. Their solution is printing money.

Don't Mistake Printing For A Sustainable Recovery

The plan to date is called Competitive Currency Debasement with the US, China, and Japan as the key players.

As noted in Gold And The Watched Pot Theory, "Every country wants to grow by ramping up exports in a world of decreasing consumer demand. To achieve that end, every country wants its currency to be weaker against every other currency. Of course that is logically impossible. Besides, the US consumer is tapped out. European consumers are tapped out as well. And tapped out or not, the Japanese consumer just does not want to buy."

Neither the G-20 nor G-7 did anything to address the massive global imbalances. Something critical is going to blow sky high, when and what remains to be seen.

Mike "Mish" Shedlock

Consumer Credit Contracting at Record Levels

Jesse's Café Américain

Total Consumer Credit Outstanding in the US is contracting at a year-over-rate of almost 5 percent, which is a record for the post 1960 economy.

The challenge facing Bernanke and the Obama economic team is how to get the US consumer spending again, if they cannot be paid a living wage, and if they can no longer be encouraged to borrow beyoned their means, by using their homes as a cash machine with variable interest rates, as they were encouraged to do by Fed Chairman Greenspan.

[Oct 13, 2009] The Forgotten Peg: Chinese Yuan and U.S. Dollar

"Those calling for a full-blown collapse in the U.S. dollar might profitably ask if the dollar's partners--China and Japan--would approve"
October 12, 2009 | charles hugh smith-Weblog and Essays
And lastly, let's establish the primary context of China's leadership: 1 billion poor citizens seeking a better job/wage/life. Here is a puff piece by former U.K. prime Minister Tony Blair which makes one key point: most of China's citizens are still very poor, and thus the leadership is obsessed with "growth" and jobs above all else: China's New Cultural Revolution: The world's largest country has a long way to go, but there's no question it's changing for the better. (WSJ.com)

Superficial stories about China are accompanied by glitzy photos of Shanghai skyscrapers and other scenes from the wealthy urban coastal cities, but the fact is that the consumer buying power of China is roughly equivalent to that of England (51 million residents).

Thus those who believe the vast Chinese manufacturing-export sector can suddenly direct its staggering output to domestic consumers in China are simply mistaken: Chinese consumption is perhaps a mere 1/10th of that needed to absorb the mighty flood of goods being produced by China.

Put yourself in the shoes of China's leadership: what do you care about more: $2 trillion in U.S. bonds or creating jobs for 100 million people? It's the jobs that matter, and despite its very public complaints about the slipping dollar, perhaps China doth protest too much--or more accurately, for domestic public consumption.

The consequences of a weakening dollar are neutral for Chinese exports to the U.S. but positive for exports to Japan and the European Union. Chinese exports to the EU and Japan have risen sharply in the past nine years, and a weak dollar keeps Chinese goods cheaper than rival exports in these key global markets.

 Since we have many friends in Japan and my brother has lived in France for 15 years, I can report anecdotally that where Chinese goods were not all that common 10 years ago in Japan and the EU, they are now as ubiquitous there as they are in the U.S.

In other words, the Chinese interest in expanding exports to Japan and the EU is more pressing than the paper loss of a few hundred billion dollars in their dollar holdings.

 

[Oct 13, 2009] Rosenberg on Economy String of lowercase Ws for the next five years Hoocoodanode

Tarzan:

That string of lowercase w's is the worst case situation for Americans. It is also called brazilization down to dog-eat-dog society: tiny rich elite controlling everything together with military, small middle class serving the rich bastards and a vast pool of poor people just trying to cope somehow in ghettos.

If there were somekind of huge crash, people might even react and demand more egalitarian society but this slow frog boiling is not going to cause any reactions among Americans. Some guy could say to another guy this in 2019: "Wow dude, you are lucky, you get to mown rich guy's lawn! Good money!"

[Oct 13, 2009] For America’s small banks, the problems are just beginning

Oct 12, 2009 FT Alphaville
And as the New York Times reported on Saturday, the FDIC is approaching the “grim milestone” of having 100 failures among lenders it regulates:

Burdened by worsening commercial real estate loans, many small banks’ troubles are just beginning. Many analysts say that the now-toxic loans could sink hundreds of small lenders over the next few years and place a significant drag on the economy.

[Oct 12, 2009] Ford Interest Advantage

Non-secured, non-diversified. Any time withdrawal.
Under $15,000 -- 2.45%

[Oct 11, 2009] Energy crisis is postponed as new gas rescues the world -

Telegraph

America is not going to bleed its wealth importing fuel. Russia's grip on Europe's gas will weaken. Improvident Britain may avoid paralysing blackouts by mid-decade after all.

The World Gas Conference in Buenos Aires last week was one of those events that shatter assumptions. Advances in technology for extracting gas from shale and methane beds have quickened dramatically, altering the global balance of energy faster than almost anybody expected.

Tony Hayward, BP's chief executive, said proven natural gas reserves around the world have risen to 1.2 trillion barrels per day of oil equivalent, enough for 60 years' supply – and rising fast.

[Oct 11, 2009] Precipitous Drop In State Tax Collections

Oct 10, 2009 | Mish's Global Economic Trend Analysis

New York: Sales-tax revenue in counties, state continues steep drop

October 9, 2009

ALBANY -- Sales-tax collections for counties and the state dropped 8.3 percent in the third quarter, a troubling sign for governments already struggling with higher costs and declining revenue.

The figures from July through September continue a precipitous drop in sales-tax revenue for governments and an indication that the economy is still struggling. It's the fourth consecutive quarter of sales-tax declines for the state.

What's also troubling, government officials said, is that they hoped the third quarter would have marked improvement, particularly because of the popularity of the federal Cash for Clunkers program and back-to-school retail sales.

[Oct 11, 2009] The coming CRE losses for Local and Regional Banks

Oct 10, 2009 | CalculatedRisk

Local and regional banks are exposed to about $870 billion in CRE loans. Not all of the loans will go bad, and the loss severity will be far less than 100%. So the losses may be in the $100 to $200 billion range; small compared to the residential mortgage losses, but still very significant.

[Oct 11, 2009] The Pension Crisis

Oct 10, 2009 | CalculatedRisk

From David Cho at the WaPo: Steep Losses Pose Crisis for Pensions

The financial crisis has blown a hole in the rosy forecasts of pension funds that cover teachers, police officers and other government employees, casting into doubt as never before whether these public systems will be able to keep their promises to future generations of retirees.
...
Within 15 years, public systems on average will have less half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers. Other analysts say funding levels could hit that low within a decade.

After losing about $1 trillion in the markets, state and local governments are facing a devil's choice: Either slash retirement benefits or pursue high-return investments that come with high risk.

[Oct 11, 2009] Why It's Time to Retire the 401(k).

... at the end of 2007, the average 401(k) of a near retiree [55-to-64-year-old] held just $78,000 — and that was before the market meltdown.

[Oct 11, 2009] RATS IN A CAGE

TheBurningPlatform.com

Americans throw away close to $100 billion per year gambling in casinos and playing lotteries. This only includes the amount spent legally. Illegal gambling accounts for billions more. This is the net amount spent. In reality, $60 billion is spent on lottery tickets or $600 per household annually. Another $100 billion is squandered in gambling casinos. This amounts to $950 per household. The $160 billion spent on gambling each year is indicative of the get rich quick without hard work attitude of Americans.

Even worse, households with income under $13,000 spend, on average, $645 a year on lottery tickets, about 9 percent of all their income. Our government feeds this addiction by siphoning off billions in taxes from these gambling revenues to redistribute as they see fit.

Government sponsored gambling is a regressive tax on the poor and is immoral. Politicians have become addicted to the tax revenues being drained from the deprived in the country.

...According to recent research, about 2.5 million adults in America are pathological gamblers and another 3 million of them should be considered problem gamblers

[Oct 11, 2009] Safe Haven Bernanke Resurrects the Bond Vigilantes

On top of Japan's direct intervention in the currency market, key U.S. policymakers finally deemed it necessary to weigh in with some verbal support of the world's reserve currency yesterday. Federal Reserve Chairman Ben Bernanke has insisted anew that the central bank is ready to tighten monetary policy once the economy shows signs of improvement (naturally, that is left undefined.) White House chief economic advisor Larry Summers quickly weighed in with a "huzzah," adding that the Obama administration knows that devaluing a currency is not the road to prosperity. So, they wouldn't think of doing that!

... ... ...

The relatively paltry $12 billion auction of 30-year bonds Thursday, however, has violently shaken folks at the Treasury and the Federal Reserve out of their complacency and smugness. Though the market was pricing the 30-year's yield at 3.98% just prior to this auction, the bonds left at an effective yield of 4.01%. Though not a disaster on the surface, it could be -- and was -- taken as a signal that Uncle Sam's ability to sell his debt under the recent very favorable conditions is not unlimited after all; especially when there is such a lack of interest on his part to lift a finger to defend the currency that paper is denominated in.

Like rats leaving a sinking ship, holders of the longest-term Treasury paper began selling. In a mere 24 hours, through yesterday afternoon, long-term interest rates as measured by both the 10 and 30-year Treasury issues spiked a quarter of a point higher. This took at least some of the starch out of the continuing, gravity-defying rises on Wall Street, where stocks most likely would have closed at decisive new highs for this cyclical rally had rates not spiked and given the giddy bulls there a little pause.

... ... ...

That Bernanke in particular did not recognize this (when, truth be told, has he EVER done anything right?) shows he's not such a great history student after all. For he may have just started in motion a chain reaction which -- though it will probably be a bit slow in developing -- will cause a repeat of what we saw in 1987.

[Oct 11, 2009] Overly Optimistic Consensus Plays Greater Fools' Game Once Again

Mish's Global Economic Trend Analysis

The crowd is often right except at market turns. After the turn, the crowd tends to hold on until most previous gains vanish. In a secular bull market, such optimism works out acceptably well. In a secular bear market, rampant optimism is severely punished.

[Oct 11, 2009] Trader- The Missing Paul Tudor Jones “Rogue” Video

The Big Picture

“Trader” (PTJ) video, long out of print and practically impossible to find, is (finally) showing up on line. It includes his now infamous 1987 crash forecast.

After he made his fortune, Jones reputedly bought up all of the copies of Trader. One rumor had it he was embarrassing at the naked footage of his trading; others suggested his “secrets might be discerned.

Regardless, it has been pretty impossible to find . . . Until now.
 

Here is the copy from the cover of the VHS tape:

“Is financial trading an art, science, profession or out-and-out gamble? If you’re interested in money and you want to know what it’s really like on Wall Street, this is the video you, your family, your colleagues and your friends should own. Filmed before Wall Street’s October 1987 crash, TRADER is a riviting one hour documentary of a fascinating man, Paul Tudor Jones II. It delivers a rarely seen view of futures trading and explains the workings of this frantic, highly charged marketplace. It gives viewers an inside look at his estate in Virginia, skiing in Gstaad, his New York apartment. It also examines Jones’ prediction that America is nearing the end of a 200-year bull market. If he’s right – and he almost always is – this country and the world are about to experience economic changes of unprecedented proportions.”

Here are a few sites you can view and/or download them at:

View Video Here: Tudou.com
http://www.tudou.com/programs/view/XH5W4vffBbY/

Download Video Here
http://www.zshare.net/download/63460181316d3cc8/

(Your system may require a DIVX codex)

[Oct 11, 2009] Obama Wins the Nobel Peace Prize

Looks like Onion headline but being in Henry Kissinger is not fun. Might be kind of warning not to do stupid things in Afghanistan as his only real diplomatic accomplishment so far has been withdrawal of unilateral bullying... 

Is the award taxable?

Selected comments

call me ahab:

I see it as preemptive- as putting a shock collar on Obama so he doesn’t raise troop levels in Afghanistan and doesn’t take a preemptive strike against Iran -- because he hasn’t done anything remarkable -- except in the eyes of VennData -- hereafter called VD -- who from his comments would support Obama under all circumstances
 

Bruce in Tn

I strongly think the two wars we are in were ill considered. Yet, we continue in them. Our generals want more troops, and apparently that is not going to happen. Does this make our manpower in Afghanistan too small to be effective, and if it does, why don’t we leave.

Kristjan:

What a pity. This goes to show that the Nobel Prize really needs reform. Obama is no different than Bush Jr. but for some reason (Guantanomo hasn’t been closed as he promised, troops are still in Iraq and there are now more troops being sent to Afghanistan), they all love him. And don’t give me that ‘he’s only been in office for less than a year’ BS. Obama is all talk no action. BTW, you should see Obama’s Saturday Night Live spoof: http://www.youtube.com/watch?v=4nWhe-EPv8w
Drink the Kool-Aid!

VennData:

I’m proud of our President, his progress, and using the power of the office to effect change.

beaufou:

Strange club where your portrait can find itself next to Kissinger, Arafat, Begin and De Klerk.

Rikky:

who really cares? nothing has changed in America. we’re still $12 trillion in the hole, $80 trillion in unfunded liabilities, still spending more than we make, trying to reform things which will cost multiple times more than any rosy forecast by our ‘non-partisan’ hacks in collaboration with K-Street. Obama can win 10 nobel peace prizes and carry around the 10 commandments for all I care, as long as he deals with the structural fiscal problems this country has.

mars10:

With regard to the Peace Prize, the will [of Alfred Nobel] stipulated that it was to be awarded to the person “who shall have done the most or the best work for fraternity between nations, for the abolition or reduction of standing armies and for the holding and promotion of peace congresses”.

http://nobelpeaceprize.org/en_GB/about_peaceprize/establishment

Marcus Aurelius:

ljoncape Says:

“So he did all that after 11 says in office…..whatever, oh wait a minute maybe the Peace Prize committee is launching a new affirmative action program, now it makes sense……”
___________

Aren’t you supposed to be getting ready for your Friday night Klan meeting?

HCF:

The problem with the Peace prize is that it is associated with prizes such as the Nobels in Physics or Chemistry which are (usually) true acknowledgment on groundbreaking work. The Peace prize (and often the Nobel prize in Econ) is a complete joke. I’m not saying he’ll never do anything groundbreaking for peace, but what the hell has our President done yet? Peace in Middle East? Negotiate nuclear disarmament? Thus far, his greatest achievement in international peace is “I’m not W.”

HCF

crosey:

Patrick Henry was quoting Ezekiel..”they speak of peace, peace, when there is no peace.” Another quote from Ezekiel..”they have seduced my people with talk of peace when there is no peace…”

The word “peace” is almost always used to lull opponents before waging war. Even in Ezekiel’s day. And the suckers still fall for it.

…….thanks to Ruth King for her thoughts!

km4:

a great way to piss off and check the US military industrial complex and Neocons.

I would short Halliburton and a few others.

cvienne:

@bergsten

By that I mean…

Replacing Michelle

At the top right hand corner of Page 17 of the New York Post of January 24th, 2009 , was a short column entitled “Replacing Michelle” in the National Review “The Week” column. So here it is, word for word, as it appeared:

“Some employees are simply irreplaceable. Take Michelle Obama: The University of Chicago Medical center hired her in 2002 to run “programs for community relations, neighborhood outreach, volunteer recruitment, staff diversity and minority contracting” .

Hmmm…

-In 2005 the hospital raised her salary from $120,000 to $317,000 – nearly twice what her husband made as a Senator.

- Her husband had just become a US Senator? And had requested a $1 million earmark for the UC Medical Center.

- Michelle’s position was a part time, 20 hour a week job.

- Now that Mrs. Obama has resigned, the hospital says her position will remain unfilled.

How can that be, if the work she did was vital enough to be worth $317,000? And I wonder what some of the price tags on a Chicago 2016 Olympics would have been?

[Oct 11, 2009] Andy Xie Why One Bubble Burst Deserves Another

The lesson from the Lehman collapse seems to be, "Take whatever you can and, when it crashes, you get to keep it."

 Lehman Brothers collapsed one year ago. The U.S. government refused a bailout and warned other financial institutions to be careful. The government felt other institutions had already severed their dealings with Lehman's investment network, and that a collapse could be walled in.

Little did the government realize that the whole financial system was one giant Lehman.The securities firm borrowed short-term money to punt in risky and illiquid assets. The debt market supported the financial sector, believing the government would bail out everyone in a crisis. But when Lehman was allowed to collapse, the market's faith was shaken.

... ... ...

The Lehman collapse strategy backfired. Governments were forced to make implicit guarantees explicit. Ever since, no one has dared argue about letting a major financial institution go bankrupt. The debt market is supporting financial institutions again only because they are confident in government guarantees. The government lost in the Lehman saga, and Wall Street won.

So Lehman died in vain. Today, governments and central banks are celebrating their victorious stabilizing of the global financial system. To achieve the same, they could have saved Lehman with US$ 50 billion. Instead, they have spent trillions of dollars -- probably more than US$ 10 trillion when we get the final tally -- to reach the same objective. Meanwhile, a broader goal to reform the financial system has seen absolutely no progress...

[Oct 10, 2009] "Clash of Autonomy and Interdependence"

"An entrenched oligarchy can use a small share of its wealth to capture political policymakers "
Oct 6, 2009 | Economist's View

Something quick between classes - Jean-Paul Fitoussi says "Don't hold your breath" waiting for those who have found success within the free exchange system to acknowledge it was the result of more than their own meritorious achievement:

Clash of autonomy and interdependence, by Jean-Paul Fitoussi, Commentary, Project Syndicate: The bailout of the financial system was a bizarre moment in economic history, for it benefited those who benefited most from the markets’ “irrational exuberance” — the bosses of financial firms.
Before the crisis hit, however, redistribution of wealth (and the tax and social security payments that make it possible) was considered the biggest obstacle to economic efficiency. Indeed, the values of solidarity had given way to those of individual “merit”, judged by the size of one’s paycheck.

The paradox is that a part of this evolution may be attributable to two positive factors: the slow work of democracy, which liberates individuals but at the same time leaves them more isolated; and the development of a welfare system that shares risks and makes individuals more autonomous.

With this isolation and autonomy, people increasingly tend to believe, for better or for worse, that they alone are responsible for their own fate.

Here lies the conundrum. An individual is free and autonomous only because of the collective decisions taken after democratic debate, notably those decisions that guarantee each person access to public goods such as education, healthcare, etc.

Some sense of social solidarity may remain, but it is so abstract that those for whom the wheel of fortune has spun so favorably feel little debt. They believe that they owe their status purely to merit, not to the collective efforts — state-funded schools, universities, etc. — that enabled them to realize their potential. ...

The central place where this self-(over)evaluation meets the fewest obstacles is the financial market. ... Of course, when the crisis hit, financial institutions were the first to argue that autonomy was unrealistic, and that we are all interdependent. After all, why else should taxpayers agree to rescue them?

But now these same institutions are deciding that they want to go their own way again. ... Dismissing the risks that taxpayers incurred, financial institutions used the bailout to restore profitability and are now reverting to their old habits...

No one should be surprised about this. ... The bailout of banks led to a wave of mergers. If they were already too big to fail, what should we now say when banks are even bigger? Their market power has increased, yet they know they incur no risk, owing to the aggravated systemic impact of their potential bankruptcy. Moreover... Working in so uncompetitive a market is a real stroke of luck. I do not know many businessmen who would not take advantage of this; to be honest, I do not know any.

The free-market doctrine, which has become almost a religion, reinforced this belief: markets are efficient, and if they pay me so much..., it is because my own efficiency warrants it. I also participate indirectly and abstractly in forging the common good, by creating value through my work, and I am rewarded for it.

But suddenly the system collapses, the creation of value turns into destruction and parallel universes collide ... with autonomy becoming (for the brief moment of the bailout at least) interdependence. ...
Eyes are opened... The crisis reminds us what each person owes to others, highlighting an ethical truth that we were quick to forget: the rich benefit more than the poor from their cooperation with other members of society.

Two conclusions can be drawn from all this.

The first is that we all owe at least some of our success to others, given the public goods that society provides. This calls for more modesty and restraint in determining the highest salaries, not for moral reasons but for the sustainability of the system.

The second conclusion is that the most privileged classes, which have benefited the most from the solidarity of others, notably the poor, can no longer deny the latter’s contributions. But don’t hold your breath waiting for them to agree.

Cynthia:

BTW, hat's off to Congressman Grayson for having the guts to tell the world that Republicans are a tribe of evolutionary throwbacks. They are in his words, "foot-dragging, knuckle-dragging Neanderthals."

[Oct 10, 2009] Concerns Grow About Another Mortgage Giant

NYTimes.com

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” Edward Pinto, a former Fannie Mae executive, said in testimony prepared for the hearing. Mr. Pinto, who was the chief credit officer from 1987 to 1989 for Fannie Mae, went further than most housing analysts and predicted that F.H.A. losses would more than wipe out the agency’s $30 billion of cash reserves.

[Oct 10, 2009] Dust-Up When should we start worrying about deficits -- latimes.com

It is important to clarify an important misconception about the stimulus and where the economy sits right now. It is often said that most of the stimulus has not yet been spent. This is true, but it is misleading.

Think of it this way: Suppose my rich uncle tells me that he will give me $2,400 over the next two years in payments of $100 a month. At first I may not change my spending much, maybe because I'm not sure that my uncle will keep his promise. After three or four months, I would probably recognize that the money will keep coming and would adjust my spending accordingly.

My monthly spending would reach its peak around, say, the sixth month, even though I will have received only one-fourth of the total money promised. This is where we stand now with the stimulus; we have already gotten pretty much the full lift from the package. The stimulus will remain in place through 2010, but it will be providing no additional boost in demand in future quarters compared to what it has already done, just as my spending will not increase in the seventh month that I get my uncle's check compared to the sixth.

[Oct 10, 2009] Are Low Bond Yields Here to Stay

Fed got closer to beginning of tightening: they need to defend curency...   
Yahoo! Finance

Know Your Risk Tolerance

'I'm more concerned about the return of my principal than the return on my principal,' stated humorist Will Rogers. Of what value is a juicy bond yield if your bond issuer defaults and can't repay you? This is a vicious lesson, many bond investors still haven't learned. High risk junk bonds (NYSEArca: JNK - News) have been bid up over 31% so far this year by eager buyers desperately seeking seductive yields. How much longer can the feast last?

One way to ensure the return of your money is not to lend it to untrustworthy borrowers. Another strategy is to diversify your single issuer credit risk by not investing in individual bonds. Bond ETFs can help you to accomplish this goal.

One last tip is to avoid the temptation of following the crowd by chasing bond yields. Many investors have shipwrecked themselves by exclusively concentrating on yield and throwing credit and duration risk aside. Don't make the same mistake.

[Oct 10, 2009] Asian Countries Intervene to Prop Up Greenback (Dollar Bind Edition)

naked capitalism

An unannounced but evidently coordinated effort to arrest or at least slow the fall of the dollar is underway. The Financial Times indicated that Asian central banks were aggressive dollar buyers on Thursday, but the information came via currency traders rather than an official pronouncement. Thailand, Malaysia and Taiwan made substantial purchases; Hong Kong and Singapore also intervened today. The action may also have a secondary objective of rejiggering their currency values versus China’s, since China repegged the renminbi against the dollar.

However, these efforts were seen by traders as merely an attempt to control the fall in the dollar rather than halt it. And other markets responded to the dollar weakness. Oil prices rose nearly $3 today, gold hit a new high in dollar terms, and copper and tin spiked upward. The dollar is strengthening overnight on Bernanke’s empty promise that the central bank will raise rates when the economy recovers.

The dollar’s weakness exposes a series of dilemmas and a lack of obvious remedies. Normally, a country experiencing a financial crisis takes measures to depreciate its currency so it can use an export boom to help pull itself out of its economic mess. However, Paul Krugman, among others, have pointed out that trade has collapsed, so even if one were to break glass and trash currency, it isn’t as effective a solution as it would normally be. And even if that approach might work, with so many countries affected by the crisis, it’s too easy for currency depreciation to lead to beggar-thy-neighbor competitive devaulations.

Yves Smith:

...As for being able to start up factories quickly, my father did manufacturing startups in a capital intensive industry. With all due respect, you are dreaming. You have to acquire land, get permits, do design and feasibility studies, contract to have the plant designed, negotiate with vendors, shake down operations, etc. This is not like opening a restaurant or retail store. This is a minimum three year cycle to get going. You might kid yourself you can do it in 24-28 months, but nothing goes fully according to plan and it easily takes three years. That means you have to have some confidence where the world will be in three years going forward for at least the next four after that.

And if you read the post, I did not disagree with global rebalancing, in fact, I have called it for quite some time. But for the US to pretend we can suddenly become a net exporter is somewhere between wishful thinking and delusional. It will take economies like India and China time to move from an investment/export driven model to one with more consumer demand. To imagine that that will take anything less than a decade is unrealistic.

.
Reply
◦ bb says:
October 9, 2009 at 3:42 am
http://www.oanda.com/convert/fxhistory

all three mentioned currencies appreciated slightly against the usd. in fact their daily moves were smaller than their bid/ask spreads(!!!). non-majors are usually quite volatile (2-3% daily). the very fact that the FT author does not cite any numbers hints at some confused causation link that he is trying to establish.

it is impossible for a central bank to fail in the depreciation of its own currency because all FX in its own banking system is less than the local currency. on the other hand, attempts to stem the decline of a local currency usually fail.

and do NOT rely on currency commentary from bloomberg either, their asian currency team is plain horrible. i personally only regard reuters/thomson currency commentary.

Krugman and the pied pipers of debt Blogs

Rolfe Winkler:

Investors are celebrating an incipient “recovery,” but the interventions that were responsible for it are sowing the seeds of a more violent contraction down the road. The problem, quite simply, is debt. We’ve accumulated record amounts, yet many economists tell us we need more.

Leading the charge is Paul Krugman. He exhorts us to borrow our way back to prosperity, but he doesn’t acknowledge that his brand of Keynesian economics ignores the consequences of debt. If you look at a chart of America’s total debt burden, he’s leading us over a cliff.

(Click chart to enlarge in new window)

public-and-private-debt-burden

The problem begins with the flawed way Krugman and other economists measure well-being. Primarily, they look at measures of activity, like GDP. These tell us how much people spend, but say nothing about where we get the money.

Every so often, we overextend ourselves, buying too much useless stuff with too much borrowed money. So we cut back, dumping the third family car and swapping the McMansion for a townhome.

But this is problematic for Krugman and other economists. Less spending means falling GDP. It means “recession.”

They ride to the rescue with two blunt instruments — monetary and fiscal policy — that encourage more borrowing and thus more spending. More spending equals “growth” so economists congratulate themselves for engineering “recovery.”

But if recessions never happen, bad businesses and unpayable debts are never washed away. They grow like cancer inside the system.

Since the mid-1980s, we’ve intervened whenever the economy hiccuped, so sectors that should have shrunk sharply — like housing and finance — never did. Feasting on easy credit, these sectors have exploded as a percentage of the economy.

Now, since individuals and corporations refuse to borrow more, the only way to grow spending is for the government to borrow.

According to George Cooper, author of The Origin of Financial Crises, “what is missing from today’s debate is recognition that previous growth rates were artificially supported by an unsustainable credit binge, itself the result of the misapplication of Keynesian policy.”

Cooper counts himself a Keynesian but says Keynesian policy has become “dangerously distorted.”

“We should be using Keynesian stimulus only to arrest the rate of credit contraction not to reverse it. The harsh truth is that our economies desperately need a recession.”

That’s because they desperately need to de-lever. As you can see in the first chart, debt relative to GDP is at record highs.

If we want sustainable growth, spending that drives it must come from savings, not more borrowing. To get there, we must first pay old debts. And that means recession.

Krugman is clearly aware of the consequences of excessive borrowing.

“I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits,” he wrote in 2003, citing a $1.8 trillion 10-year deficit projection from the Congressional Budget Office.

Fast forward six years, total debt has jumped 70 percent relative to GDP and optimistic projections put the 10-year deficit at $9 trillion.

This time, however, Krugman dismisses deficit “hysteria,” arguing that we can grow our way out of debt. “We did it during the Clinton administration,” he told me when he visited Reuters last week.

But we didn’t. While Clinton balanced the federal budget, Americans plowed through their savings. We kept growing because, in the aggregate, we were still accumulating debt.

recall Krugman calling for a $600 billion stimulus program last year after Bush’s $160 billion one failed to do whatever the $600 rebate checks were supposed to do. I was stunned at the number and wondered just what thought, if any, went into arriving at it.

In the event Krugman got more than he had asked for when Obama pushed his $787 billion ’stimulus’ bill through.

The whole debate is becoming redolent of the Vietnam War if one substitutes billions of dollars for American troops. Then it was General Westmoreland promising the president victory if he could just have 100,000 troops. Then he needed 200,000 more and then another 200,000 and finally, before he was relieved of command, he was asking for another 250,000!

Obama began his presidential campaign as the anti-war candidate. He needs to remember what happened to Lyndon
Johnson when Johnson ‘escalated’ a minor war his predecessor started into the defining event of his presidency. Extending unemployment benefits and bailing out the car industry might be understandable efforts to mitigate a recession he did not create but bankrupting the nation in a endless series of stimulus and bailout packages will cripple him as surely as Vietnam did LBJ.

- Posted by sangellone

===

It is evident none of these commentators read either Mr. Krugman’s books or his NYT periodicals.

Krugman stated many times publicly 800 billion was not enough and that the money would be better spent building infrastructure for public transportation, green energy production, education, water and sewer, communications….etc. The stimulus bill that was passed failed to address most of these projects that would have paid dividends in the future health of the economy and environment. Of the 787 billion dollars appropriated only around 20 billion has even been spent.

In contrast the 700 billion dollars for the banking industry was all released as well as unknown trillions that the fed funneled to banks and the stock market through the Plunge Protection Team. The threat of inflation due to excessive debt and simply printing money is all to real.

Personally I would rather have seen investment banks fail and put people to work rebuilding what was once a great country. Given the state of education, health care, environment and economic opportunity this nation resembles some South American banana republics of the past three decades.

- Posted by Anubis

===

As Anubis pointed out, few people seem to bother with reading Krugman. He took great pain to differentiate debt that is an investment for our future (infrastructure, better education etc. from the kind of debt our politicians and banksters are so fond of nowadays, namely bailout money without conditions for the financial sector.

I would totally expect Newsmax or Fix News to be organically incapable of understanding this; but, that a usually sharp and smart commentator like Rolfe miss this crucial point is disappointing to say the least.

- Posted by Francois T

===

Over a 17 year period, a mere 4% inflation rate will cut the value of the dollar in half. It doesn’t take a genius to put that into perspective. You have the Fed with a target policy of 4% inflation (which we will not hit in the next few years, so they will have to throw printing into overdrive to approach it,) and you have people who are saving to put their kids through college. Think it won’t affect you, and that inflation is healthy at ‘only’ 4%? This means that if you buy 30 T year bonds, you’re practically an idiot if they yield less than the fed’s target rate average over that period. Think bankers make out like gangbusters on your 30 year fixed rate mortgage because they pull more than twice the principle down over that time? Think again.

- Posted by dave

Kubarych Sees Fed Tightening `Little Bit' by December: Audio

Oct. 1 (Bloomberg) -- Roger Kubarych, senior fellow at the Council on Foreign Relations, talks with Bloomberg's Tom Keene about Federal Reserve monetary policy, the credit crisis and the Chinese economy and fiscal policy. Listen/Download

Dudack Says U.S. Stocks Are `Overbought': Audio

Oct. 6 (Bloomberg) -- Gail Dudack, managing director of Dudack Research Group, talks with Bloomberg's Tom Keene and Ken Prewitt about the U.S. economy, labor market and equities.

Listen/Download

Ed Rogers Says Stocks May Fall 10-15% Before Year End

It's difficult to believe that this rally can continue without strong positive economic data like declining of unemployment to 8%

I-Believe-in-Strong-Dollar Turns Relic as China Begs [for stability]

The dollar’s 15 percent decline against the euro and 11 percent depreciation versus the yen since early March are increasing concern among world leaders. At the same time, Americans are getting poorer.

Per capita net wealth tumbled to $172,749 in August from a peak of $212,599 in September 2007, government figures show. A United Nations Human Development Report released Oct. 5 showed America’s quality of life dropped rearch?q=George+W.+Bush&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1"> George W. Bush, the Dollar Index declined 20 percent.

While the dollar dropped in global currency reserves, holdings of euros rose to a record, the IMF report shows. The U.S. currency’s portion declined to 62.8 percent from 65 percent in the first quarter. The euro’s share rose to a record 27.5 percent from 25.9 percent while the pound and yen gained.

“The U.S. is a domestically driven economy. It has huge output gaps, and these are going to keep inflation subdued for at least two years.”

"‘It’s Not the Great Depression — It’s Worse’"

“When it comes to international trade, actually it’s not the Great Depression, it’s worse,” he said, presenting charts showing the decline in global trade activity falling much more steeply in the current downturn than during the Depression.

[Oct 8, 2009] Of gold coin craziness and conspiracy

Is this event a symptom of the breakdown in confidence in the US government and its monetary policies by its own citizens. Like old saying states: "You can't eat gold, but owning gold if/when a collapse happens will mean you can still eat."
FT Alphaville

Here’s the Mint’s press release:

Because of unprecedented demand for American Eagle Gold and Silver Bullion Coins, the United States Mint suspended production of 2009 proof and uncirculated versions of these coins.

[Oct 8, 2009] Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems (American Politics and Political Economy Series) (Paperback)

Product Description
 

"To discover who rules, follow the gold." This is the argument of Golden Rule, a provocative, pungent history of modern American politics. Although the role big money plays in defining political outcomes has long been obvious to ordinary Americans, most pundits and scholars have virtually dismissed this assumption. Even in light of skyrocketing campaign costs, the belief that major financial interests primarily determine who parties nominate and where they stand on the issues—that, in effect, Democrats and Republicans are merely the left and right wings of the "Property Party"—has been ignored by most political scientists. Offering evidence ranging from the nineteenth century to the 1994 mid-term elections, Golden Rule shows that voters are "right on the money."

Thomas Ferguson breaks completely with traditional voter centered accounts of party politics. In its place he outlines an "investment approach," in which powerful investors, not unorganized voters, dominate campaigns and elections. Because businesses "invest" in political parties and their candidates, changes in industrial structures—between large firms and sectors—can alter the agenda of party politics and the shape of public policy.

Golden Rule presents revised versions of widely read essays in which Ferguson advanced and tested his theory, including his seminal study of the role played by capital intensive multinationals and international financiers in the New Deal. The chapter "Studies in Money Driven Politics" brings this aspect of American politics into better focus, along with other studies of Federal Reserve policy making and campaign finance in the 1936 election. Ferguson analyzes how a changing world economy and other social developments broke up the New Deal system in our own time, through careful studies of the 1988 and 1992 elections. The essay on 1992 contains an extended analysis of the emergence of the Clinton coalition and Ross Perot's dramatic independent insurgency. A postscript on the 1994 elections demonstrates the controlling impact of money on several key campaigns.

This controversial work by a theorist of money and politics in the U.S. relates to issues in campaign finance reform, PACs, policymaking, public financing, and how today's elections work.

Stands mainstream political science on its head., June 11, 2009
By J. Gwinn (West Virginia USA) - See all my reviews

Thomas Ferguson argues the US two party system functions as a mediator between conflicting business interests. Through case studies (primarily the New Deal era) Ferguson persuasively backs his argument.

During the New Deal era, Ferguson contends the Democratic party was controlled by capital intensive "free trade" multinational businesses vs the Republican party which was dominated partly by labor intensive "protectionist" industry.

Who were the multinational interests? (siding with Democrats) Major oil companies/ Rockefeller dominated banking e.g.,standard oil,chase manhatten. General Electric was also a major player.

Who were the labor intensive/protectionist interests? (Siding with Republicans)Textiles,Steel,Domestic oil producers and rubber manufacturers. Capital intensive Chemical industries led by Dupont lobbied for protection due to competition from Germany....Also JP Morgan due to interlocks with certian holding companies which partly separated Morgan Interests from Rockefeller financial interests.

A fascinating study! The capital intensive industries favored labor mediation/social welfare while the labor intensive industries lobbied against.

Ferguson follows the paper trail which shows GE interests strongly influencing the creation of the national labor relations board while the Social security act was the brainchild of Rockeller interests. From ferguson's point of view, business reacted to class conflict by creating top down business oriented reforms in reaction to labor unrest.

Much more to Ferguson's research. I highly recommend this book. Don't let the copywrite fool you...Ferguson's work is a timeless classic and will be used as source for years to come.

[Oct 8, 2009] Too Politically Connected To Fail In Any Crisis

Re David Cohen’s comment

It seems to me that there is a lot of preaching to the choir on The Baseline Scenario and other blogs devoted to the financial crisis and the banks.

The issue needs to be framed in terms of the interests of most Americans. Yes, it is annoying that banks have special access to Timothy Geithner, but so what? Big banks have probably always had special access to the Treasury Secretary since Alexander Hamilton.

Rather, the issue needs to be framed in terms of the dollar cost of the subsidies to banks from the Federal Reserve and the Treasury, possibly in the several trillion dollar range (it will certainly be trillions if the banks default on the various loans).

The real resources represented by trillions of dollars do not come from nowhere. They are coming from other sectors of the economy: from smaller banks that did not make bad bets on the housing bubble, from agriculture, from manufacturing (what is left), and so forth.

Most ordinary people and most businesses do not benefit from these policies. Businesses are seeing declining demand, higher interest rates from the megabanks, and so forth.

If people want to change this/stop it, they must phrase the debate in terms of the self-interest of the unconverted and indifferent.

Document the cost, demonstrate the cost, never let the debate move away from the cost.

Sincerely,

John

P.S. Note that Dean Baker at CEPR has some posts detailing the specific costs of some of the implicit and explicit subsidies.

[Oct 8, 2009] Warning: Capital Controls Are in Your Future

When Jim Rogers taught classes at Columbia, he liked to tell students that the US had a proud history of implementing capital controls, and warned them against going on the merry assumption that it would ever and always be easy to make cross-border investments. For instance, taxes on foreign securities transactins are a soft form of control and have been used to facilitate or restrict cross-border capital flows. The US lowered them when it abandoned Bretton Woods in 1971 to aid in adjustment of the price of the greenback.

Despite the hue and cry that we must keep trade and capital flows open, I have long believed that they would be restricted as financial reforms moved forward. The Carmen Reinhart-Kenneth Rogoff work shows convincingly that periods of high international capital mobility are associated with frequent banking crises. They do not assert that the relationship is causal, but I suspect it is. Capital that can move easily across borders is by nature difficult to regulate. It would require a considerable sacrifice of national sovereignity to devise rules and organizations that could do an adequate job of supervision. So a high level of international investment flows means lawless or seriously underregulated financial firms and activities. And we have just seen that this lawlessness eventually exacts unacceptably high costs to the real economy.

Thus, measures to increase stability that will be effective can only take place on a national level, and they further require at least some restriction of cross border flows. But how that would come about remained a mystery to me, hence my silence on this topic. Everyone seems wedded to the prevailing ideology of “fewer international restrictions are better.” Indeed, some have decried how awful it would be if the world were to revert to largely national pools of capital, depicting it as a financial Dark Ages. But would it be a Dark Ages for the economy, or merely for bankers?

Russell Napier in today’s Financial Times, describes how capital restrictions might come about, and his case is entirely plausible. The interest of high finance are increasingly opposed to those of governments. Capital will want to flee to havens which are not suffering from the need to work off enormous bank rescue costs. But those very same governments will find it necessary to keep funds at home to earn a return to work down those very same expenses. Hence capital controls.

From the Financial Times:

One consequence of the financial crisis is that fund managers are increasingly going to come into conflict with governments…

Developed world governments are desperate for finance; they will attempt to constrain private-sector credit growth and are likely to ease the economic pain with inflation and exchange-rate depreciation.

This differs from the environment of the past few decades when investors were happy to save in their own currencies, buy government debt and participate in credit-fuelled domestic asset booms. Will fund manager fiduciaries now be prepared to finance record fiscal deficits? Will they buy domestic assets in an era of sub-par credit growth? And will they buy shares in banks stuffed with government credit and loans aimed at securing employment rather than sound returns?

If they don’t, how much capital will they export? Indeed, might they consider it prudent to short government debt to protect their clients’ wealth? To protect against inflation, might they buy commodities?

This may all look necessary to fiduciaries, but governments will view it as speculating against their currencies and driving up the cost of government financing. Governments will not stand by and watch what they might come to term “capital behaving badly”.

Until 2008, capital colluded in maintaining the myth of prosperity, by providing the credit for excessive consumption. Capital supported the illusion of savings by pumping up equity valuations to ridiculous levels; and it supported ths, buare will mean they will increasingly be seen as the ungrateful undead. The political necessity of supporting their claims will drive government further into the capital allocation business.

Governments still need the support of capital to ensure that the myth of prosperity dies slowly. If that support is not provided willingly, history shows that governments can conscript capital to the cause. So what sort of “national service” can we expect ?

A transaction tax on financial instruments is very likely…

Japan is a case study in the cost of losing control of capital flows. The government made it easy for retail investors to buy foreign currency investment, with the logic being that yen-based returns were so low, savers needed to be allowed the opportunity to earn higher yields overseas. Unfortunately, a cadre of retail FX traders, every bit as manic as US day traders and holding even more funds in aggregate, now dominates yen trading. The government now has more impediments than it otherwise would have in influencing the level of the yen thanks to this self-inflicted wound (not that currencies are easy to manage even in the best of circumstances, but this policy has made a difficult task even more fraught).

[Oct 8, 2009] Securitization Drought Exposes Policy Bind, Threatens Recovery

There is much discussion of counter-cyclical capital requirements, but the reality is that capital standards and leverage ratios for financial institutions almost never work. They are always set so low that they allow leverage that would have been viewed as extreme as recently as 30 years ago. They are easy to scam through accounting fraud.

bb:

great post. this subject is everywhere this week and i was asking myself the question: are the securitization business practices of 2005-2007 (we now know more about them) the normal that we have to return to?
for some it seems that is the path to a recovery, not more mess. this group includes some knuckleheads at the Fed.

Francois T:

“Unfortunately, ideas like this are simply unacceptable right now. The path of least resistance is to find a way to declare victory…”

This has been one of the fixtures of this crisis, hasn’t it? The regulatory (and political) capture by the FIRE sector is almost absolute.

Each and every common sense idea that would have been to the benefit of the common good is qualified as “simply unacceptable”.

In the meantime, here we are, praying a catalyst won’t trigger a push into a deeper well of enzyme-free bovine digestive remains. How likely is a benign outcome to this Great Recession in these conditions? How can we solve an already very difficult set of problems if the best solutions are constantly thwarted by the polity?

Not likely, regardless of how much econ/financial wizardry we try to plaster over this gaping wound of debt.

Me think there will be a catalyst precipitating the “second leg” of the Great Recession. It’ll look innocuous at first, but then, events will unravel at a terrifying pace.

Only then, will the salutary effect of pitchforks and torches may (I repeat…may) lay the ground to a more sensible regulatory and political mindset toward everything financial.

How likely is this scenario of bigger crisis followed by a return of common sense?

I’d say the bigger crisis is very likely. The return to common sense? Hmmm! You tell me!

RueTheDay:

Securitization per se was not the problem. Even the tranching into CDOs of these MBS was not the root problem (though many of the assumptions around risk correlations turned out to be inaccurate during a financial storm). The ratings agencies certainly contributed to the problem greatly, but they wereuse of CDS that allowed ratings agencies to generate AAA ratings for the senior tranches of CDOs which in turn drove demand to originate new mortgages to securitize. Unless and until (God forbid) someone is willing to step in and be the new AIG and provide cheap financial insurance, the securitization market will not revive.

Siggy:

Securitization, of an by itself, is not an inherently evil undertaking. What becomes folly is the securitization of the income streams attributable to the lower rated tranches. That is in and of it self a concentration of risk. A presumed part of fabricating AAA ratings for the CDO assumed that there was default insurance in place.

Comes now AIG etal, selling default insurance, well its not really insurance, its a credit default swap, you send me the defaulted stuff, I’ll send you some money. Sounds rational, sounds utterly stupid to me! Selling such a contract can rapidly get into the realm of being an eggregious tort if not a fraud. Interestingly both parties are guilty, the buyer in representing that the reference paper does indeed have some value; and the seller in representing that he can honor the contract.

Shadowy Banker, the kleptocrat, holds some low rated paper that he can’t sell, it’s too risky, so he does ledgerdemain and viola, we have a CDO. The CDO goes off his balance sheet and his capital position appears to be fine.

Caveat emptor goes out the window and the party goes on. After all, you can’t really see a bubble coming and the house price chart your looking at is clear evidence that housing is a good buy that never declines.

Efficent market hypothesis, bullocks! Deregulate the markets, since when did altruism become the norm?

Too big to fail, nonsense, you didn’t read your Schumpter, oh it wasn’t taught? Well, ignorance is bliss, well perhaps no longer.

meli :

Securitization connects our biggest pools of funds (pension funds and insurance companies) to our biggest pools of assets (home mortgages, unsecured credit and commercial loans). All this talk about the equity of the banks and the leverage of the banks seems to miss that crucial link. If we do NOT securitize mortgages (in some form) then how are pension funds to invest in them? Go out and start originating loans?

In the meantime, what are pension funds and insurance companies investing in? Corporates wouldn’t seem to be a big enough market to fill their appetitite, they can’t meet their targets investing in treasuries and equities doesn’t seem to be big enough for them to be even investing their runoff. Where do they go?

[Oct 8, 2009] Banks Under-reserving for Commercial Real Estate Losses

There has been a peculiar disconnect between the “the crisis is over, on with the recovery” drumbeat of news, and the sobering reality that a good deal of credit bubble overhang still remains to be dealt with.

Mary:

“What are the implications? Consider the $1-$1.5 trillion in commercial mortgages being held as whole loans at commercial and savings banks in the U.S.** Because whole loans are “held to maturity,” they are typically carried at full value until the borrower actually defaults. Never mind that the underlying collateral is now worth far less than the mortgage.

But banks aren’t forced to take writedowns until an event of default. To avoid that they can play all sorts of games to make things easier for the borrower. According to Alpert: Banks and other lenders with loans collateralized by income-producing properties have been offering borrowers nearly any forbearance imaginable: loan extensions, interest rate reductions, delayed principal payments, wavers of covenants and guarantees, and in some instances additonal funding—anything and everything to avoid taking a current loss, as long as there is some cash flow or reserve balance to draw on so as to maintain that the loan is performing against its (often heavily modified) terms.

The bottom line is that banks still have hundreds of billions of losses buried on their balance sheets. Commercial real estate prices aren’t coming back, which means these loans will have to be marked down eventually. The longer banks wait, the more painful the write downs will be.

Bank shareholders should take note. Assuming the government isn’t going to absorb all these losses, their equity may eventually be wiped out.

Rolfe Winkler
The CRE disaster
http://blogs.reuters.com/rolfe-winkler/2009/07/23/the-cre-disaster-comparing-with-residential/

DownSouth:

Mary,

Rolfe Winkler says “Bank shareholders should take note”.

Why?

I think eh gets it right (see comment below). Bank shareholders can all but rest assured that, under the current political scenario (known as “Change We Can Believe In”), banks will be bailed out by the federal government. Is it not this sentiment that is really driving bank share prices?

And as SidFinster (also see comment below) suggests, anyone who dares suggest that the bailouts should cease is going to be branded a “communist.”

Actually, as we saw in Pittsburgh at the G20, the new catchall pejorative is “anarchist.” Anyone who had the impudence to suggest that the bailouts should stop was branded an “anarchist” and their message brutally suppressed by the new American fascist regime. Here’s an excellent and hilarious video that conveys the sentiments of the students concerning how our new America works:
http://www.youtube.com/watch?v=dm1kSMSDJBw

And if you’re wondering what an “anarchist” is, a student made up this list and posted it on a campus discussion forum:

an ANARCHIST is, but is not limited to, anybody who:
1. Rides, or is in possession, of a bike.
2. Talks through a megaphone. Offenses include telling people to be peaceful, not resist, and follow orders.
3. Tries to exercise the right or free speech without inducing or suggesting harm or violence to any individual or establishment.
4. Tries to talk to the police. Common offenses include, but are not limited to:
” Why are you doing this to us?”
“How can I peacefully leave?”
5. Takes video, pictures, or is in possession of a camera that might document the truth.
6. Tries to help/care for those who are in immediate danger or harm.
(e.g. see Iraq medical war veteran, and helpful towers residing pitt student)
7. Is in possession of any object that will protect them from tear gas.
8. Buys a lighter on a Friday
9. Follows police orders by walking, rather than running.
http://www.whathappenedatpitt.com/forum/viewtopic.php?id=18

Peripheral Visionary:

Unfortunately, this is a depressingly pervasive issue. I recently received a notice from my bank–a small local bank, previously very conservative in its lending operations–informing customers that it was “working with” a number of real estate developers who apparently were having difficulty. “Working with”, in this case, is likely in the form of forbearances or even additional funding in the desperate hope that somehow a real estate developer saddled with huge amounts of debt and properties that can’t be sold will somehow turn around. In other words, pouring money into a hole in the ground, or sending good money after bad.

The bad news is that the commercial and development portfolios of the banks are doing poorly–but the very bad news is that they are likely blowing even more money on ill-advised attempts to mitigate the situation, which will ultimately prove to be unsuccessful and costly.

bob:

The game is pretty evident by now. Banks get cheap money from the Fed and the Treasury. They hide their bad investments and growing insolvency for as long as they can. They use the cheap money that should be set aside as reserves to make leveraged investments and short term profits as their true position gets slowly worse. They pretend their short term gains are bottom-line profits and their businesses are healthy. They give themselves generous pay packages and bonuses. The Fed and the Treasury wink and look the other way until the whole thing falls apart. Then the banks go back for another bailout. It will probably work for a few more cycles.

 

[Oct 7, 2009] Financial Armageddon Goldman Sachs The Smart Money!

From comments

Who is Dan Hunt? by the Sandwichman

The only real currency right now are hydrocarbons.
EconoSpeak

A powerful comment on Krugman's blog in response to "Reinventing 1934 macro." Who is Dan Hunt?

 

This is a misreading of Schumpeter entirely. The problem with inflation is not that it doesn’t work to east the pain, it’s that it has side effects that make the cure worse than the disease. I’d like to understand why that point of view is as callous as you’ve tried to paint it Mr. Krugman, both here and in your magazine article. I presume as well you disagree with any medical procedure that involves pain, irrespective of its result on final outcomes?

In any case, if memory serves Mr. Krugman, you are one of the economists who has pointed out how much more severe each successive financial crisis has become. And yet you see no linkage with these teachings you so deride. To deepen the irony, as I understand it, you are currently looking to build a model of Minsky moments. Who was it again, that Hyman Minsky studied under at Harvard? Yea…. Joseph Schumpeter. And what was one of Hyman Minsky’s most renowned teachings? That new-Keynesians such as yourself have dangerously misunderstood Keynes, leading to mistaken policy proposals such as that de jour. May I suggest a book?

Your grasp of recent events is no better. This wasn’t a housing boom and bust, just the latest chapter in the ongoing, nearly three-decade-long credit bubble, painstakingly cultivated by self-styled slayers of business cycles like yourself. One could also trace the 80’s real estate bubble and S&L crisis, the late 90s stock bubble and all manner of other speculative manias from then to now (commodity futures anyone?) to the same underlying credit fueled phenomenon. It’s as Keynes called it- casino capitalism, only in this version, the only safe bet is the one against the house.

The legacy of all that bad policy are deep, painful maladjustments to modes of consumption and production that have been postponed for decades now. Does US goods producing productivity justify the massive chasm between its wage and per-capita consumption levels and those of its emerging market trading partners? Does it make sense that all we do here is produce ’services’, drive big cars and live in 5 bedroom homes with two car garages? As a cockney might say, yeur arvin’ a laugh.

That mess cannot be fixed painlessly. Resources and investment have been terribly misallocated- people have developed the wrong expertise, whole countries have developed (or underdeveloped) the wrong infrastructure, people have grown accustomed to the wrong lifestyles, companies have researched the wrong developments, for the wrong markets, etc. etc. That’s not going to have serious costs manifesting themselves in poor outcomes in people’s lives? More laughs. It simply cannot, and if the last 30 years have taught us anything, it is the absolute necessity of such adjustments. The necessity of periodic retrenchment, pain and unemployment when commerce and intermediation is organized as it is in a capitalist economy.

That does not mean we need ignore the lessons of Keynes with regard to what happens when there are bad loans, then bad banks and all manner of misappropriated savings, then collapsing asset prices and effects on intermediation, animal spirits etc. What it does mean, is that we cannot let expedients have worse consequences than that which we hope to expedite. And we have. In spades. This stimulus and all the inflationist monetary nonsense you have advocated that have gone along with it, are just more of the same.
 

[Oct 6, 2009] SSRN-Not What They Had in Mind A History of Policies that Produced the Financial Crisis of 2008 by Arnold Kling

This paper looks at the roots of the current crisis through an analytical framework of bad bets, excessive leverage, domino effects, and 21st-century bank runs. The paper shows that broad policy areas-including housing policy, capital regulations for banks, industry structure and competition, autonomous financial innovation, and monetary policy-affected elements of this framework to varying, but important, degrees. While considering alternative points of view concerning the causes of the financial crisis, the paper concludes that bank capital regulations were the most important causal factor in the crisis and that the policy “solutions” to previous financial and economic crises sowed the seeds for this current crisis.

[Oct 6, 2009] Interesting times might be returning...

[Oct 4, 2009] Return of the old ways of thinking threatens recovery By Mohamed El-Erian

Looks like 2010 will be repetition on 2008 (or 2002) with a new sauce -- rising unemployment and public debt... 
September 28 2009 |  FT.com

Last month, the governor of the Bank of England stated bluntly: “It’s the level, stupid – it’s not the growth rates, it’s the levels that matter here.” Investors have not yet accepted his insight that the absolute levels of income, debt, wealth and unemployment, not just the rates of change, are what matters today. They need to, and soon.

... ... ...

These considerations serve to accentuate the inconsistency between market valuations and the reality facing companies and economies. Today’s markets – be they industrial country equities or corporate bonds – have priced in vigorous growth for 2010. Valuations assume companies will be able robustly to grow earnings through higher revenues, not renewed reliance on the cost reductions that have propelled earnings in the past six months. For that, they are depending on what is likely to prove to be an elusive high-growth scenario for 2010.

The longer it takes for investors and the policy consensus to shift to the appropriate analytical framework – one that factors in levels rather than just rates of change – the greater the risk of disappointment in 2010. Mr King’s insight will need to be more widely appreciated if the global economy is to avoid a growth and wealth relapse next year.

Mohamed El-Erian vs Lakshman Achuthan The Big Picture#comments

HarryWanger:

Looking an awful lot like 8/30 – 9/2. If that’s the case we’re going higher. I spent a lot of time recently analyzing job creation. Where are the jobs going to come from? I’ve read every possible scenario and yet I keep coming away empty on that answer. Ask any of these “experts” that question. No one can truly answer it. No one. It’s sad but those jobs are gone, more people are entering the marketplace daily and yet there’s not job creation.

techy :

Harrywanger:

job creation is happening where-ever stimulus money is flowing:
1. Healthcare IT
2. Scientific research
3.Nasa

these are the one’s i directly know of.

but others should be on the way:
1. teachers
2.infrastructure

you can use the below information to make a guess:
http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/01/GR2009020100154.html

but so far job loss in private is still huge..

i just hope that everyone is done laying off, but it is possible that more companies will have to shrink due to loss in business…not to mention the second derivative effect due to further reduction in consumption by consumers due to uncertain job market.

yankee19:

Ummm… I vividly recall hearing Lakshman Achuthan (his name is unforgettable) back in 2007 and 2008 on Bloomberg saying there would be no recession in the U.S. I think the man is without a clue….

sharkbait:

By Mohamed El-Erian:

“Investors have not yet accepted his insight that the absolute levels of income, debt, wealth and unemployment, not just the rates of change, are what matters today. They need to, and soon.”

-> Agreed.

“First, consumer indebtedness is still too high relative to income expectations and credit availability, particularly in the US and the UK. This inconsistency will hold back any sustainable bounce in the most important component of aggregate demand.”

-> Fundamentals – Household assets vs. liabilities: liabilities still too high.

“Second, some banks’ balance sheets are still too geared for the comfort of regulators or their own managers. This will inhibit them from lending to the real economy at a time when certain sectors (such as commercial real estate, but also residential housing) still require significant refinancing, and when consumers need time to work down their excessive debt loads.”

-> toxic assets + zombie banks: still there, along with shadow housing inventory. Creative accounting 101.

Third, unemployment has risen well beyond expectations, and is likely to prove unusually protracted. “It will take years for US unemployment to return to its natural rate, even after the natural rate shifted upwards. This will dampen the recovery of consumption and investment, stress social contracts that assume flexible labour markets, and endanger political support for essential structural reforms.”

-> employment: +125k-150k jobs/mo. needed for population growth (std. assumption = 150k/mo.). Approx. -7M jobs currently. Assume in expansion: + 150k/mo pop. gr. +100k/mo new = 250k/mo.
7M/0.1M=5.8 yrs. to pre-recession empl. rate. Still approx. 3yrs. out assuming 200k/mo new. Does not incl. the effects of 1)hrs. worked /wk. to incr., 2) underemployed, 3) discouraged upon returning to labor force post-recession.

“Finally, public debt has grown so rapidly as to spark concerns about future debt dynamics. This would inhibit the effectiveness of future stimulus measures, as well as complicating the formulation of exit strategies. It could also erode the medium-term ability of the US to fund cheaply its large deficits by undermining both the global standing of the dollar as world reserve currency and the attractiveness of US financial markets.”

-> $4-5 debt for $1 GDP growth currently. Interest pmnts. major drag on growth + all the other nasties (above).

Yes, I would agree here. My 2 cents in 2009 USD, or approx. 1/2 1913 USD.

Taxpayer to Fed + Congress: “Well, here’s another nice mess you’ve gotten me into.” – with credit to Oliver Hardy.
 

YouTube - Matt Taibbi Wall Street's Naked Swindle

1mealperday:

dear Grace.....

what are we the people supposed to do? I sit in my house and see the dishonesty on wallstreet and the fed, and the gov, and sec etc. I live on the west coast. What should we be doing about this?

so what to do now............HELP!!

[Oct 3, 2009] Week overview

Some facts to keep in mind

Opinions

Guest Post The Real Reason the Giant, Insolvent Banks Aren’t Being Broken Up 

naked capitalism

interregna:

Why does the Administration cling to US casino finance?

Perhaps the Administration understands that we lack better options or prospects.

With industry and its support markets ‘off-shored’ by US multi-nationals to maximize their return on investment, nearly all we have left, as a nation, is our ’service economy’ -
mowing one anothers’ lawns and cutting one anothers’ hair.
However, the so-called service economy generates no new wealth – we merely redistribute, often inequitably, credit tokens amongst ourselves.

With US ‘investment’ banking unrestrained, running a global financial casino for hot and dangerous speculation is a ’service’ the US has offered for export. US $dollar credits are ‘chips’ – and the action invariably favors the house. Indeed, some of the ‘tables’ are fixed by the FedTreasury, who may see everyone’s cards.

By all appearances, the Administration is betting that global, baser instincts remain attracted or addicted to our engineered ‘bets’ – sundry derivatives and ($dollar denominated) debt-related instruments (including ‘quant’-engineered speculation on the contractual performance of packaged debtors.) In my view, this is why there has been no attempt by a thoroughly incorporated Administration to tighten investment banking regulations. During our New American Century, our greatest economic line item – accounting for about 40% of GDP – has been US ‘finance’ operations.

Is this is our new American epoch? Croupier to the world, indeed.

Though offering no hope for middle and lower class employment or income generation, casino operations, as long as they continue, may pad the coffers of the top 5% demographic, who have the wherewithal to tag along on ‘investment’ banking shirttails.

However, casinos are opening elsewhere – where the creditors reside – where the games and tables aren’t ‘fixed’ to a $dollar reserve currency that is now publicly discussed in the past tense.

New York and London were the great financial centers of the 20th century. London is in terminal decline. As liquidity invariably gravitates to zones of surplus versus debt, it is certain, in my view, that New York’s prominence will be sorely tested – that the Administration’s ‘casino service exports’ will invariably wane.

Welcome to the jobless recovery and the jobless economy. Place your bets as you may – there are managed markets for a few, and the lotto for lumpens.

This is not a viable fiscal or social structure for a Republic.

A safe day for the bears…

FT Alphaville

First out of the cave - SocGen’s Albert Edwards. From the strategist’s latest Global Weekly:

One of the key lessons from Japan’s lost decade is that investors’ confidence that the authorities are in control of events will ultimately drain away. In a balance sheet recession, one should expect frequent downturns as the authorities balk at additional stimulus. Only then will zombie investors, sucked dry of confidence, squeeze the remaining puss from equity market valuations. Only then will the 20 year boil of equity market over-valuation be properly lanced.

Edwards is prepared to launch a full-on challenge to the idea that excess liquidity will continue to drive asset prices higher. He suggests the uptick in growth is actually sucking speculative money into risk assets.

That’s dangerous because the fragility of this cyclical recovery - and the shocking state of personal and state balance sheets - means frequent lapses back into recession are inevitable.

This happened in Japan, of course, in the 1990s:

This eventually drained hope away from zombie investors who then became sellers-on-rallies, rather than buyers-on-dips.

On the balance sheet front, Edwards notes that in the US the private sector as a whole is paying down debt faster than the government is able to pile it up. This, the SocGen man argues, is a headwind to growth that will be with us for a long time to come.

16766.jpg

Similar sentiments on Thursday from  Gluskin Sheff’s David Rosenberg, who’s pretty furious with this “flashy but very dangerous rally,” in which  equities are up 60 per cent over a six-month span while  US employment slumped by 2.5m over the same period.  His response to the latest ADP employment numbers:

Of course, the mantra of many is that the pace of layoffs is subsiding – this was the smallest decline since July 2008 — and that this is actually encouraging news. How weak is that? It’s like saying that your golf score is going up but at a slower rate than it was last year. You can’t pay the bills and feed the kids on “less negative” employment data and we know of no sustained or solid recovery that has ever occurred on productivity growth alone.

Rosenberg is with the common man here:

It is not lost on the individual investor that equities have generated no net return over the last 11 years and that we are very clearly in the middle of a classic secular bear market. What is amazing, and indeed, encouraging, is that the long-term resolve of the investor is not being overwhelmed by greed as Wall Street strategists push the theory of pricing the market on “mid-cycle” earnings and economists push the theory that data that come in “less negative” is actually bullish.

Related links: Bears, keep the faith - FT Alphaville

praxis22:

If you want chapter and verse on Japan then Richard Koo is your man:

http://www.amazon.co.uk/Holy-Grail-Macroeconomics-Lessons-Recession/dp/0470823879

Though Martin Wolf's "fixing global finance" and the recent research papers of Rogoff & Reinhart are fairly good too, as was today's Rosenberg.

It's kind of weird to be living through this really, but perhaps I just have an exaggerated sense of history :)

Too Expensive and Ready To Collapse – U.S. Stocks, Bonds and China

Nice timing ;-)
Sep 29, 3009 | ETF Guide

The year 2008 provided a glimpse of what can happen with corporate bonds. Within a few days in October 2008, the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD) fell nearly 20%. The iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG) dropped 25%. Lower quality junk bonds did even worse.

“Canaries” for beginners

Just as a canary would be useless for a coal miner if left on top of the mine shaft, many indicators are useless to investors because they’re being misapplied. Indicators have to be viewed in context with the current market environment otherwise they might “misfire.”

Different statistics such as consumer spending, consumer sentiment, home prices, etc. are lagging indicators. As such, they provide a snapshot of what happened, not a prediction of what is to come. You don’t drive by looking in the rear view mirror, why invest that way?

In a March 2nd Trend Change Alert, the ETF Profit Strategy Newsletter predicted the biggest rally since the October 2007 all-time highs with a target range of Dow 9,000 – Dow 10,000. The end of this rally was to be marked by extreme levels of optimism.

The recent upticks in home sales, home prices, consumer sentiment, and consumer spending are all a manifestation of the higher prices and optimism foretold in the Trend Change Alert. As the chart below shows, consumer confidence (and upticks in most other statistics) increases with stock prices. It is probably safe to say that economic indicators increase because of stock prices. If stock prices fall, so will the economic indicators.

This is confirmed by forecasts of analysts and economists given over the past month or two. The yo-yos who never saw the recession coming, are now proclaiming the “The recession is over,” and every “guru” who’s been wrong on the market, is now saying “buy.”

The key is to be ahead of lagging indicators such as economists and analysts. Once the aforementioned jump on the trend, it has usually come close to being exhausted.

The ETF Profit Strategy Newsletter used investor sentiment to issue a sell alert in January around Dow 9,000 and a buy alert in March around Dow 6,800. The time has certainly become ripe for another sell alert to be issued soon.

The extent of the fall

Based on sentiment readings and the intensity of the recent rally, the upcoming fall will be as deep as it will be surprising.

History tells us that stock markets only bottom once valuations are reset to rock bottom prices. With a P/E at 144, and the “E” (earnings) unlikely to grow, the only way to lower the ratio is by (significantly) lower stock prices. The 2002 bottom failed to properly reset valuations and we’ve seen what happened since.

This bear market won’t make the same mistake. Stock prices will hit rock bottom to restore P/E ratios and other valuation metrics – such as dividend yields – to the levels that truly define a major market bottom. The stock market has established a predictable pattern of how low P/E ratios and dividend yields will have to fall in order to “ring the market bottom bell.”

Based on those predictable patterns it is possible to calculate a target range for the ultimate market bottom. The ETF Profit Strategy Newsletter includes an analysis of historic market bottoms, along with a target range for the top of this rally and the ultimate market bottom.

If your canary has been asleep in the cage or left on top of the mine shaft, now is a good time to find a reliable early warning indicator. History suggests that we are at a major turning point for the U.S. stock market.

[Oct 1, 2009] Americas Very Soggy Outlook Why the Recovery Wont Be V Shaped Tech Ticker, Yahoo! Finance

See also Ignore Rising Inflationary Forecasts, Warns Economist David Levy Reuters and No Way Has Housing Bottomed, Says David Levy The Big Picture
...the optimists are wrong, says David Levy, chairman of the Levy Forecasting Center, who is "very confident" the economy is "not going to be going up very strongly" in 2010.

Levy's forecast is the U.S. will experience "very soggy" growth over the next decade, based on Japan's performance after its debt bubble burst in 1989. Levy doesn't believe America's workout will be as prolonged, but says Japan's continued malaise is exhibit A in his counter to Grant's view that recoveries "always" mirror the shape of downturns.

"It's different this time" are the most dangerous words on Wall Street, but Levy says this recovery will be different than past post-war rebounds because of the nefarious effects of deleveraging.

"Balance sheet shrinkage...will assure that the economy cannot perform well and that new, serious financial problems keep arising," Levy writes. "Assuming that the cyclical recovery apparently under way will be much like past ones is a recipe for big trouble."

taopraxis

Today's gamblers use sentiment or technical indicators in a futile effort to outsmart their fellow suckers. However, people's sentiments are unreliable, indicative of nothing with regard to the future. Where are we today? The ship is sinking into the deep, the double-cross-dressing bankers have displaced the women and children in the lifeboats, and the rabble is locked down in steerage for the ride to the bottom.

Yahoo! Finance User:

I agree, the unemployment is so high and real salary/income is getting lower per http://www.salarylist.com.  This stock market up is by cheap money, and Wall Street takes advantage of it as they know Obama government won't say anything of this bubble (stock market V shape bubble).

[Oct 1, 2009] The Coming Blowback of Banking Fraud

The Double Dip Recession, or the “W” shaped recovery that a minority of economists such as Joseph Stiglitz, are now stating as a strong possible outcome of this current rally, should not be discussed in the realm of economics but rather in the more apropos realm of financial fraud. The fact that the current upleg of the “W” shaped recovery that is occurring now will inevitably crumble in spectacular fashion will not be a result of any free market principle, but rather the direct consequence of a fraudulent scheme executed by an elite global financial oligarchy, otherwise known as Central Banks. If the mission of this current manufactured leg up in Western stock markets was to fool the world into believing that global economies are recovering, then clearly, up until to this point, the mission has been a resounding success. For those unfamiliar with the term “blowback”, “blowback” is a CIA term that was first used in March 1954 to describe the unintended consequences of US government international activities kept secret from the American people.

[Oct 1, 2009] Guest Post- “Martin Wolf, the FT’s rebel with a cause, and the future of finance

naked capitalism

A few notable quotes from Wolf:

Cycles of confidence and panic are inevitable in our world of debt, be that debt public or private, domestic or foreign. Credit is extended freely and then withdrawn brutally.

Financial systems are accidents waiting to happen.

The final lesson is that financial liberalisation and financial crises go together like a horse and carriage. It is no surprise, therefore, that the last 30 years have seen waves of financial crises, of which the latest one is merely the biggest.

[Oct 1, 2009] Money figures show there's trouble ahead by Ambrose Evans-Pritchard

Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise.

[Oct 1, 2009] Survey Young adults don’t trust financial institutions - Pacific Business News (Honolulu)

Definite improvement in IQ in comparison with baby-boomers ;-)

Young adults between 18 and 29 years old don’t trust traditional financial institutions very much, according to a new survey commissioned by Microsoft Corp.

Two-thirds of the survey respondents said they won’t invest money in the stock market and more than half said they won’t invest in a 401(k) or other retirement plan. Slightly less than half said they’d invest in an insurance policy and 22 percent said they would not even deposit money in a bank.

... ... ...

The youths, which Microsoft describes as the “millennial” generation, weren’t too optimistic about the future of U.S. financial institutions. There are an estimated 80 million U.S. youths in the “millennial” generation, Microsoft said.

More than 80 percent said they believe that more financial institutions will fail in the future and 80 percent said that U.S. financial institutions don’t deserve any more bailout money.

“The financial crisis has created a deep sense of mistrust in millennials, which is keeping the next generation of wealth on the sidelines,” said Colleen Healy, general manager of U.S. financial services at the Redmond computer giant (Nasdaq: MSFT), in a statement.

[Oct 1, 2009] Pimco’s Gross Buys Treasuries Amid Deflation Concern (Update1) - Bloomberg.com

Suspicious rumblings on deflation. Why Gross is promoting Treasuries now ?  The debt train already left the station and pressure the next year will be up independent of any government actions.

Pimco in July reversed a policy to steer clear of U.S. debt when it said it would buy five- to 10-year Treasury securities.

“With Treasury yields near the top of our expected range, Pimco plans to overweight duration and take exposure to the five- to 10-year portion of the yield curve,” the firm said July 20 in a report on its Web site.

On that day, the yield on the 10-year note touched an intra-day high of 3.72 percent and a low of 3.57 percent. The note yielded 3.29 percent at 10:36 a.m. today in New York.

Gross said intermediate- to long-term bonds will perform well as long as policy rates and inflation remain low, after minutes of the Federal Open Market Committee’s Aug. 11-12 meeting was released on Sept. 2.

‘New Normal’

Officials at Pimco have forecast a “new normal” in the global economy that will include heightened government regulation, lower consumption and slower growth. The economy will likely expand at a 2 percent to 3 percent rate going forward, Gross said.

The world’s largest economy shrank at a 1.2 percent annual rate from April to June, more than the originally reported 1 percent contraction, according to a Bloomberg News survey before the Commerce Department’s Sept. 30 report. The jobless rate climbed to 9.8 percent this month, from 9.7 percent in August, according to a separate Bloomberg survey before the Labor Department reports figures on Oct. 2.

[Oct 1, 2009] The secret to Goldman Sachs' good fortune

Basically good old insider trading...  May be some tricks in supporting stock market that Greenspan pioneered were performed via GS. 

You've heard the old saying, "it's not what you know, but who you know."

Goldman Sachs knows lots of important people. That fact is indisputable, mainly because former Goldman employees are scattered around the country, and the globe, in important, decision-making financial positions.

... ... ...

It's also about the unparalleled access that Goldman Sachs had to Treasury Secretary Hank Paulson, whose mission -- according to his own words -- was to bring Wall Street and market regulators (not to mention decision makers) together, so that they were "seeing the same issues, the same problems and working toward the same solutions." On Wednesday, Sept. 17, 2008 -- the day before the one I am writing about -- the stock market performed horribly.

By the end of the session the Dow Jones industrial average tumbled 449 points as investors worried about the nation's financial system. The next morning, Sept. 18, Paulson placed his first call of the day at 6:55 a.m., to Lloyd Blankfein, who succeeded Paulson as CEO of Goldman. It's unclear whether the two connected because Blankfein called Paulson minutes later.

And then Blankfein placed another call to Paulson at 7:05 a.m. for what looks like a 10-minute conversation.

After that Paulson called Christopher Cox, Securities & Exchange Commission Chairman twice; British Chancellor Alistair Darling and New York Federal Reserve head (and now Treasury Secretary) Tim Geithner two times.

Then Paulson took another call from Goldman's Blankfein.

It wasn't even 9 a.m. yet -- 30 minutes before the stock market was to open -- and Paulson and Blankfein had already exchanged three phone calls.

This wasn't particularly unusual.

On Wednesday, Sept. 17, the day the stock market was in trouble, Paulson spoke with Blankfein five times, including a pair of calls at 7:20 p.m. and 8:45 p.m. One of the earlier calls -- at 12:15 p.m. -- is listed on Paulson's log in the same five minute interval as a call to Geithner, which could indicate that this was a conference call.

If Paulson did set up a conference call, it would have been an extreme instance of putting someone who wielded a lot of power -- Geithner -- together with someone -- Blankfein -- who could profit from that connection.

And all of this doesn't include possible cell phone calls. The Treasury turned over to me Paulson's official schedule and phone records after I made a request under the Freedom of Information Act.

There's no way for me, or anyone else, to know what Blankfein and Paulson talked about during those first three calls on Sept. 18.

But it would be reasonable to assume that the conversation, coming as it did in a period of market turmoil, had something to do with what was happening on Wall Street.

So no matter how you slice, dice or excuse it, Blankfein by 9 a.m. would have had information that was not available to anyone else who makes their money trading securities. And, as you can imagine, there is a whole lot of value in that kind of inside access.

Robert Scully, a co-president of Morgan Stanley, called Paulson at 8:50 a.m. on the 18th.

But he appears to be the only Wall Street-type who was in contact with Paulson until Larry Fink, head of the private investment firm Blackrock, called at 12:40 p.m.

By then the stock market was going down again. But the decline wouldn't last long.

Stocks began a miraculous recovery at 1 p.m. on Sept. 18, when rumors started to spread that Paulson was considering a "government entity to bail out troubled banks" and that a meeting was going to be held that night on the matter.

At 1:05 p.m. Blankfein called Paulson again. Paulson would call Blankfein for the last time that day at 4:30 p.m. when he "left word."

That was the sixth time these two men called each other on Sept. 18.

That's one time less than Paulson spoke with Federal Reserve Chairman Ben Bernanke, arguably the most important person when the fin ancial markets are in trouble. But Bernanke didn't get his first call from Paulson until 9:30 a.m. -- and it included Cox and Geithner.

President Bush only spoke with Paulson twice that day. To be fair, on the afternoon of Sept. 18 Paulson did call John Mack, head of Morgan Stanley (at 1 p.m.) and Merrill Lynch's John Thain(at 1:10 p.m.).

But Fink is the only one who seems to have gotten through to Paulson anywhere near the time the market started rallying.

By the end of the day, the Dow was up 410 points in an astonishing comeback.

[Oct 1, 2009] IMF warns of further recession risks - CNN.com

"Banks round the world have still to reveal about half of their likely losses resulting from the financial and economic crisis"

Banks round the world have still to reveal about half of their likely losses resulting from the financial and economic crisis, the International Monetary Fund said on Wednesday, warning that there was still a "significant" risk of another downward lurch in the global recession.

... ... ...

It said these risks, alongside weakened banks, were likely to depress the availability of new credit and damp the global economic recovery unless significant additional capital was raised to improve the health and lending capability of banking systems.

In its twice-yearly Global Financial Stability Report, published on Wednesday in Istanbul, the IMF, estimated the ultimate losses in the financial system would total $3,400 billion between 2007 and 2010, an improvement from the $4,000 billion estimate it published in April.

... ... ...

Even so, the IMF warned that much still needed to be done to secure a recovery and to ensure that renewed stresses in the financial system did not restart the vicious spiral of banking losses, rationed credit, deeper recession, increased defaults and further banking losses.

Within the banking systems, the IMF estimates that losses will total $2,800 billion alone and that banks have so far recognized only $1,300 billion of those losses. "U.S. domiciled banks have recognized about 60 percent of anticipated writedowns, while euro area and UK domiciled banks have recognized about 40 percent," the report said.

... ... ...

Although banks have been profitable this year as their borrowing costs have fallen with exceptionally low interest rates and the rates charged on lending have remained higher, the IMF warned that this happy position for banks might not last. "In the medium term, banks are likely to suffer reduced margins from paying more for deposits and incur higher interest costs," it said, so greater capital-raising measures were still necessary.

... ... ...

Massive public deficits also complicated the financial stability picture, the IMF warned. They implied that total borrowing needs in certain countries, particularly the U.S. and UK, will exacerbate the difficulties in raising finance for the private sector, and imply the need to raise finance from abroad, potentially undermining the dollar and sterling, or raising long-term market interest rates.

[Oct 1, 2009] W/P = MP?

Bankers are, apparently, being rewarded generously for their fine performance in recent years:

In 2008, salaries of the top 10 banks reached $75 billion (up from $31 billion in 1999), while cash dividends to shareholders were only $17.5 billion. Management took 4.3 times more than shareholders at a time when shareholders were injecting capital and government was guaranteeing deposits.

If people were really compensated according to the value they create, wouldn't bank managers would owe us money?

[Oct 1, 2009] Greenspan Calls Market Top

"That flattening out will probably “put some sort of dull face” on the economy in 2010, he added." --  "Given Greenspan's key role in the financial mess of today, it surprises me that anyone still listens to him other than the establishment whom he served so well. This leads me to suspect that this a strategic call rather than the musings of some dottery old man."
I’m not certain I would give Greenspan great market as a stock market seer, but he may have gotten better over time. He saw the stock market as frothy in 1996 (the time of his famed “irrational exuberance” remark, and was a skeptic through most of the equity bubble, then threw in the towel and decided he was a believer less than 6 months before the market top.

Nevertheless, the Maestro seems to be calling an end to the current rally, based on his view that the fundamentals will not pan out and growth will falter next year. He sees growth coming in at 3% to 4% over the next two quarters, but as Ed Harrison has pointed out, a big chunk of that is “the mother of all inventory corrections.”

From Bloomberg:

Former Federal Reserve Chairman Alan Greenspan said he sees the U.S. economy slowing next year as the surge in stocks comes to an end.

“The odds are that we flatten out, even though earnings are doing very well,” Greenspan said in an interview with Bloomberg Television, referring to the equity market. That flattening out will probably “put some sort of dull face” on the economy in 2010, he added.

Greenspan said he expects the economy to grow at a 3 percent to 4 percent annual pace in the next sixth months before slowing down. As a result, unemployment isn’t likely to decline much from last month’s 9.7 percent rate, he said. Even so, he doesn’t expect the economy to relapse into recession next year.

The world’s largest economy shrank at a 0.7 percent annual rate from April through June, the best performance in more than a year, the Commerce Department said today. An unexpected decline in a gauge of business activity released today, along with a private report showing employers cut more jobs than forecast, indicate a recovery may be slow to take hold….

“We are still by any measure in a disinflationary environment,” said Greenspan, 83. “Unless we sterilize or unwind the big monetary base we’ve built up, two, three years out inflation really begins to take hold.”

Selected comments

Glen:

Given Greenspans key role in the financial mess of today, it surprises me that anyone still listens to him other than the establishment whom he served so well. This leads me to suspect that this a strategic call rather than the musings of some dottery old man.

Skippy:

The Greenspan years, remind me of Popular Mechanics issues of my youth *Heady optimism* to sell print.

Skippy…reckoning of ones past mistakes is what separates the boys from the men.

MarcoPolo:

I’ve made mistakes too. I know what it’s like to look back at the dumb things you’ve done and wonder how you might have done better. What do you say when you know you’ve just been wrong?

“Unless we sterilize or unwind the big monetary base we’ve built up, two, three years out inflation really begins to take hold.”- AG

Remember that, I’m betting he’s right about that and there is no exit strategy. The present policy is likely wrong too.

Hugh:

I have been saying for a couple of months now that the current suckers rally will end in the Fall or Winter. It is fully mature and could go any time. All it needs is a precipitating event or the lack of a single greater fool.

Note: the September jobs numbers will be coming out tomorrow.

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Last modified: October 02, 2017