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Financial Skeptic Bulletin, November 2009

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There are no markets anymore, just interventions

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German Wise Men fear 'credit crunch' in 2010 by Ambrose Evans-Pritchard,

Oct 15, 2009 | Telegraph'

There is still a significant risk of further shocks to the international financial system,' said a joint report by the five 'Wise Men', a panel that advises the government.

Emergency action by the European Central Bank and authorities worldwide "averted a looming collapse" of Germany's banks over the Winter but lenders are still too frail to renew normal lending.

"Credit to non-financial firms has clearly been declining. Financial conditions are likely to worsen further. Banks are facing large write-offs on toxic debt and a rising toll of company insolvencies," it said.

The report said it was a serious error to pressure banks to raise capital ratios in the middle of a downturn, causing them to tighten lending standards. "There is a major danger that already tight financing conditions could lead to a credit crunch next year," it said.

The first round of the financial crisis hit the big banks and state Landesbanken, which had portfolios on US sub-prime debt and other traded assets,. The next wave of victims may be the country's savings banks faced with the 'slow-burn' losses of loan defaults.

Large companies can raise money on the bond markets but smaller Mittelstand family firms are facing serious problems rolling over debt. Germany's industrial lobby VDMA this week called for a change in policy to prevent savings banks from choking off credit to its members, the backbone of the export machine.

The Wise Men said Germany's economy would contract by 5pc this year. They have upgraded their growth forecast for 2010 from minus 0.5pc to plus 1.2pc, but cautioned that unemployment will rise by another 300,000 as firms pull back from costly work-support schemes, known as Kurzarbeit. The pace of the current rebound - driven by restocking and short-term stimulus - is "not likely to be sustainable".

David Goldsby

Paul. Gibraltar on October 16, 2009 at 06:37 AM

  • Gloom and doom, and equities hit another year high. One of you must be wrong.

No real contradiction. The stock market rally is a factor of four things.

  1. A brilliant worldwide government PR campaign allied to an endless supply of cheap money for the big banks and 'in the know' hedge funds to put in place the biggest bear squeeze the world has ever seen. Big momentum.
  2. A relief rally in the markets and in the economy that governments had at last got their act together enough to stop world economic meltdown. The amount of business cancelled last Autumn only to re-emerge this Spring and Summer was awesome.
  3. The inventory cycle turned positive.
  4. The major stock market indices are made up of companies with such dominant monopolistic or oligopolistic market positions, and served by labour markets so cowed, that they were able maintain margins in the face of horrendous volume downturns, and it is these companies that get the headlines and drive the markets.

So we have momentum feeding confidence feeding momentum.

But, as AEP continues to point out, the underlying realities remain precarious in the extreme, and if governments take away fiscal or monetary stimulus; nay, if they even just maintain it; nay, if they don't increase it; they can still send the world economy crashing.

Meanwhile, commodity prices continue to rise on the momentum and before we know it countries with the weakest currencies (temporarily) will find CPI inflation heading towards and past the 2% target. As long as that target remains in place world employment will never recover. Hence you now hear some people talking about much lower growth rates being the new norm - 1% I heard touted. So with population growing at say 1% and productivity growth potential in the internet driven age at perhaps as high as even 4%, that leaves unemployment soaring by 4% per annum. Something's got to give, and they don't want it to be the inflation target.

On the other hand, maybe the cogniscenti know something I don't, and 'price stability' has already been redefined upwards. The gold bulls obviously think so.

Andrew

According to the other article "Ex-FSA chief Sir Howard Davies sees 'dramatic� risks for Britain" people aren't willing to change. This is perhaps the most fascinating aspect of the entire event: that as much as people blame the politicians and the bankers, they're as much to blame.

The Germans alluded to above won't be in nearly as many difficulties because home ownership is much lower than in Anglo nations. Unemployment won't lead to massive mortgage defaults. Once the second crunch hits, nations of renters, like France and Germany, will be much better off.

Unfortunately, the Anglo nations want better lifestyles than their continental counterparts, and to own their own home and to export very little. So, do we change our money into gold, move to France or Germany, or both?

November

[Nov 30, 2009] Standard & Poors New Policy Concealing the S&P 500 P-E Ratio from the General Public

Nov. 17, 2009

Some high-level decision-maker at Standard & Poor's has decided that the public should no longer be allowed easy access to this crucial number: the Price/Earnings ratio of the S&P 500.

That number went above 140 on September 30, 2009 -- the highest ever recorded. It had continued upward all year.

I went to the old page late last week. The page has been totally redesigned. The P/E ratio was missing.

I wrote to the webmaster and asked where the figure is reported. On November 16, I received this reply.

Thank you for your inquiry. Last week our website was upgraded and so some information has moved, or has be removed. For information regarding the S&P 500 please see the below link to the website:

http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--

On the left hand side of this page you will be able to see information regarding Index Data and Index Information (Including Earnings data). To see the Index data you will need to register your details. If you click on one of the spreadsheet icons, this will link you to a login page, please click the link "Register Here" and enter your details accordingly. You will then be sent an email with your password for the site. If you then go back to the original link, enter your login name and password, you will be able to open the documents.

If you require further assistance regarding this issue, please refer to your inquiry number in this email.

Thank you for contacting S&P INDICES Client Services.

We value your opinion, please feel free to provide us with Feedback on our service:

http://event.standardandpoors.com/content/US_IN_Email_Client_Service_Feedback

This is a polite way of saying, "This site is not for the sake of the general public. It is for the sake of the retail brokerage industry. So, please go away."

My guess is that the company came under pressure from the brokerage industry to stop publishing what has to be a frightening statistic for brokers, a statistic that says "Sell!"

Because the company has solicited feedback, I suggest that you provide it. Ask that the P/E ratio be restored. Here is what the page looked like two weeks ago:


  
 
I suggest that you forward this article to anyone you know who would like to have the P/E ratio available just as it was a month ago. You know: visible.

[Nov 29, 2009] No growth and possible crashes in Eastern Europe  in 2010

FT.com

For 2010, the outlook is bleak. The European Bank for Reconstruction and Development forecasts growth of 1 per cent for new member states, about the same as for the eurozone.

The pre-crisis boom is over and with it – for now – the catch-up race that underlies the hopes of east Europeans aspiring to west European living standards.

The impact of the crisis varies greatly, with an average drop in gross domestic product of more than 15 per cent in the Baltic states set against growth in Poland, albeit of only 1 per cent.

[Nov 29, 2009] Credit Crisis vs. Permagrowth Crisis

Oh, the pundits will immediately say, but unemployment is a trailing economic indicator and once things are back to normal it will go down fast. Nothing to worry about...

Oh, really? What if this no longer applies? Today's economy is not characterized by fast-reacting manufacturing with short hiring/firing cycles that accommodate domestic production swings. We have exported this dynamic to China, along with much of our manufacturing base, so we are likely to see a very, very slow recovery in job creation.

And if no jobs are to be had, income will suffer and so will consumer spending, which is the foundation of our entire Permagrowth economy. Yes, there is a chance that we will revert to substituting consumer debt for earned income, as we increasingly did during the Bush II era. But if we do, then we will indeed have learned nothing and soon be responsible for our own demise... again.

Therefore, we should immediately start revamping our economy along Sustainable lines. For a model, perhaps we should start looking at Japan from a different perspective, outside the GDP-metric box. I mean, does anyone think that the Japanese are suffering, or are they enjoying a high living standard after well over a decade of so-called "stagnation"?

Let's bottom-line things: Permagrowth/Permadebt is like the high-wire acrobat who must forever keep moving in order to keep his balance and not plunge to the ground. Likewise, our economic model depends on ever more frantic activity to generate more debt and thus more "money" to service this debt. Debt conservation has replaced human development as the self-evident goal of governments.

If this were only a shocking ethical tragedy we could just shrug our shoulders and quote Cicero: O tempora, o mores! Unfortunately, Permagrowth/Permadebt is also completely antithetical to natural law, the simple truth of energy conservation and the constant increase of entropy.

[Nov 29, 2009] Hidden Cost of War

Mish's Global Economic Trend Analysis

Cost Per Soldier = $1 Million

Any expectations that Obama would show some sense of restraint about military spending have long ago vanished.

[Nov 29, 2009] Wells Fargo Chief Economist- "There is no clear, easy way out for housing"

A report from the Federal Housing Financing Agency showed that prices were flat in September from August.

The housing market is confronting an abundance of inventory, high unemployment, fearful consumers and devastated family balance sheets.

“There is no clear, easy way out for housing,” said John Silvia, chief economist at Wells Fargo. “Contrary to my hopes, housing prices and the housing market in general will weaken again.”

He forecast a new decline in prices of as much as 10 percent, which he expected to shave a half-point off the nation’s economic output just as it emerges from the recession.

The Case-Shiller index, which covers about 45 percent of the United States housing market, is a three-month moving average. Since July and August were relatively strong, the weak September report could indicate a plunge in prices.

The 20-city composite index is off nearly 10 percent in the last year and 29.1 percent since its 2006 peak.

[Nov 29, 2009]  “Can’t Get Enough: Goldman’s Profit is Citi’s Pain?”

"Make the connection. Hank Paulson was the one to put on the $20B exposure on Goldman’s books insured by AIG. Paulson bailed himself out."
By Thomas Adams, at Paykin Krieg and Adams, LLP, and a former managing director at Ambac and FGIC.

Many thanks for the thoughtful comments on my earlier post. If you can take a little more on the subject, I thought I would add some clarification to some of the issues raised.

First, on the merits of a monoline vs. AIG bailout, consider a case of counterparty compare and contrast, using Goldman Sachs and Citigroup as examples.

The popular wisdom in the aftermath of the crisis is that Citigroup is the sick man of the banking world: they lacked sufficient controls to protect against unwise exposures to CDOs and other structures, they are still alive only due to massive government loans, etc. Goldman, in contrast, has been praised for their superior risk management and their shrewdness in avoiding the worst aspects of the crisis.

In light of the benefits Goldman received through the bailout of AIG, are these interpretations still accurate?

Citi had massive exposure to the monolines due, in part to their unique history together. Way back at the time of their first bailout around 1990, Citi owned two bond insurers: Ambac and Capmac. At the strong suggestion of the government, Citi unloaded Ambac and Capmac through initial public offerings in the companies. Capmac was subsequently acquired by MBIA. Though Citi sold off their interests in Ambac and Capmac, the companies have long been in bed with Citi. The senior management of both companies consisted of many former Citi executives. Both Ambac and MBIA were very active insurers for Citi’s asset backed commercial paper programs and for a variety of other structured finance assets.

Over the course of late 2007 and early 2008, as the bond insurers faced pressure and eventually downgrades due to their CDO exposures, the stock market would swing wildly around based on news of possible bond insurer bailouts. At times, these previously obscure companies seemed to hold the fate of the market in their hands. Despite widespread concerns about the impact monoline insolvency might have on counterparties, municipalities and investors, various commentators and bankers suggested that a bailout for the monolines would be inappropriate or might create the risk of moral hazard. Goldman Sachs, back in January of 2008, suggested that a bailout of the monolines would be ineffective and that putting the companies into run-off made more sense. As hedge fund manager Whitney Tilson (who was gleefully shorting the insurers) helpfully points out in the same article, a bailout of the monolines would have helped banks like Citi and Merrill who had been foolishly writing dozens of CDOs, but would not be in Goldman’s interest, since Goldman had avoided such risks. The monoline bailout never arrived.

It is strange then, after months of debate about the market-wide risk presented by monolines and the apparent government decision not to rescue them, that the Treasury and Fed suddenly discovered systemic risk when AIG faced a potential failure. This discovery coincided with AIG’s massive new collateral posting requirements after the company’s ratings were downgraded in September 2008. As it turned out, this posted collateral eventually flowed to the benefit of Goldman, among others. As it also turned out, the transactions for which Goldman received the collateral revealed that Goldman had not entirely been avoiding CDOs after all. They just had a different counterparty for their trades than Citi or Merrill.

Had the government bailed out the monolines, rather than AIG, Citi might have been in much better shape than they are now. The status of Citi’s huge off-balance sheet risk, some of which received enhancement from Ambac and MBIA, might be materially different. Today, Citi might be the bank being hailed for navigating the crisis successfully and paying impressive 2009 bonuses. In addition, had the Fed bailed out the monolines, no collateral posting would have been required and cash would not have flowed directly into Citi’s pockets.

Goldman, which had argued against a monoline bailout, was a major beneficiary of the bailout of AIG. In the absence of an AIG bailout, Goldman might now be the bank propped up by huge government loans. For this, Goldman can be credited for being a better political operator in a time of crisis than Citi. Or maybe they just managed to hide their bailout better.

Next, I would like to add a few clarifications.

AIG’s “regulatory capital trades” have been the subject of some confusion in the comments to my prior post and elsewhere. I believe that this phrase is just another name for “negative basis trades” which is just another way of describing collateralized debt obligations (CLOs) which were insured by AIG and the monolines via CDS. AIG had a massive portfolio of insured CLOs but, in aggregate, the monolines did as well. Some of the monolines who avoided real-estate related CDOS (such as FSA and Assured) had very large insured exposure to CLOs. In fact, all of the insurers had much bigger exposures to CLOs than to those CDOs.

As the crisis was emerging, the insurers sought to distinguish CDOs backed by subprime and mortgage collateral from CLOs backed by high yield corporate debt. However, these two asset classes were just offshoots of the same business. Like CDOs, the insurers would insure AAA rated bonds on a “secondary” basis by delivering credit default swaps to the protection buyer. Because both CDOs and CLOs were insured via CDS, they were both subject to mark to market accounting, whereas traditional insurance was not. In the wake of the financial crisis, the insurers experienced mark to market losses on both CDOs and CLOs.

However, by mid-2008, while no CDO had resulted in an actual claim yet, the insurers could no longer credibly argue that they would not incur real losses on the CDOs (though they tried). In contrast, CLOs, while suffering from impaired pricing, were still rated AAA and looked like they might survive without any losses. CLOs were still considered “safe” and therefore not a significant source of future insured losses. Thus, the impact from AIG’s and the monoline’s downgrades was much less for holders of insured CLOs. The regulatory arbitrage that the European banks had played with the CDS might be unwound, but the underlying bonds were still AAA, whereas the insured bonds in the many CDOs were worth pennies on the dollar.

With respect to questions regarding Goldman’s security in the collateral posted by AIG: this was no sure thing for Goldman. Had AIG gone bankrupt, the bankruptcy trustee could have tied the money up for years, as has happened in the UK to hedge funds exposed to Lehman. If Goldman had a pressing need for this cash, such a tie-up might have been a real problem. In addition, as the Skeptical CPA pointed out in a series of excellent posts some time ago (http://skepticaltexascpa.blogspot.com/2009/05/goldman-aig-and-18-usc-152.html,http://skepticaltexascpa.blogspot.com/2008/11/bust-outs-and-paulson-mob.html, andhttp://skepticaltexascpa.blogspot.com/2008/12/deprizio-doctrine-and-aig.html), the posted collateral could be subject to claw back, or worse, by a bankruptcy judge, depending on whether AIG was determined to be “insolvent” at the time of the posting. Had the deals that lead to AIG’s dire straits been examined in detail by a bankruptcy judge, Goldman might have faced questions about their own culpability in their AIG’s demise.

Goldman has made it clear that they are upset and concerned about all of the media attention on their role in the bailout. In my view, they should really turn their gaze inward and be angry at the people who put them in a position of massive exposure to AIG. Instead, they (and their friends such as John Paulson) boasted about how much smarter they were than everyone else by profiting from the market downturn and having superior risk management. As we know now, some of these claims turned out to be an exaggeration.

DownSouth:

@”…Goldman can be credited for being a better political operator in a time of crisis than Citi.”

The words “merit,” “talent” and “ability” take on new meaning in our newly minted Banana Republic.

Paulson, Geithner and Pandit should be stripped of all their wealth, dressed in bright orange, shackled and paraded around in public before being marched off to a life behind bars.

They are traitors to the American people. Econo-terrorists.

They deserve no better treatment than the terrorists who flew the airplanes into the World Trade Center.

DownSouth:

Arianna Huffington appeared on Charlie Rose with several other pudints yesterday.

I find it amazing that Huffington is the only one of the bunch who grasps the damage being inflicted upon the body politic and the civil society by Obama’s failure to punish the perpetrators of these heinous crimes.

http://www.huffingtonpost.com/huff-tv/arianna-discusses-afghani_b_371431.html

kievite:

I do not think that Goldman bailout was something extraordinary taking into account general context that existed during the last year of Bush administration.

I think it it would be more constructive to view Goldman as the major beneficiary of the theological belief in self-regulating market which shackled regulators and made public just a shipple in the hands of unscrupulous gamblers with good government connections. Resulting fleecing of taxpayers, economic damage and the destruction of the “moral compass” of the society are natural results Goldman or no Goldman.

But the problem is that any ideology after becoming dominant has a lock-in effect on the society. And what is the key question is whether the society will be able peacefully to transform without some kind of direct uprising aka revolution (which might take new forms as the direct confrontation with police forces now is pretty dangerous).

While the buildup of this pressure might take years, it looks like Goldman now became a catalyst for public anger against the existing regime. I think that at some point the elite might realize that it can serve as a sacrificial lamb to dissipate some of the tension.

Robespierre :

Call it for what they are: unscrupulous gamblers:

Calling them gambler implies some modicum of randomness. There was no gambling here there was pure an simply the systematic application of fraudulent transactions to collect millions of dollars in bonuses. To call them gambler is equivalent to call Al Capone an unscrupulous gambler because he bet on the distribution of alcohol during prohibition. Society MUST recognize that these people are just as criminal as organize crime, drug cartels and terrorist even when their crimes are implemented in a different way. BTW what you call self-regulation believes I called systemic bribery of elected officials to undermine supervision so that crimes can be committed with impunity.

jdmckay:

Very good article Thomas, thanks.

(…)It is strange then, after months of debate about the market-wide risk presented by monolines and the apparent government decision not to rescue them, that the Treasury and Fed suddenly discovered systemic risk when AIG faced a potential failure.

You’re much too kind… strange is not the word I’d use. strange is the bearded lady in a circus.

When the federal gov dumps these guy’s mistakes on taxpayers while their remaining repub K-street lawmakers are decrying the evils of BO’s “socialism”, w/virtually no accountability for the entire bunch.

A couple days after Mount St Helens blew blew I was flying over in a private plane w/several friends. We took several hours to circle, swoop in for close views. The swath of destruction from the lava flow was dramatic… hard to grasp w/out actually seeing it. “Devastation”, “anhilation” are words that come to mind which kind’a sorta approximate the reality.

This financial thingie… I’m not sure our language has words to describe it’s swath of destruction.

So anyway, great article. But strange it ain’t.

Why I Am An Optimist

When anything as relatively small as Dubai spooks the market, it should serve as a warning sign. The world has priced in 5% GDP growth for the US...

But in any event, one of the lessons to be learned is that investors should pay attention to where the leverage is. Unsustainable debt trends end in tears. They always do. Spain, Greece, Italy, the UK, and Japan will all have to face major restructuring in the next decade due to leverage.

 

Deficits the causes matter - Paul Krugman Blog -

NYTimes.com
  1. Yep: “it’s about whether America is still America.” What I find increasingly depressing about reading Krugman (and others) is my sense that this is tending toward a trainwreck in which the “liberals” are blamed for the recession, joblessness, etc., and the, um, “illiberals” win the next two elections (which, it seems to me, it’s reasonable to guess, has been a plan since before the nomination of McCain/whatsername).

    Please tell me I’m wong.

    — Russ Hunt
  2.  

    “The financial equivalent of a war” wasn’t that the designed purpose of the Bush administration? Declare a war and rob the treasury of the United States?

    More than Mr. Krugman’s generous characterization of “irresponsible” government, my impression was of a deeply immoral, unethical and shamelessly criminal government.

    If we are to understand the scope of that destructive administration, as Mr. Krugman suggests, then “the key point: the source of the current deficit matters when you try to figure out what kind of problem we have.”

    It is very clear the Bush administration hated the poor and disadvantaged and remained intoxicated with power for eight years while robbing the Americans blind at every turn.

    — kc
  3.  

    If you sit wringing your hands, then yes. Whether American will be America, depends on Americans depends on whether Americans stand up to be counted.

    As you did when BHO was voted into office. We can all lament how in bed he is with Wall Street. But with Palin as the alternative, while the world was premature to hail the Second Coming, it wasn’t unreasonable to heave a sigh of relief.

    Time for everyone to do their part.

    yes, nothing has changed. no matter who’s in office.

    — lokyc
  4.  

    Most of our current budget deficit is not the result of a temporary emergency. It only appears this way because of less than transparent structural deficits of the last 25-30 years. These structural deficits were obscured by unprecedented and prolonged overvaluations in the stock market and real estate arenas during this time. Debt to GDP has risen in the face of our current crisis mostly because these bubbles have been unmasked. It would be a mistake to think of this as a temporary emergency. This should certainly not be confused with the equivalent of a war and WWII is not relevant here.

    — Gus Satkowski

  5.  

    You wrote “but the housing boom also led to a revenue boom”. Really?! Where is all this revenue? The market, living in the real world, is trying to liquidate ‘bubble’ housing prices but the government and misguided Keynesian economists are trying to reflate the housing bubble.

    — Konstantin


  6. Professor Krugman, kudos on owning up to overstating the 2003 alarm about the US deficit. Many prominent economists would not be so modest. Perhaps concerns over the short and medium-term were unfounded, but one could argue that your long-term concerns were justified.

    — Gus Satkowski

  7.  

    “Most though not all of our current budget deficit can be viewed as the result of a temporary emergency.”

    Fair enough. But can we ignore the starting level of the public debt (before the temporary emergency triggered the additional deficits) AND whether the causes of the build up of the prior public debt were temporary or structural?

    Arguably the starting level of public debt was high relative to GDP (when compared to levels over the last 50 years) AND the causes of this build up were not temporary; they were structural.

    This leaves us with a situation where our government may be much LESS capable of comfortably withstanding the stresses associated with the ballooning budget dificits from the current temporary emergency.

    — PM
  8.  

    Actually, the problem is this: both parties use deficits to pursue their own political aims. So, the Republicans use a “starve the beast” strategy to try and force spending cuts and the Democrats use a “release the beast” strategy to force tax increases.

    Time to take it out of the politicians hands and have an independent fiscal authority that sets spending limits. The pols can argue over distribution of the monies - its what they are best at.

    Oh, and as for the thanksgiving clip - if the “true” mkeaning of everything was the same as the original meaning of everything, then the Democrats would be a party against huge federal deficits. Now that IS funny!!!

    No more horrible Stimulus Bills, please!!!

    — Robert
  9.  

    Thank you for finally saying what I’ve been thinking for some time now: the Bush administration fomented this crisis on purpose to “dismantle the welfare state,” as you put it.  (I wouldn’t call the U.S. a “welfare state” by any stretch of the imagination, and I suspect you’re being sarcastic in calling it that.) After all, that’s what Reagan did to the Soviet Union -– got them to spend so much money trying to keep up in the arms race that they bankrupted themselves. If it worked for one Republican….

    I hope now that you’ve actually said it, you’ll keep repeating it. Of course few people will listen, but it still has to be said.

    — Paula
     

  10. its about time somebody pointed out that we are seeing the strategy of “starve the beast” being played out right now. right in front of us.

    We have enormous debt and deficits because of two unnecessary wars, two huge tax cuts for fat cats, and an added entitlement that was mostly a giveaway to big pharma. but because of all this, we have no money left for health insurance reform. 5 trillion pissed away over the last eight years for no benefit for most all of us. and now we cant even afford one trillion to provide basic healthcare.

    I have two siblings in their late fifties who can't get health insurance no matter how much they pay. i’m sure everyone else out there has some loved one(s) in the same boat (incl. tea partiers and glenn beck). whats wrong with these people.

    kinda gives you an idea where our priorities are. the amazing thing to me is that so many of our citizens cant see it for what it is. its really depressing, the number of idiots that fall for this crap. and all of it is acting directly against their own benefit. doesnt give me alot of confidence that things will ever change.

    — ripley thedog

  11. Mr. Krugman:

    Why don’t we just lift the cap on FICA?

    No one can explain to me the downside–Based on what I can find the last FICA adjustment was 15 years ago.

    Why should the majority of working Americans pay FICA on 100% of their salaries ( since most earn less than the current capo of $ 107,000) while the CEO’s of the big corporations are done after the first day of their work?

    By continuing FICA we could fund Social Security and Medicare/Medicaid for 100 years and refill the coffers of our treasury.

    Real HEALTH CARE REFORM could happen then–

    –and I would just like to see Republicans the rich justify NOT paying their fair share.

    Thank you.

    — Sue Cohen
  12. There ARE revenue options. Gas taxes, financial transactions taxes, higher marginal rates on the bonus class, uncapping payroll taxes — all are substantial and not particularly harmful to spending.

    But the issue is not the federal government’s debt so much as the total debt. Household debt. Corporate debt. CRE. The huge LBOs, er, private equity deals. These mean a depressed economy that will struggle to meet its bills, including its government’s debt service.

    Like David Rosenberg says, the recession may be over, but when does the depression end?

    — Alan Harvey
  13. “Return to normal” appears to be the key term. What exactly do you define by return to normal. It would appear that the “new” normal is government intervention to drive the economy back to its previously unsustainable growth trends: housing (through tax credits), auto production (cash for clunkers), banking health (by excesive low interest rates), exports (by the plunging dollar), and overall an effort to maintain a 70% consumer driven GDP by creating the illusion of a foreclosure plan that simply allows people to live in the underwater homes without paying mortgages. Removal of any of these supports will simply create more problems.

    How can any of this be unwound without causing the whole deck of cards to collapse?

    Finally, there’s: “government that is running big deficits even though there isn’t an emergency. That’s much more worrisome”

    Doesn’t this describe a substantial number of state budgets? Do you expect the Federal government to simply allow this to play out without some type of ongoing support? Let’s not forget health care reform either. Medicare has never had a good track record of projecting costs beyond more than a couple of years. What makes you think the CBO numbers have any basis in reality for 10 years down the road.

    Whether the intention is to proactively avoid a Japanese type 2 decade stagnation, while the fundamentals continue to deteriorate, we are likely to be in for 10 - 20 years an ongoing fiscal crisis that will stubbornly refuse to go away.

    — Mike K
  14. I take it you are not seeing the double standard you have applied. Deficits are imprudent if originated from republicans, but godsends if from democrats.

    — bill d

  15. I have to be careful here, because I may be missing something. I think that Dr. Krugman was correct in 2003 in his assessment that we were approaching a deficit crisis. Of course, the definitions here of “crisis” and the time line, etc. may be causing my confusion.

    And I must disagree with at least his definition of the of our current deficit crisis as a WWII-type debt. Although do not disagree with the solutions that Dr. Krugman has proposed, as I understand them, to return the Great Recession to substantially reduce unemployment.

    I simply cannot understand that anyone could say that we do not have a basic structural deficit and have had since the early 1980s. Ronald Reagan came in to a government that had most recently had been running annual deficits of about $63 bilion. And that was during very difficult economic times. Reagan, despite chanting about his new theology of smaller government, simply reduced government income by 50% and quadrupled about half the budget. The result was a net defit after his tenure of an additional $1.4 trilion, leaving us with an aggregate national debt of about $2.14 trillion.

    But if it had ended there, we could have handled it. The reason I disagree with Dr. Krugman is that it not only did not end there, but the deficits grew, except briefly under Clinton, and to as much as $500 billion a year!

    That is what I would call a structural deficit. Of course, I must note that I have been chastised by my one of my peers (5 years old) for calling a Zebra a horse.

    Nevertheless, how can this be a WWII-type, i.e. one-time-thing, deficit when it has been going on and getting worse, under so-called “fiscally responsible” Republican congresses for nearly thirty years?

    It is a puzzlement.

    Well, no. Not really. It’s actually pretty damned obvious to me.

    If you’re spending a lot more than you make and you cut living expenses to rent, food and transportation, with no circuses, you need to raise more revenue.

    Now…being a schizophrenic Communist/Fascist, like Barack Obama, I say let’s raise it from the people who have been making millions or billions more every year than they can ever possibly spend. Start there, when you’re in a Great Recession.

    You don’t need to take the money away, if that helps replace your ideological security blanket. You just need to get that money back into circulation. We need an investment pool that would put 5 million people back to work relatively quickly. That’s an easy $200 billion.

    Yes, there will be some risky investments. Some very rich people will lose some of their extra money, though it will make their other money more valuable. Yes, some of them will become resultingly even wealthier than they are now. So what?

    You can borrow from the government and pay it back or borrow from these cats and pay them back in spades. The latter is the way we really all like to do things…pay our way. Forget how they made their money. Elections have consequences and one of those in electing Bush was to make a lot of easy billionaires.

    Now it is time to switch the game. You don’t need more than a billion…do you really…to survive comfortably. Let’s risk some of those other billions–if we can even figure out where they are–on industry here.

    Let’s make the government protect those industries for about ten years until they can mature and we can rebuild manufacture in this country. Make the tax system fair again by raising the top marginal rate to about 50%…again for ten years or so if we need to retire it…and the result will be to solve our deficit problem in a hurry.

    — Joseph O’Shaughnessy
  16.  

    Well, that depends on your definition of what “America” is.

    Are we going to continue to have an unfair advantage compared to the rest of the world? I would say no.

    Are we going to continue to have unchecked (by unions), unregulated (by government), and unbridled (by politics) capitalism where the higher goal is profit and boosting stock price and to hell with tomorrow and all the negative consequences this will bring? No, I don’t think we want that anymore.

    However, are we going to make real investments and efforts to improve the quality of life for our country by improving education, healthcare, the environment, and a host of other issues that have been ignored since the ’70’s? That remains to be seen.

    So overall I would say the entity you refer to as ‘America” will not be like it was in the past and we should all be happy for that. However, having said that, we must recognize that we have a much grater responsibility and burden to face than before. We must live up to a higher standard. Our free-lunch is over.

    — Jeff
  17.  

    On the revenue side, thanks for coming out in favor of a Tobin Tax on financial transactions yesterday. But, on the day after a feast of good sense, we now have to figure out how to sell it. I’d suggest a graduated capital gains tax which eliminates the tax on the sale of assets held over 20 years. The ramp to zero tax might start at ten years or fifteen. Tying the two together should gain enough support to get the proposal adopted.

    — Chris Dudley

  18.  

    Paul, what do you think about getting different companies in various sectors to put together a wish list for infrastructure the US could build for them.

    It seems like getting terabit fiber to every house would be a good investment.

    Directly employing people is a chance to invest in our future, as opposed to pushing for short term fixes like promoting consumption. Its too bad we’re still thinking about short term fixes to liquidity, when we could be building for our future.

    — Jonathan Fischoff
  19.  

    I think Russ “named that plan”. So know the question moves beyond, “it’s about whether America is still America.” , it is about whether America has grown through these histrionics of the neo-cons. If America out grows these guys, we will indeed have a great turning. And as another personality says, “Tag, your it.”

    — Don

  20.  

    nothing will stop the Republicans and their scam of looting the American middle class. they have so completely propagandized the American people that “government is the problem.” that along with the “southern strategy will keep the zombies from awakening.

    it’s worked for 30 to 40 years. what’s a mere downturn to them? just one more chance to “twist” facts to their advantage.
    Trust the Republicans to care about America?? I’ve got wetlands in West Texas, too!

    but don’t dare call this behavior “idiocy.” that’s elitism and causes “how dare YOU criticize Me” response from the idiots who believe the Republican propaganda.

    after all, those who say anything about Republican greed, lying and looting are just DFHs.

    — Bernard
  21.  

    What about the huge debt we owe to China? How are we to ever begin to reduce it without ending its main cause - the last two invasions/occupations we made into Iraq and Afghanistan, and then raising taxes and interest rates enough to slow the wild credit spending of consumers? Although, with the nearly-extinct American blue collar worker and the continuing stagnation of wages for nearly everyone except the already wealthy, this is probably not going to happen. It seems Grover Norquist got his desire - and then some.

    — Will Mattsson

  22. American is not going to be America much longer.

    When China achieves a GDP larger than ours American is going to be different. The golden rule is the country with the most gold makes the rules. What kind of rules will China make when it starts collecting on the debt we owe them Mr Krugman?

    — Douglas Dye CA

  23. Yes, well indeed! The problem is America is not America any longer, at least the version that won and emerged from WWII. Instead I am not sure which but we are either argentina, Mexico or the USSAR in its last years.

    Politicians and policy are divorced from aims that would benefit the majority. Many are hoodwinked into a Stockholm Syndrome of identification with people who do not wish them well, and act with contempt towards the body politic.

    — MHD
  24. Dr. Krugman,

    You point out, but in circumspect language, what Professor Hamilton never acknowledges: the U.S. never paid back its WWII debt and in all likelihood never will. If we attempt to pay the deficit down while running a large current account deficit, we’ll be in Depression, so let’s not do that.

    The question for the deficit hawks to answer is what policies will they implement to create a current account surplus so the Government can run a budget surplus without causing a Depression. I have yet to see a single sensible proposal on this issue. Even the moderate weakening of the dollar elicits howls of protest from the elites - evidently they don’t like to see the price of German sports cars and yachts increase.

    The triumph of the Wealthy Right is complete. They have a large portion of the middle-class advocating for policies that will preserve the wealth of the elites at the expense of high and persistent unemployment and a falling standard of living for ourselves. This madness will not end until the public is made to understand national income accounting. Which probably means the madness will never end.

    — OregonGuy

[Nov 28, 2009] Dubai – The First Credit Crisis Since March Market Recovery

"But while a Dubai default may not provoke a banking crisis, it could well spur a broader crisis of investor confidence in overly leveraged economies." From the NYT: Dubai Debt Woes Raise Fear of Wider Problem

The Big Picture

It appears this is the first credit crisis since financial markets began their recovery.   So while many are trying to dissect the particulars of this case (Dubai gets its money from Abu Dhabi who will eventually bail them out), they are missing the larger issue.  As we have been arguing for months, markets have been rallying non-stop on the back of cheap money.  This carry trade has led to many bubbles in the markets.  A solvency issue causes the dollar to rally (not good for the carry trade) and investors to “blink” from risk markets.  This is not good when financing your entire position at 0%.

This is more about the timing of the issue than the issue itself.

[Nov 27, 2009] Are Dollar Bears Too Bullish  by R. Forsyth

Barrons.com

Indeed, Albert Edwards, Societe Generale's global strategist, sees the risks running quite the opposite of the consensus, which has a global recovery on track with a steadily falling dollar. Instead, he looks for a double-dip back into recession leading to a surging greenback, with a collapse of "the China economic bubble" resulting in a double whammy for commodity prices.

Writing in his latest Global Strategy Letter, Edwards points to signs of doubts about the U.S. economic recovery, from the labor market remaining "very sick" with the uptick in unemployment rate over 10% plus the Conference Board's consumer finding showing jobs getting still harder to get. Meanwhile, the ECRI Leading Indicator, which trumpeted recovery earlier in the year, has fallen for five straight weeks.

But what's way out of the consensus is the call for China's massive trade surplus to turn to deficit by Societe Generale's Asian economist, Glenn Maguire, who Edwards writes has been "very right on China this year."

"This is a mega-call and will have major implications for the global financial markets," Edwards declares. China no longer will be accumulating currency reserves at nearly the same pace, leaving less to recycle into U.S. Treasuries. The reduced capital inflow would also slow China's domestic monetary growth and real output, which track each other. Meanwhile, capital outflows from Japan, another source of global liquidity, could be hampered were there a sharp rise in its government bond yields.

A synchronized end to the Chinese and U.S. economic recoveries could play out in increased protectionist pressures, including competitive devaluations, Edwards continues. That could lead to a spike in the dollar as speculative carry trades are unwound, as happened to the yen in 2008. A rise in the dollar would pull up the renminbi, which "may be all too much for a beleaguered Chinese economy."

Then, Edwards says, the U.S. goal of delinking of the RMB from the dollar would be accomplished -- with China devaluing rather than revaluing its currency higher.

Edwards adds, "I am reassured that my views are not totally bananas when two of the deepest thinkers are also concerned about a Chinese economic crash."

Those include Edward Chancellor, who has written extensively about bubbles, including "The Devil Take the Hindmost: A History of Financial Speculation," and recently observed the Chinese economy shows symptoms of weakness similar to those after the Greenspan Fed reflated following the bursting of the tech bubble. Meanwhile, Jim Chanos, the famed short seller of Kynikos Associates, thinks he spies manipulated data about China's economy. Chanos, it should be remembered, sniffed out the phony accounting at Enron.

Indeed, there were hints the bubble in China was about to burst, or at least deflated, in the 3.5% plunge in the Shanghai Composite Tuesday. That came after on rumors that China's banks were ordered to raise more capital. Charles Dumas of Lombard Street Research writes in a note to clients this wasn't just a matter of an increased supply of shares, but a move almost certainly on orders of the government for banks to bolster their balance sheets following their lending spree earlier this year. Tightening of monetary policy is likely to follow as the boom produced by massive fiscal stimulus -- equal to 25% of gross domestic product--is generating inflation pressures.

The sort of deflationary crisis, resulting in competitive devaluations, protectionism and contracting world trade, recalls what happened in the 1930s, Edwards concludes. Despite politicians' solemn vows not repeat those blunders, "all I see are more and more protectionist measures being implemented, belying the soothing rhetoric."

The 1930s were indeed very different from the 1970s. In the latter decade, you could just buy gold (though that was more difficult before today's exchange-traded funds) and let your cash earn double-digit yields. The falling dollar battered stocks and especially bonds back then.

Now, cash yields absolute zero but stocks benefit from every drop in the dollar while global investors continue to buy Treasuries, seemingly undeterred by the greenback's steady slide.

But recall a year ago; the dollar soared like the yen with the unwinding of carry trades (which involve the borrowing in those low-yielding currencies) as stocks and other risk assets fell sharply.

Such a rerun seems to be the one potential risk that seems ignored as gold gets bid giddily higher -- a significantly more painful deflationary squeeze than the inflationary surge they see.

At the minimum, China's likely moves to cool its boom could portend outcomes quite different from the what the consensus expects. As Lombard Street's Dumas concludes, "With China's recovery as the leading force in the world recovery, this would mark the end of the stock market, and general risk asset, rebound from last winter's lows."

[Nov 26, 2009] Data on the Debt

That probably means that corporate bonds are overpriced now.
The Baseline Scenario

CBO is already incorporating higher interest rates into their forecasts; they expect the 10-year Treasury bond yield to go from 3.3% in 2009 to 4.1% in 2010, 4.4% in 2011, and 4.8% in 2012-13, and that’s built into their projections of future interest payments.

Russ

“Non-economic actors”, that’s good. I thought according to their ideology everyone is always by definition a rational market actor, guided by the invisible hand.

Is that their non-falsifiable heads-I-win-tails-you-lose dogma scam – any noise in the data, any contrary evidence, is simply excluded as “non-economic”? Excellent. Very scientific.

So I’ll say again: none of this is good. But if we’re going to make important policy decisions based on fear of the debt, we should have a rational way of thinking about the impact of that debt rather than just fear-mongering.

I don’t think anyone is trying to be rational here. Fear-mongering is the point. (Krugman put up a blog post comparing this to the buildup to Iraq. If I recall correctly he used the word “uncanny” to describe the resemblance.)

The point is to conjure some economic scare to justify radical steps forward on the neoliberal agenda, namely gutting Social Security and other spending.

I’m starting to think this is an only-Nixon-could-go-to-China thing. Only the Democrats, still believed by many who haven’t been paying attention to be the party of the people, as opposed to the Republican party of greed, can carry out the most extremely radical elements of the feudalist agenda.

robby

Does it occur to any other regular readers of these posts that the underlying problem is income inequality?

For instance, the debt—it is large, maybe not unmanageably so, but eventually we have to pay it back. This means money from taxes, but now tax revenues are down. The middle class is squeezed by unemployment, stagnant wages/living standards, and so on. So where is the money going to come from? It is going to have to come from the people who have the wealth. Ever increasing taxes on the shrinking middle class, and ever higher sin taxes on the lower class, just won’t fund the kind of society we want to live in.

Eventually we have to face the fact that a democratic, free market society doesn’t function well, doesn’t efficiently allocate its capital, when too much of that capital is concentrated in too few hands. Too much concentration of wealth seems, to me at least, to conflict on a structural level with both democracy and a free market economy. A certain degree of equality among citizens, conceptually and at least to some degree practically, is essential for democracy. Similarly, a free market requires competition etc.. But what we have seen very clearly over the past eighteen months is that the banker class, because of their extreme wealth, control both the government and the market. Until that changes, how will the problems it has caused ever be fixed?

MrM

The government plans its expenditures long time in advance, and once it fixes such plans, it is difficult to change them. So the risk here IMO is in the following potential dynamic:

People who argue that inflation is impossible when the unemployment is so high should only think of stagflation in the US or any number of developing countries.

[Nov 26, 2009] Lex: The US recovery

Choosing between helping the economy and playing in casino banks always choose playing in casino. So efforts to save banks instead of direct creation of jobs.

It is going to be a long slog. The US economy only grew at 2.8 per cent in the third quarter compared with the second, rather than the original estimate of 3.5 per cent, thanks in part to weaker consumer spending. The downwards revision compounds worries that, particularly as the the effect of short-term boosts such as clunkers fades, the economy is not growing strongly enough to start meaningfully generating jobs.

[Nov 26, 2009] Fed Reserve Endorses “Crony Communism” for Wealthy

It looks like a pressure is building against Helicopter Ben, so his reapointment might be far from smooth.
November 25, 2009 | The Big Picture

Here’s a candidate for the understatement of the year: The Federal Reserve is concerned that their free-wheeling, money-printing, dollar-destroying, quantitative-easing, zero-percent interest rate policy might be “fueling undue financial-market speculation.”

HEHEHE:

Good post. The reality being that the only bubble bigger than the current speculative bubble in assets is the bubble in INVESTMENT BANK BONUSES!!!!

I really am amazed that there’s not rioting in the streets over all of this. I think it’s the first time in the history of this country where an entire failed industry was rewarded for their failure. Absolutely criminal. Bergabe, Paulson, Geithner, Bair, Blankfein, Dimon, Summers, Bush, Obama, Frank, etc. all belong in jail for their conduct or lack thereof in the past year.

One more thing, the current mess is not the result of capitalism. It is the result of a crony capitalist fascist state that has evolved in this country over the past 30 years. We only have capitalism on the small business level in this country. You want a way out of this mess break up the banks and pass a constitutional amendment making political campaigns publicly funded.

Wes Schott :

…uh, you were speaking with rational and properly educated people in euroland. ones who can see that the money comes from one big pot

when i listen real carefully, what i hear is that the concern with health care is that government is getting involved – ie getting bigger and the government can’t do anything right, not whether it is good or bad for the people who are not covered, or for undoing the scam between the drs-insurers-pharma, etc…(come to think about it – they are kinda entwined like the banks-fed-mortgage providers-re were/are)

what Paulson engineered doesn’t seem the same to the people, it doesn’t seem like a “new” extension of government, it may not seem right, but it doesn’t seem like a growing government – thank you Ronnie.

inflation is the hidden tax – its all one pot, in the end – the fed as pick pocket

there is a large portion of america that does not live near any coastline, they like their guns and bibles, and they are pissed and getting more pissed.

the government has been taken over by bidness interest, the congress and the executive are owned, beholding to corporate interest through the massive lobbying and campaign contributions – there was no change we can believe in – sos – f a s c i s m

tea parties, tax revolts, american revolution part deux? i kinda doubt it, but, we’ll see...

scepticus:

A few points to consider:

1) if obama et al are following keynes, keynes advised against wholesale reform in the midst of a crisis. He advocated short term measures to stop the freefall then a longer period of gradual reform. That is not to justify bankrolling criminals – keynes never advocated that AFAIK.

2) dressing banker bailouts up as communism is a peculiar, very american bit of twisted logic. its cleary fascism/corporatism, not communism. C’mon, admit it. Stalin would have simply executed these men.

3) an economy with very low underlying growth needs very low interest rates. No two ways about it. Given that’s where we are (both sides of the pond, europe too), the needed reform might be held to be reform designed to secure long term low interest rates while at the same time preventing undue speculation as a result of the same. Cheap money, not easy money.

danm:

I really am amazed that there’s not rioting in the streets over all of this.
————-
It’s brewing. We have not reached the straw that broke the camel’s back.

Most people still have faith that things can get fixed. Americans are an optimistic bunch and this is a thorn on their side.

But with the elite, increasingly smug or sticking out their tongues at the “losers” and telling them they are doing god’s work, the mood is starting to change.

Having 2 kids, I know what taunting leads to.

danb:

In theory, it is decidedly not communism because the class divisions are clear. I think the best description is Corporatism, the govt. serves the interests of business elites, not the public.

The fundamental problem is one of the paradigm, or cultural epistemology, through which we make sense of what is going on. We can stipulate to regulatory capture, greed, making debts a public burden and profits a private right (to crow about: “Doing God’s work”). Since banking was invented finance’s internal dynamic has been to become that vampire squid. The issue now, I suggest, is that we no longer have the net energy inputs into this system to keep it going or repair the damage. But if the dominant paradigm/episteme assumes abundant energy inputs, the foundation of our dilemma remain unrecognized. I’m referring, of course, to peak oil. Now whistleblowers (at the IEA) are beginning to come forward -as are counter propagandists like George Will- to inform us of the oil situation. The hidden equation is something like this: net energy inputs are at a plateau, possibly in decline = no possibility of a return to a growth economy. All the corruption, greed, cronyism, waste is based upon the belief that it’s really okay since the economy will expand forever.

bsneath:

BRSays: Let me be brutally frank: With George W. Bush AWOL during the crisis in 2008, it was Bernanke and Paulson who stepped into the void. But make no mistake about it — the chief architect of the massive bailouts was none other than former Goldman Sachs CEO and then Treasury Secretary Hank Paulson.

Yes. My affiliation as a Republican ended during this episode of absolute ineptitude where the economy was crashing, Bush was dumbfounded (quite an appropriate use of the word), and the Republicans in Congress, led by cartoonish characters like Shelby & Boehner were opposing any and every action proposed by anyone to stop the massive hemorrhaging of the economy and financial system.

Romney understood what was happening and would likely have taken an appropriate no nonsense business approach to coming up with a fix, but he had already sold out his soul to the Republican elite and lost in the primaries to the more populist but economically inept McCain.

Lugnut:

Not to be pendantic, but its Crony Corportism.

“One fund manager said to me in Berlin, “You give trillions to rogue bankers, yet you have 40 million uninsured American. Why is that?”

My answer: I haven’t the foggiest idea why.”

Because there’s less money and power to be gleaned by helping Joe 6 Pack. Actually helping the citizens requires the expenditure of political capital, it does nothing to build it. This is why we have a Health Plan that does nothing to help reduce costs of obtaining medical care, it only provides a subsidy so that people who don’t have expensive insurance can get it on the backs of the other taxpayers. In essence, it allows providers, insurance carriers, and other interests to get a slightly larger piece of the public pie.

The reason Europeans are confused are that they don’t see it for the shell game that it really is, as other Americans are starting to realize. Show me a bill that has real tort reform legislation in it, ways to have big pharma reduce their prices to be more on par with what they charge other countries, ways to actually reduce the cost of insurance, not just make it more accessible for poor folks, ways to allow hospitals to not have to cover every indigent and illegal immigrant, and overcharge the payers into the system, and make them disclose up front procedure cost, then maybe you’ll see a more ‘rational’ response from Americans on the Healthcare debate.

tt:

there is nothing communist or socialist. it is pure corporate fascism. mussolinis evil cocktail was the merging and marriage of businessmen(bankers), with military for profit, with unions with the government.

barry you are dead on correct about the outrage over healthcare being really about the bailouts. but your political analysis needs a bit more refinement. using the word fascism confuses people because they equate it with genocide. mussolini himself defined it as socialism turned on it’s head. there is confusion whether he called it corporatism or not, but it is.

br, you have a wonderful blog. keep up the the good work.

hue :

“what about the harm done to retired peoples income”

it’s call the transfer of wealth, danm has been posting about this here. Mr. Practical has been writing about it for years at Minyanville. when Greenspan did it in back 2004, it spurs the housing bubble and inflated risk assets that people moved their savings into, only to see their risk assets get wiped out starting in 2007. cash is still king, or rook. at least cash may be deflating slower then risk assets.

 Mannwich:

Great point, Wes. This is all about credibility and our gov’t “leaders” (and corporate, Wall Street “leaders”) have none anymore. Not many trust them to do anything right anymore, even formerly “progressive” or “liberal” types. The corruption is just too obvious. Again, no trust or confidence, and nothing positive can get done. Nada.
 

torrie-amos:

Most things go back, 50-60 years. After WW-II, the rest of the world said to government, you take care of health care we will rebuild businesses, and they did. We were fine and ramped up mfg of everything. In 65 when medicare was passed, as with everything now that you had a government back stop, ie, a consistent money stream, big smart money came running, also with employment good it was easy to give folks cheap, very cheap health care, and so our existing system was born. Over time you went from non-profit hospitals, to private profit ones, and they dominated the industry because they provided same service lower costs, until they took out the non-profits and now for the last 15 years you raise them prices all the time. Like most things, it’s not intentional it is just the evolution, health care providers have money, customers, lobbyitsts, connections etc. They don’t want customers who can’t pay and are always sick.

DeDude:

Concerned that it might???

Do they have any data to support the idea that it is fuelling anything BUT “undue financial-market speculation”? They have allowed the speculators from the investment banks, that almost destroyed our financial system, to become FDIC insurred real bankers with full access to free cash. Without severe restrictions on what FDIC insurred “free money from the fed” banking institutions can do with that money, how could anybody expect it to be used productively? If you allow the bankster the choice between “free money, quick profit, fat bonuses” and “hard work, small delayed profit, small bonuses”, does anybody have any doubt what they will chose? Our federal reserve bank is pumping money straight into speculative bubbles in commodities via conduits called banks; and that speculation is directly blocking our economy from recovery by sucking money out of the consumers pockets. I can see that with half an eye open, don’t tell me that the geniuses at the fed can not.

red_pill:

I don’t think a revolt will come as we are incapable of outrage as a society. we’ve been told that only those crazy Europeans do that. the erosion in our purchasing power is being done gradually (well, maybe not so gradually these days) enough that people aren’t aware of it. As long as we get some scraps thrown to us and a little bread and circus with it, we are happy with our mundane lives. we like to think we are rebellious as a society because we like to break with socially acceptable behavior: South Park, Family Guy type humor, a disdain for nobility, etc. In reality, what we have done is substitute the old type of nobility (based on birth or class) for a new one (based on wealth, political power) that controls how this country operates (and most other countries as well). The sign something has changed will come from the streets.

[Nov 25, 2009]  “A significant portion of policymakers are simply clueless”

November 25, 2009 | naked capitalism
Francois T:

“These statement is an indication of intellectual bankruptcy at the Fed, that they have learned nothing from the crisis. But that isn’t surprising. CEOs usually need to be fired after they have presided over a disaster. They are incapable of seeing and remedying their errors. Why should senior bureaucrats be any different?”

As any spanish-speaking soccer fan would utter: GOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOL!!!!!

You nailed it! All this hocus-pocus ethereal pseudo-philosophical hogwash about the “Fed independence must be preserved” is vaporized when we consider the simple human element; What did the deciders learned?

Answer: Nothing, since they didn’t personally suffer the consequences of their neglect and wrongheadedness. Often times, Professor Pain is the only one who can trigger a needed change in maladapted belief systems.

This is one of those times.

DownSouth:

The same dynamic operative on Wall Street is also at work with the neocons.

It is never the neocons, with all their posturing and chest beating, who are present in the trenches, fighting and dying. Someone else always pays the price for the neocons machismo.

JKH:

I’m afraid Duy’s the one who’s looking a bit clueless here. It’s not that surprising, since he makes an error that is common in the interpretation of Fed balance sheet operations. But he looks somewhat silly as a Fed watcher as a result.

Banks are not reserve constrained in lending. They are capital constrained. This is the standard post Keynesian interpretation and it is correct. Most neoclassical economists such as Duy don’t seem to understand this distinction. The provision of reserves was not intended to replace capital discipline. It was to provide additional liquidity to the interbank market in the initial stages, and then later to serve as the funding portion for the Fed’s own balance sheet expansion, whereby it substituted its own credit expansion for what the banks were failing to provide in their lending.

The Fed’s concern now is a reasonable one when balancing out the possibilities for the pace of recovery. Should the economy recover more quickly than expected, banks may become more comfortable with their current and more importantly their prospective capital positions. That’s what determines their strategy, not reserves. Nevertheless, in that robust scenario they may be tempted to deploy capital more quickly, and in doing so aim to shift unwanted low risk, low interest reserves over to other competing banks as an associated balance sheet benefit. That’s a temptation that would be wrong to incorporate in lending strategy, but it’s an understandable human judgement risk to consider in a rapid recovery scenario. Moreover, it is a risk that becomes more complicated should new capital standards be slower in formulation and introduction, with the additional risk that banks underestimate the severity of future standards while in an environment of robust recovery.

DownSouth:

I have not a clue what in the hell you’re talking about, and I suspect I’m not alone. That makes the following passage from George Orwell quite germane:

The great enemy of clear language is insincerity. When there is a gap between one’s real and one’s declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish squirting out ink. In our age there is no such thing as “keeping out of politics.” All issues are political issues, and politics itself is a mess of lies, evasions, folly, hatred and schizophrenia. When the general atmosphere is bad, language must suffer.
–George Orwell, “Politics and the English language”

Mark:

The message was always clear. The Fed is lending to insolvent banks to purchase T-Bills and banks pocket the difference. A back door way to tax the public to support the banks.

Don’t be too surprised when inflation kicks in that the Fed doesn’t go back to an implicit Regulation Q with the banks. Where the banks agree not to compete for depositors and lend out money at large spreads. Savers being paid less then the rate of inflation with no other place to park the money.

Siggy:

The Fed induced artificially low interest rates, and its expanded balance sheet are intended to create a basis from which the insolvent ‘primary dealer’ banks can earn their way to solvency. The concept is morally corrupt in that it is implicit that the banks will be taking profits that might otherwise not be available.

Now just who is getting taken? Savers!

What is at the core of our problem? Excess debt, debt that cannot be serviced. How do you cure the problem? You extinguish that debt that cannot be serviced. When you do that what will happen to a large number of the ‘primary dealer’ banks? They will recognized as being insolvent and at that juncture the only recourse will be to nationalize them directly or move them through the FDIC resolution process.

If you want to limit the Taxpayer’s cost, you do so by wiping out the shareholders and the unsecured creditors and the secured credotors get a significant haircut and a substantial portion of their reduced secured loan is converted into equity in the new enterprise.

The employment problem is reflective of the forces within the economy that result when the purchasing power of the currency is in a constant state of decrease. Moreover, the labor problem is developing in response to the labor arbitrage that is being effected by our trading partners, most notably China. Don’t tell China to revalue the Renminbi/Yuan. Help China raise the living standards of its population. Their wages are extraordianrily low relative to the west. As a nation, they exploiting this labor cost differential to bring their nation to parity in the global economy.

I that find that since the publication of the FOMC minutes have become more timely, the minutes have become more staged. The Fed is saying what it wants to spin rather than discussing what needs to be addressed.

This admendment is off the mark in that it is looking to fix a peripheral problem. The discussion needs to move to the core of the problem. The failure of the fait currency, profligate borrowing, the abrogation of regulatory responsibility and the moral collapse of the financial community. The public is not with blame in this. The public has abrogated its responsibility by failing to demand of its representatives that they enforce the laws that exist.

In this regard we, the public, would be wise to consider limitations on election campaign and political contributions and the amount of money that may be spent by incumbents for any purpose not directly related to legislation.

The problem at hand is a societal problem that has been motivated by a fraudulent currency that has been contrived out of a conceptual morass of idealogue canards whose fallacy is only apparent in the longer term. We have arrived at that point where the undoing of this error will be very costly. There is no painless resolution to this problem.

kievite:

When we talk about “intellectual bankruptcy” we need to distinguish elements of luck from elements of conscious actions.

Most part of Greenspan period was the period of merciless looting of former Soviet block. That permitted Fed actions which would be disastrous otherwise be neutral or even slightly positive. And it created incentives to go too far on the slippery road of perma-deficit.

Right now the situation is defined by existence of a “super-creditor” which is concerned about depreciation of its dollar reserves and growing dissatisfaction of European patsies over the same.

This is much more challenging context and unsurprisingly any action might look intellectually bankrupt. In chess such position is called Zugzwang.

mikkel:

Yves, I was a little confused by your post. I know in the past you’ve said that the fear of a (continuing) major dollar collapse was understated, do you still feel that way?

I personally think that generalized inflation is very far from occurring, I mean look at the last few months with grocery stores and now Amazon/Walmart. Plus no one has any money to buy anything. However, I think that the massive liquidity problem is a huge mistake, but for non-historical reasons.

Instead of too much money leading to inflation, there is a good chance that it will heighten deflation. This is because all the excess liquidity is flowing overseas and into commodities, which is increasing the trade deficit once again. Commodities continue to rise, not because of demand but because they are being used as an alternative store of value…and that will put even more pressure on margins.
 

[Nov 24, 2009] The new AIG report reveals how Geithner—and U.S. taxpayers—were fleeced by Wall Street banks. - By Eliot Spitzer - Slate Magazine

Barofsky's report reads like a case study in failed negotiation. The New York Fed didn't have the backbone to stand up to Wall Street, didn't understand its capacity to protect taxpayers, and didn't appreciate that its responsibility was to taxpayers.

Geithner and the Fed have proffered a series of spurious reasons for their willingness to pay AIG's counterparties—the leading Wall Street banks—in full while demanding concessions from every other entity with whom the Treasury or the Fed dealt. Geithner suggested he could not use the threat of AIG's default in the absence of a federal bailout to get concessions from AIG's creditors. Why not? 

... ... ...

Perhaps most remarkable is that Geithner claims the "sanctity of contract" prevented renegotiating with the counterparties. But the government wasn't a party to these contracts! The government was stepping in with taxpayer money to save a broken company on terms to be set by the government. The counterparties had the contractual right to refuse the terms, throw AIG into bankruptcy, and suffer the consequences. In a workout context, the entity with cash—here, the government—can set the terms, and the other parties can either accept those terms or walk over to bankruptcy court. The government had absolutely no contractual obligation to do anything.

[Nov 25, 2009] Heeding the Populist Call

This is less about populism and more about accountability...

It's clear that hostility towards Wall Street is increasing. Considering the well documented role that banks and brokers played in creating the mess we are in and the ways in which they manipulated the post-crisis clean-up to their advantage, the only real surprise is that it's taken so long.

One reason, of course, is money. The financial sector has spread lots of it around, both in Washington, where their efforts have stalled, diluted, or killed hearings, initiatives, and legislation that are in the public interest, and in the media, where the industry has, until recently at least, been among the biggest advertisers.

However, with more and more Americans feeling angry and hard done by, Wall Street's largesse no longer speaks as loudly as it used to. Fearful of a voter revolt, Washington is beginning to rethink its industry-friendly stance. Instead, they are heeding the populist call, summed up quite nicely by Washington's Blog in "Is America Finally Starting to Stand Up To Wall Street?"

At the same time, the media is taking its watchdog role a bit more seriously -- though there's still a way to go, to be sure. The industry is also realizing that efforts which tap into a darkening zeitgeist could have an upside: boosting audiences and putting them on the right side of the shifting social mood. With that in mind, I expect we'll see many more critiques, exposes, and investigative reports like the one PBS-TV's Frontline is broadcasting tomorrow, entitled "The Card Game":

[Nov 25, 2009] Are We “Vastly Better Off Than We Were” Pre-Lehman? By Barry Ritholtz

November 24th, 2009

“We feel like this market still has some room to move higher,” said Burt White, chief investment officer at LPL Financial in Boston, which oversees $259 billion. “We’re still at levels that are lower than we were before Lehman Brothers. We are vastly better off than we were then.”

-Bloomberg

>Are we really “vastly better off than we were then?”  Gluskin Sheff’s David Rosenberg (via Barron’s) looks at the details and concludes not one tiny bit:

If this is “vastly better off,” I shudder to think what “worse off” would look like. . .>

Source:
Long Way for Nothing
ALAN ABELSON
Barron’s NOVEMBER 23, 2009
http://online.barrons.com/article/SB125875996020558221.html

[Nov 24, 2009] Goldman-AIG Conspiracy Theories There’s a Reason They Won’t Go Away

November 24, 2009 | naked capitalism

Macro:

I would have thought that the author of this blog was above the populism of conspiracy theories and Goldman bashing. I have already quit reading a few blogs because of their bitter views around this subject. One has to admire the pseudo-reasoning the writer of this post must have gone through to reach the conclusion that there can be no other reason than Goldman that AIG was bailed out and the Monolines not. The author touches on an important point, which is the different stages of the crisis and the understanding on main street prevalent at the time of the Monoline defaults and that of AIG. However, any difference in the public perception of the situation is attributed to rumor feeding by Goldman itself. Forgive me, but it is hard to take this text seriously when misguided and biased speculation permeates it. I am deeply saddened by the fact that one of Americas most respectable institutions falls victim of the public outrage only for the fact that it had the foresight and mindfulness to profit when its presumed equals lost.

RueTheDay:

“one of Americas most respectable institutions falls victim of the public outrage only for the fact that it had the foresight and mindfulness to profit when its presumed equals lost”

Are you kidding me? You don’t really think we’re all that stupid do you? Goldman (and a few other large banks) would not even EXIST today had the government not intervened to save them last Fall. When the panic hit, these “masters of the universe” peed in their pants and went begging to the government for a rescue.

Toby:

Macro, can you prove at all that Goldman Sachs is one of America’s most respectable institutions? It is a claim which surprises me.

And do you mean by “respectable” that one could respect it if one chose to do so? Do you mean GS would be respected if only people were in possession of the facts, as you are?

fresno dan:

“I hate to get sucked into the vampire squid line of thinking about Goldman”

Never attribute to conspiracy what can be explained by idiocy. On the other hand, there was a conspircy by idiots to kill Lincoln.

Actually, I don’t think its a conspiracy. It is far worse. Keynes said “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

There is a apparently the belief at the FED that everything hinges on saving big finance. It you hang around with, are trained by, financiers, you have a financiers frame of reference. And if every big finance firm had failed, that undoubtedly would have been very bad. But there seems to be the idea that the financial shenanagans that these guys come up must be tolerated, and that these scams are “innovation.” My view is that there is little innovation in loaning money, and to the extent that there is, it is either designed to hide risk, or misprice the asset, or generate fees.

vlade:

Hm… What point is in having collateral you cannot seize when the cpty goes bust? This is what your post seems to imply (collateral lost if AIG went bankrupt). AFAIK, Collateral Security Agreement (CSA) says that on the event on bankruptcy you net your exposure, and seize the relevant collateral (less any treshold/minimum transfer amount). There may be a bit of legal dancing around that, but not much.

Of course, especially in volatile market and on instruments with large gamma collateral will be only an approximation and you can still suffer losses, but no-one explained how exactly would GS suffer, and how much would they lose based on the posted collateral and offsetting transactions.

For me, GS’s collateral is the elephant in the room that people ignore when talking about AIG and GS.
Until it is sufficiently well explained why even collateralised deals would cause large losses (or lower GS’s profit very significantly), it is pointless to try to frame GS one way or another, as there’s no clear motive.

[Nov 24, 2009] The US government’s toxic borrowing strategy by Stacy-Marie Ishmael

FT Alphaville

We were struck by the following quote in Monday’s NY Times story about the wave of debt repayments facing the US government:
“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, More…

We were struck by the following quote in Monday’s NY Times story about the wave of debt repayments facing the US government:
“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

The irony of Mr Bixby’s analogy, of course, was that a not insignificant portion of that debt was incurred as a result of spending on various efforts to save the US financial system. And why did the US banks need saving? Because of their considerable exposure to structured financial products backed by US mortgages, and to the collapsing housing market more broadly.

These structured products — now broadly considered “toxic” — included collateralised debt obligations which bundled pools of mortgages of varying duration, type and quality. Among those were so-called adjustable rate mortgages, which featured attractive teaser rates that would ultimately move higher — leading to what is known as “payment shock“.

And payment shock, if not exactly surprise, describes precisely what is in store for the US government, per the NY Times (emphasis FT Alphaville’s):
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

Some US homeowners responded to payment shock by defaulting on their newly unaffordable mortgages.

It remains to be seen how the federal government will respond to its own mortgage crisis, but walking away is not an option. The Chinese will not accept the US equivalent of jingle mail.

Related links:
The US debt buildup - NY Times graphic
Could sovereign debt be the new subprime? - Gillian Tett / FT
Debt and the dollar’s demise, a compendium of concerns - FT Alphaville
On the not-unlimited investor appetite for government bonds - FT Alphaville

[Nov 24, 2009] Dave’s gonna hit someone by Paul Murphy

Nov 23, 2009 | FT Alphaville

Gluskin Sheff’s David Rosenberg hit out at Jim Paulsen of Wells Capital Managment in his Monday missive. Why?

Here’s an extract from Paulsen’s latest monthly newsletter:

We believe the recession has ended, and the U.S. is very early in a new economic and stock market recovery that will likely mature and sustain during the next several years. The lagged impact of massive economic policies may just now be starting to show up on Main Street, and these medicines should continue to strengthen activity for some time. Businesses are incredibly lean and mean (after all, they prepared for the “Great 2008 Depression that wasn’t”), they are woefully understaffed and underinventoried, and are posting the profits necessary to drive a significant capital spending and hiring cycle. Consumers are just beginning to stick their heads out of there foxholes, possess considerable pent-up demands, have amazingly large cash balances, are seeing stock and housing values starting to rise again, and should soon see a return of job creation. Finally, the U.S. economy has perhaps never experienced a recovery with the amazing new asset and global growth booster called the emerging world!

With so many Halloween Horrors about, the trick this holiday season may be staying focused on future “treats”!!!!

And from David Rosenberg’s Breakfast with Dave on Monday, courtesy of Gluskin Sheff:

We sifted through Barron’s over the weekend and found out in ‘The Trader’ column that Jim Paulsen of Wells Capital Management is “a favorite market strategist”. Well, everyone is entitled to their opinion and we have debated Mr. Paulsen in the past, and just as we may be looked upon as ‘perma-bears’, he most certainly is a ‘perma-bull’. We can’t lay claim to be able to pick every peak and valley but we have been consistent with our view that we are halfway through a secular bear market in equities, and while we were never quite optimistic enough during the credit and asset bubble from 2003 to 2007, we like to feel that we saved people who listened to us a lot of pain during what economists now call the Great Recession.

We saw it coming, and admittedly we were early on the call, but after re-read Bob Farrell’s market rules to remember and Charles P. Kindleberger’s “Manias, Panics and Crashes” and we’re confident that the housing and credit bubble would collapse under its own weight of dramatic excess. We all make calls that in hindsight proved to be inaccurate. But the question is where you were on the really big calls. The calls that really mattered — that actually saved people their hard-fought wealth and capital. Well, on November 22, 2007, a month away from the steepest economic downturn since the 1930s, and as a matter of public record, Mr. Paulsen had this to say:

“This thing hasn’t been about people losing their jobs and their incomes. It’s been more about CEOs getting fired, banks writing off hedge fund losses and a showdown between Wall Street and the Fed.”

Mr. Paulsen wasn’t the only one to dismiss the credit bubble bursting and what was to follow. But just because he stayed bullish and caught this year’s government-induced rally, pundits like him are now viewed as being a “favourite” in one of the most influential business journals is rather incredible. But it does attest to the ‘what have you done for me now’ mentality that has gripped an equity market that has stayed so short-term focused.

A reader of our daily missives reminded us last week that as for the current non-fundamentally based situation, we might want to reference the beginning of Annie Hall when Woody Allen tells the joke about the family thinking about institutionalizing their crazy uncle who believes he’s a chicken. Here it goes:

This guy goes to a psychiatrist and says, “Doc, uh, my brother’s crazy. He thinks he’s chicken.”

And, uh, the doctor says, “Well, why don’t you turn him in?”

And the guy says, “I would, but I need eggs.”

That just about sums up a market that can rally more than 60% over a span when the economy managed to lose three million jobs and organic personal income hit new lows for the cycle. It goes to show that if the government can change accounting rules in the middle of the game, take a 40% stake in Citigroup, GM, and a 100% stake in Fannie and Freddie, have the Fed orchestrate a controversial bailout of AIG, allow the FHA to dominate the mortgage lending market with a 3.5% down-payment and encourage consumption through an array of housing and auto subsidies, at a time when the deficit has ballooned to over $1 trillion, then anything is truly possible.

Related link’s
Poor Dave
- FT Alphaville
Fuming with Dave
- FT Alphaville
Dave’s furious
- FT Alphaville

This entry was posted by Paul Murphy on Monday, November 23rd, 2009 at 20:55 and is filed under Capital markets, People. Tagged with , , .

Gordon

Merrill's Rosenberg: A New Bull Market? Are You Out Of Your Mind?
Henry Blodget
Apr. 2, 2009, 6:27 AM

Merrill's departing economist thinks the S&P will trade between 475 and 650 "for an extended period of time." That's 20%-40% below today's level.

[Nov 22, 2009] Online US at a crossroads By John Browne

This guy is definite Peter Schiff accolade. It's not clear how in view of the size of its debt to china, the USA can manipulate dollar exchange rate; at least Fed freedom is seriously curtailed...  Still  the rise in the gold price above US$1,100 per ounce last week means that either speculators became overly bold again or that something fundamental was changed.
Asia Times

For the moment, the cheap liquidity has saved Wall Street. To the delight of the Goldman Sachs, et al, the Fed has created a boom in financial assets, including equities, bonds and commodities. These rallies have stimulated a nearly universal belief that the worst has past. This feel-good attitude could be clearly seen on a recent cover of The Economist that read: "After the Storm - How to Make the Best of the Recovery."

But, to many people, life looks increasingly desperate. Official US figures admit to some 15 million unemployed.

John Browne is senior market strategist, Euro Pacific Capital. Euro Pacific Capital commentary and market news is available at http://www.europac.net.

[Nov 22, 2009] Fed Watch- "The Fed in a Corner"

nikola tesla:

The Fed is not in a corner. It is in the center of a circular firing squad.

Lobbyist Ben Dover:

I wonder how much money Greenspan has made since retiring from the Fed?

redfish9395:

I find it curious that accountability necessarily means loss of independence.

Bearded Spock:

The idea that this is a market failure that required more regulatory oversight is ridiculous. The Fed is itself an institution for monetary central planning. Central planning never works in the long run.

The solution is competing currencies.

It was inevitable that they would get centrally-planned interest rates wrong eventually.

As for this peak oil issue, it is unlikely. We didn't emerge from the stone age because we ran out of stones, nor did we switch from coal to oil because we ran out of coal.

Angry Saver:

I think Tim Duy, Krugman and others are finally catching up to numerous bloggers and posters (on this site as well as others).

The Fed and Wall St. (finance capitalism) have been utter failures. Acknowledgement is the first step to recovery.

The key is to strip the privilege out of the system. Lobbying, un-earned inflation (think land) and all the other special interest/free lunch policies must be exposed, ended and/or taxed appropriately.

rich:

The Fed earns accolades from academics for its handling of the crisis, in particular since the Lehman failure.

Only if you believe that it's part of the Fed's role to secretly manipulate financial markets, with the help of TBTF banks that are raking off billions in profits from insider knowledge. The manipulation began at the NY Fed under Geithner and has continued until very recently, if not to this day. Everybody knows the Fed was manipulating.

Nanoo-Nanoo:

rich: This started decades ago, seriously. Greenspan shares boatload of blame. He saw it coming and after a very long tenure as federal reserve chair all of a sudden, said buh-bye. As I recall, he was employed by Deuche (sp) bank right out of the box as a consultant that was making bucks off the RRE meltdown.

curious:

It was inevitable that they would get centrally-planned interest rates wrong eventually.

It was more than just interest rate policy that the Fed goofed. It was also the tone of the regulatory environment that was set by Greenspan and others. CR has commented numerous times about lower level regulators who wanted to do something in 2004-2005 regarding lax lending standards, but they were prevented by policies supported by Greenspan&Co. Competing currencies can't fix that flaw.

Allen C:

This "Stop the Madness" post over at Naked Cap really got me steamed.

The real madness is ignoring that we (the US and likely the West) have lost the durable advantage necessary to maintain the extraordinary income disparities. To make matters worse, we borrowed heavily for wars, granite counter tops, and other non-investment.

This is worse than the '30s. Real, median incomes may have to fall by 50% (total guess) to return to equilibrium.

Rob Dawg:

Axiom: Tax something, get less of it. Subsidize something get more of it.

Apply to reckless financial practices and it becomes obvious how we got here. Partisans on all sides share some of the blame. Ideology encouraged both lax regulation in the name of free markets while at the same time lax standards were promoted under the guise of social justice agendas. For all that worse still is the phenomena of regulatory capture. This too we have been incautiously subsidizing. Ask Paulson if he'd have entered the revolving door were it not for the tax free inducements.

Angry Saver:

The fed totally blew it. Debt is not wealth. Wall St. is a giant skimming operation. Wall St. loads up the world with debt and takes a cut of all the senseless, noneconomic credit creation.

CONsumption debt is the road to ruin. Increasing debt without increasing output is unsustainable, a ponzi scheme - and yet, the Fed ecouraged this nonsense.

I can only conclude that the fed is not independent, but thoroughly controlled by Wall St. The Fed has clearly acted in ways that enrich Wall St. at the expense of the productive economy.

No way should the prudent majority be subjected to this thievery anymore.

patientrenter:

Bernanke: No Obvious Asset Bubbles In US Now

Bernanke: No Obvious Asset Bubbles In US Now - WSJ.com

Even after supervising the spending of $1.2 trillion to keep air in the home price bubble, not to mention the current stock price bubble, Bernanke refuses to recognize that there is any bubble right here in the US, right now. Everyone is happy enough to talk and act tough about past bubbles, future bubbles, and foreigners' bubbles. No one is ready to recognize and act tough on our own current asset price bubbles.

Rob Dawg:

Remember taxes are not what you are charged but what is spent by government. The $1.8T FedGov deficit is ~$6000 per person but that's flat tax prorata. If you are reading this your "share" is closer to $15k. If you don't pay it this year you'll pay it eventually with interest. So, who got their money's worth this year?

[Nov 22, 2009] Debt Dynamics Will Hold Back Economy

Comstock Partners

We believe that U.S. government and private debt levels will diverge over the next four or five years as the authorities attempt to use government debt to replace the private debt that is almost certain to decline substantially. 

U.S. total debt is presently just under $55 trillion, comprised of public (government) debt of about $15 trillion and private debt (U.S. corporations and individuals) of about $40 trillion. 

The similarities to Japan at its 1989 economic and market peak leads us to believe that we are close to the same road map that Japan was on starting at that time and continuing until today. 

With that said, we expect current U.S. government debt of $15 trillion to double to about $30 trillion and private debt to drop in half to about $20 trillion over the next 4-5 years. 

[Nov 21, 2009] Doug Kass on Fast Money by Joshua M Brown

We can basically sum up every CNBC episode with the following sentence: “The stock is up so we like it, the stock is down so we don’t like it.”

October 28, 2009 | The Reformed Broker 

My fave pundit Doug Kass appeared on CNBC’s Fast Money last night and contrary to my expectations, they actually slowed it down enough to let him get some good points across.  Nicely done, guys.

[Nov 21, 2009] Kass The Quant Bubble Innovation Update Financial Articles & Investing News

Nov. 17, 2009 | TheStreet.com

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

-- Chuck Prince, former chairman and CEO of Citigroup (told to the Financial Times on July 10, 2007).

These words resonate to me in the current investment setting as many investors and traders are assuming the most benign of economic outcomes and have begun to dance and party like it's 1999. The media's talking heads are doing their best to fuel the celebration, just as they were at DJIA 14,000 before the market crashed last year. It is also the same group of cheerleaders that was mired in depression eight short months ago.

Some, like myself, have been cautionary (and wrong) over the past few months, expressing concerns over emerging short- and intermediate-term headwinds that threaten a self-sustaining economic cycle, including the effect of the withdrawal of monetary and fiscal stimulus. Countering those concerns has been one overriding factor -- namely, the Fed's zero rate policy and curse on cash, which has already produced its desired effect of causing investors to "look over the valley" and to buy longer-dated assets (equities, bonds, commodities).

Nevertheless, there are already some more tentative economic signs emerging in housing and in confidence, and it remains my view that the real economy will disappoint in 2010. (This more downbeat assessment seemed also to have been contained in Bernanke's message yesterday.)

If I am correct, equities are in the process of disconnecting from fundamentals as they soar ever higher in the face of a self-perpetuating cycle, fueled by performance-anxiety, the unwillingness to be left behind and the growing consensus view of 3%-plus GDP growth and $80 a share in S&P 500 earnings in 2010.

As I have written previously, market participants often rationalize the irrational. If I am correct in my negative economic view, the Fed's strategy, which was aimed at inflating the prices of three assets (homes, stocks and bonds), is producing, along with higher stock prices, a widening schism between the market's perception of value and that of economic reality.

A bubble has already likely formed in the fixed-income market, gold and in non-dollar assets, and many appear to be anticipating that stocks will continue to benefit from the loose Fed. The lesson learned from the last few years, however, is that a bubble in one class can impact valuations of other asset classes, even if those classes have not gained bubble status. For example, in 2007-2008, a bubble in credit and in home prices hurt stock prices, even though equities weren't bubbly or wildly priced. Similarly, today, a bubble forming in bonds, gold and in non-dollar assets could affect stock prices adversely.

I remain a skeptic that Fed policy will be as effective as the bulls expect as I continue to believe that asset price inflation will not turn around the jobs market or induce consumers to spend nor will it produce an improvement in personal consumption expenditures; consumers are already spent-up, still remain overlevered and lack confidence about their future in the face of numerous nontraditional headwinds.

For now, though, let's throw away the fundamentals, the Fed, talk of bubbles and opinions on the economic trajectory as there might be an outside influence that is playing an increasingly more influential role and could help to explain some of the persistency of the market's advance since the summer.

A portion of the sharp rise in several asset classes over the past few months could be the dominance of quant funds that worship at the altar of price momentum (and the self-fulfilling prophecy of the fund flows that follow the price momentum induced by the quants!).

Over the course of the past few weeks, I have investigated the increased role of momentum-based and high-frequency-trading quant funds. Though hard to "quantify," I believe that the disproportionate role of these funds, which use algorithmic formulas in their directional trading strategy, is shockingly influential in the current momentum-based climate and is serving as an "invisible hand."

By some estimates, this price-momentum-based quant trading now has doubled in significance since early in the year, to more than two-thirds of the average day's trading. Trades initiated by these funds are insensitive to an underemployment rate approaching 18%, signs of an unsteady recovery in housing, the prospects for higher marginal tax rates and how we are going to finance our budget deficit, which hurdles ever higher. Really!?!

The trade of shorting the U.S. dollar, buying long-dated assets like bonds and stocks, and barreling into commodities (read: gold) and other non-dollar assets is impervious to fundamentals and is likely contributing (in part) to bubble-like conditions in several asset classes. And stocks have benefited from this wave, but it is making many look smarter than they are and making many look stupider than they are!

If you don't believe me about the growing quant fund influence, speak to any prominent institutional trader or salesman: They will tell you that their business with plain vanilla institutions is weak and that the quant funds are the ever growing whales of trading.

The pattern is all-too familiar as a new marginal buyer of an asset class dominates the market until they don't.

Here is an anecdote that underscores the changing landscape and is reminiscent of other sectors hiring at tops. (To refresh your memory, this occurred several years ago in private equity and was followed by a sharp cyclical decline in private-equity deals.) At any rate, a subscriber wrote me a telling note recently about his son's friend who attends Wharton and is "a genius in math and game theory." He was just hired by a high-frequency trading firm after being interviewed by 15 similarly talented employees at the firm. He is 20 years old and has been offered approximately $100,000 a year, with a bonus that can add up to an additional $100,000 a quarter! That's far better than even the estimable Goldman Sachs (GS Quote) pays!

Keep dancing if you will, but I continue to sit out the melt-up in stocks and the bubble in other asset classes. When investors/traders are arguably overinfluenced by prices (not fundamentals) that dominate the markets, and are all on a similar side, it has the potential to lead to a treacherous and slippery slope, as it did in 2007-08.

Remember, it is some of the same momentum-based quant funds that sold in March 2009 that have been buying over the past few months.

I have seen many bubbles in my 30-plus years in the investment business. There is a giant bubble in quant funds, and their outsized influence in buying stocks, bonds and commodities might soon be approaching the height its of popularity.

As was the case when Citigroup's (C Quote) Chuck Prince was dancing in 2007, we never know when and how these trends extinguish themselves. We do know, however, that any serious break in momentum in some of the bubblicious asset classes (perhaps caused by economic disappointment) could precipitate indigestion within the quant fund industry that could weigh on the stock market, more so than many now believe possible.

Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.
Gradiva

The problem with Doug's statements is that trading is ALWAYS a bubble, and as Soros says, there are NO fundamentals, only what the next person is going to pay for a piece of asset.

Shorting can be a bubble, too, as we saw 666 which was also an extreme reaction on the downside.

Alas, this is how money is made in stocks or any asset, including housing - those who sold houses in 2006 reaped huge rewards. There are winners and losers,and indeed there seems to be a bubble in gold now, but as long as one knows when to jump train and give the bag to the bagholder, it's old normal. Nothing new.

secret-agent

I find it interesting that you mention a bubble in gold prices (which I happen to agree with). Everyone thinks the solution to everything is to buy gold. If the government prints more dollars, just buy gold. While initially this logic made some sense, at some point it doesn't make sense. What about if gold hits $2,000 an ounce? Does this logic still hold up? No, I don't think so. My guess is that the smart money got into gold at $800 and now that they have made a nice profit are looking for better returns elsewhere. Once the public started getting into gold, you can bet the big run is over.

[Nov 21, 2009] The Great Disconnect Between Stocks and Jobs

The Fed and the Treasury have, in effect, placed a huge bet on a recovery driven by asset prices. That’s a bad bet. The great disconnect between the stock market and jobs is pushing stock prices way out of line with the real economy. This isn't sustainable.
November 18, 2009 | Robert Reich's Blog

How can the stock market hit new highs at the same time unemployment is hitting new highs? Simple. The market is up because corporate earnings are up. Corporate earnings are up because companies are cutting costs. And the biggest single cost they’re cutting is their payrolls. So they let people go and, presto, their balance sheets look better and their stock prices rise.

In the old-fashioned kind of recession decades ago, big companies laid off people with the expectation of rehiring them when the economy turned up. Then a few recessions back, companies started laying off people for good, never rehiring them even when the economy recovered.

In the Great Recession of 2008-2009, companies are going a step further. They’re using this sharp downturn to cut payrolls even below where they were when times were good. Outsourcing abroad, setting up shop in China and elsewhere, contracting out, replacing people with software and automated machines – they're doing whatever it takes to get payrolls down so earnings bounce up.

Caterpillar earned $404 million in the third quarter, or 64 cents a share. Analysts had expected only 5 cents. Caterpillar’s stock is up 165 percent since March. How did Caterpillar do it? Not by selling more bulldozers. It did it by cutting over 37,000 jobs.

The result, overall, is an asset-based recovery, not a Main Street recovery. Yes, the economy is growing again, but the surge in productivity is a mirage. Worker output per hour is skyrocketing because companies are generating almost as much output with fewer workers and fewer hours.

The Fed, meanwhile, has become an enabler to all this, making it as cheap as possible for companies to axe their employees. Money costs so little these days it’s easy to substitute capital for labor. It’s also easy to buy up foreign assets with cheap American money. And it’s now blissfully easy for Wall Street to borrow money almost free and buy all sorts of interests in foreign assets, especially commodities. That's why we're seeing the prices of foreign commodities and other assets go through the roof.

At the same time, the Treasury continues to be fixated on keeping banks afloat. The Administration's mortgage mitigation efforts are lagging. Small businesses are starved of credit. The White House has announced a "jobs summit," which is better than nothing but not nearly as good as pushiing immediately for a larger stimulus, a new jobs tax credit, and a WPA-style jobs program.

The Fed and the Treasury have, in effect, placed a huge bet on a recovery driven by asset prices. That’s a bad bet. The great disconnect between the stock market and jobs is pushing stock prices way out of line with the real economy. This isn't sustainable.

No economy can recover without consumers. Yet American consumers, who constitute 70 percent of the U.S. economy, are facing mounting job losses as well as pay cuts. They’re in no mood to buy and won’t be for some time.

Where is this heading? No place good. Without a major shift in policy -- both at the Fed and in the White House -- the economics point to a big stock-market correction and a double dip. The politics point to substantial losses for Democrats next year.

[Nov 20, 2009] Advanced Technology Deficit Widens in 3rd Quarter by Michael Mandel

November 13 | World Economy Blog - BusinessWeek

Here's more bad news for jobs.

According to this morning's trade report, the advanced technology trade deficit widened to $18.2 billion in the third quarter, up from $12.9 billion in the second quarter of 2009 (advanced technology products include 10 categories, such as information and communications, biotechnology, and aerospace).

The third quarter ATP deficit, at $18.2 billion, was just below the $18.9 billion of a year ago. I believe that was the record, though, I'm not 100% sure.

Nevertheless, the widening of the ATP trade deficit is not good news for U.S. production jobs, since it means that even as demand for innovative products recovers, the production benefits are primarily being felt overseas. Employment in the computer and electronic products industry, for example, fell at a 10% annual rate in the third quarter.

What about royalties and license fees to produce the new technology--doesn't the U.S. benefit from that? The total trade surplus in royalties and license fees was $14.4 billion in the third quarter, smaller in magnitude than the advanced trade deficit. Given that royalties and license fees include movies and tv shows as well, it's likely that the amount of revenue from licensing the overseas production of advanced technology products was actually substantially less.

[Nov 20, 2009]

Brad DeLong's Semi-Daily Journal

Second, the fact that investment bankers did not go bankrupt last December and are profiting immensely this year is a side issue. Each extra percentage point of unemployment lasting for two years costs us $400 billion. A recession twice as deep as the one we have had would have cost us as a country some $2 trillion--and cost the world as a whole four times as much. In that scale and context the bonuses of Goldman Sachs are rounding error. And any attempt to make investment bankers suffer more last fall and winter would have put the entire support operation at risk: as Federal Reserve Vice Chair Don Kohn said, ensuring that a few thousands investment bankers receive their just financial punishment is a non-starter when attempts to do so put the jobs of millions of Americans--and tens of millions outside the United States--at risk.

Graydon:

Point 2 is just plain wrong.

Yes, if you count by money, it's a rounding error.

However, the banksters have successfully used the US working population -- who are getting hammered anyway -- as hostages. Pretty much everybody knows that once a party starts *taking* hostages (I'm not talking about old style exchange-of-hostages peace treaty guarantees, here, but the kind of forcible hostage-taking associated with kidnapping and terrorism) the only sane response is to make sure the hostage-takers die, without any regard to the costs required to achieve this.

Otherwise, as a systemic problem, you get more hostage taking, and things get progressively worse. The cheapest possible cost for suppressing hostage takers is the cost you face to do it right now.

So pretty much everybody can safely predict that things are worse now and will keep getting worse so long as the folks who pulled the "pay or we crash you" economic hostage stunt are still at large.

They're probably correct, too.

[Nov 20, 2009] Peak uranium? by Emma Saunders

November 18, 2009 | FT.com Money Supply

A report published by MIT suggests the world faces a uranium shortage from 2013. So, a few excel spreadsheets later, we have a rough-and-ready Vulnerability Index for you. Most vulnerable, by our reckoning, are France, Japan and South Korea. Most secure are Australia, Kazakhstan and Uzbekistan. More here.

[Nov 20, 2009] Paul Krugman: The Big Squander

"So Krugman's 12 months behind the commentariat in recognizing the futility of TARP. Where's our damn Nobel prize?" Looks like BO spent money on the wrong horse. They could have spent half of that TARP money on direct job creation. Now it is too late.  " I think Paulson was a disaster where Geithner is just a mediocrity..."

The economy needs more help from the government, but it's unlikely to get it:

The Big Squander, by Paul Krugman, Commentary, NYTimes: Earlier this week, the inspector general for the Troubled Asset Relief Program ... released his report on the 2008 rescue of the American International Group... The gist of the report is that government officials made no serious attempt to extract concessions from bankers, even though these bankers received huge benefits from the rescue. And more than money was lost. ...
Throughout the financial crisis key officials — most notably Timothy Geithner... — have shied away from doing anything that might rattle Wall Street. And ... this play-it-safe approach has ended up undermining prospects for economic recovery. For the job of fixing the broken economy is far from done — yet finishing the job has become nearly impossible now that the public has lost faith in the government’s efforts, viewing them as little more than handouts to the people who got us into this mess.
About the A.I.G. affair:... why protect bankers from the consequences of their errors? Well, by the time A.I.G.’s hollowness became apparent, the world financial system was on the edge of collapse and officials judged — probably correctly — that letting A.I.G. go bankrupt would push the financial system over that edge. So A.I.G. was effectively nationalized; its promises became taxpayer liabilities.
But was there any way to limit those liabilities? After all, banks would have suffered huge losses if A.I.G. had been allowed to fail. So it seemed only fair for them to bear part of the cost of the bailout... Indeed, the government asked them to do just that. But they said no — and that was the end of the story. Taxpayers ... ended up honoring foolish promises made by other people ... at 100 cents on the dollar.
Could things have been different? ... Major financial firms are a small club, with a shared interest in sustaining the system; ever since the days of J.P. Morgan, it has been common in times of crisis to call on the big players to forgo short-term profits for the industry’s common good. Back in 1998, it was a consortium of private bankers — not the government — that put up the funds to rescue the hedge fund Long Term Capital Management.
Furthermore, big financial firms ... can pay a price if they act selfishly in times of crisis. Bear Stearns ... earned itself a lot of ill will by refusing to participate in that 1998 rescue, and it’s widely believed that this ill will played a major factor in the demise of Bear Stearns itself, 10 years later.

bakho:

I am not sure why PK mentions Geithner but not Paulson and Bush.

Paulson had an original plan that was even worse than TARP.

This is after all the BUSH BANK BAILOUT. Had it happened six months later, we could have had a very different response.

Now that BIgFinance has stabilized, it would be nice to have Obama bring in an honest to god labor economist. He doesn't have a labor economist in a top position. That may be why he is not getting the best advice on JOBS.

Obama is so far to the right on fiscal policy that he has Centrist Republicans running his financial policy. The Republicans are even farther to the right, somewhere in the Gamma Quadrant.

Eric:

The single concerted effort to stop the bailouts was by the Republican members of the House, with some Democrats to be sure. McCain was publically excoriated because he showed some hesitation during the events of September 2008. You're right that Paulson was Secretary of the Treasury and Bush was President when this came down, but the Democratic party in Congress, definitely including then Senator Obama, was more lockstep in favor of bailing out Wall Street than the Republicans were.

Josh Stern:

in reply to bakho...

I've had more or less the same thoughts.

Geithner's argument for why he didn't push haircuts for AIG creditors is because Paulson had already announced the bailout AIG, which meant paying the creditors (some of whom were TARP recipients), and they told him they had been counting on getting paid in full.

It would be good politics for Obama to can Geithner for the reasons you give. Obama could remind people that when he was picking his cabinet the economy was in free fall, people were scared, and the imperaands no matter how much public money pours into them is a Republican legacy, it is now up to Democrats to deal with our problems. The push-back from right-wing partisans on the way to an Obama administration was to claim that the people who had it right (as Krugman did have, regardless of whining to the contrary) were merely partisans and wouldn't equally take Democrats to task when the time came. Krugman is, forgive the cliche', speaking truth to power instead of keeping score. Partisan thugs are proven wrong, and there is virtue in that.

Now, keeping score is necessary if we are going to avoid picking leaders based solely on demagoguery, but it may be a good idea to keep our score-keeping apart from our current policy critique.

Fred C. Dobbs:

Ok, so you were maybe expecting FDR, but instead we got Herbert Hoover. Go figure!

Basel Too:

i have a friend that works for legal enforcement at a state dept of revenue. the big problem right now is getting merchants to pay the sales tax that's already been collected because so many of the small businesses are using the money for regular operating expenses.

srvbeach21:

My experience in Philadelphia suggests that at least some "non-bubble" areas still have a ways to go.

Don't get me wrong, the Philadelphia area had a bubble - house prices grew much faster than incomes for some time - but it wasn't anywhere near a Florida or California. For some reason, house prices have held up much better than I expected. Starter townhomes in the far suburbs can still go for over $300k.

For some reason we haven't had the same drop in prices as the rest of the country. There hasn't been quite the foreclosure problem, and I suspect that since employment has held up all right (relatively speaking) people have been able to hold out and "wait for the market to recover." The tax credit has certainly kept a floor under prices as well. Sooner or later prices will fall into line with incomes, and I expect a pretty big drop.
 

[Nov 19 2009] It's refreshing to see reference to a "fake recovery"

"The economy has not responded robustly given the size of stimulus. Asset markets, on the other hand have. This sets up a clear dichotomy between ordinary citizens and those who benefit most from asset price appreciation on Wall Street and elsewhere in the financial sector"
naked capitalism

...there are a lot writedowns in residential real estate still coming. This is one reason bank credit is not going up significantly despite zero interest rates. Remember when I wrote about “extend and pretend?” This is the kind of thing that is holding up bank balance sheets. The article I wrote in Octobecom/2009/10/short-sales-in-north-county-feeding-frenzy-as-banks-pretend-and-extend.html"> short sales in North County San Diego highlights the issues involved. But at some point banks will have to take the hit (unless house prices magically go up to near previous levels – what everyone except renters wants).

Ivy Zelman has the same sinking feeling I do here; we don’t think house prices are necessarily heading up permanently. She even throws in a mixed metaphor to get her point across. She says:

I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down.

Look, the fake recovery is now in full swing.  But I expect the recovery to hit a brick wall by 2011, if not earlier. While the proximate cause of my concern is the likelihood of increased taxes and/or reduced spending by the Obama Administration, it is jobs that concern me. See Calculated Risk’s post showing the correlation between unemployment and mortgage delinquency and you see the connection. The fact is we have a record number of foreclosures and that is a direct result of rising unemployment. Unemployed people don’t have any money, so they don’t pay mortgages. It’s as simple as that.

The interesting bit about the New York Times article was this:

The number of loans insured by the Federal Housing Administration that are at least one month past due rose to 14.4 percent in the third quarter, from 12.9 percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure.

S:

it is refreshing to see you refer to it as a fake recovery. Perhaps we ought to stop debating the symptoms and start to challenge the orthodoxy of the ivory tower. Perhaps the best starting point is the low rate job nexus. it would be fascinating to know how a decade of below average rates and no job growth comports with the fallacy that low rates means job creation. It doesn’t and hasn’t and it won’t. Maybe just maybe the place to start is rethinking trade dogma for a new age.

One can only laugh at Geithner casting aspertion on the “previous” administration. Yet another reminder of how seriously bankrupt is the collective, economically and politically.

[Nov 19 2009] Risk versus the US dollar

November 19 2009 | The Automatic Earth

More interestingly, perhaps, are two reports this week, in which financial giants Goldman Sachs and Société Générale, separate from each other, reveal that their view of the immediate future is not nearly as fine and benign as you may think. Société Générale singles out private and public debt as the possible instigator for economic collapse, and tells clients that sovereign bonds will get them good returns. Goldman simply bets heavily against financials and against gold!.

Where the two diverge is in their view of the dollar: Société Générale sees it plunge further, whereas Goldman Sachs sees the opposite. And as much as it may chagrin us to agree with Goldman on anything at all, we do when it comes to the US dollar. We think of it as sort of the wounded crippled last one standing when the first smoke will begin to clear and the bodies are carried out. We don't doubt that oil and gold have very good odds for a strong comeback down the line, but they are not the obvious choice in a situation such as the one we see coming short term.

What we see is not gold vs. the USD or oil vs. the USD. We see risk versus the US dollar. Investors have not been risk averse the past months. And they still are not (yet). And stocks are up, and gold is up, and so is oil. And the dollar is down.

Risk versus the US dollar. If one goes down, the other goes up.

We think that right there you can see what will happen when investors and speculators and everybody else except for a few bravehearts will want to get away from risk, lose their appetite. At that point, it'll be either risk or the dollar. If you think investors will want to take on additional risk, in the face of the numbers on housing and jobs and CRE, a bet against the dollar makes sense. If you don't, that bet, in our view, makes no sense.

[Nov 19, 2009] The Partnership Between Wall Street and the Government Will Continue Until the System Collapses

Events that are in pipeline for 2010 will test this partnership...
Jesse's Café Américain

“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank
examiner for the Office of the Comptroller of the Currency. “At the height of
the economic boom, to take an aggressive supervisory approach and tell people to
stop lending is hard to do.” Post Mortems Reveal Obvious Risks at Banks, NY Times

Well, the boom is over, so what about now?

>The current notional value of derivatives on US commercial banks’ balance sheets is $203 trillion. 97% of these ($196 trillion) sit on FIVE banks’ balance sheets, according to a recent report from that very same Office of the Comptroller of the Currency.

>It is obvious from this report that Goldman Sachs is by no means a bank, and deserves no consideration as such. It is a hedge fund. In general, Wall Street is out of control.

>

Today's testimony by Timmy Geithner in front of the US Congress is interesting to watch. It serves to reinforce my opinion that the Administration is incompetent, caught in old solutions and the status quo, and that the Republican alternative is morally and intellectually bankrupt, given to demagoguery, and owned by a similar but slightly different set of special interests.

Most of the congress are indifferent to the interests of the American people as a whole, whether through self interest or mere cravenness, despite their occasional histrionics for the cameras. It is remarkable how they can act as outraged bystanders, when they have long been at the heart of the corruption and decline. It is their job to manage the government. They have classic American CEO amnesia and 'incredible denial.'

The key to a general reform has long been campaign finance reform and a reduction of lobbying payments and campaign contributions as soft bribes to Congress. As the banks cannot regulate and reform themselves, at least according to John Mack's recent advice to the American people, so the Congress and the federal government seem incapable of reforming and managing themselves. If one does it, they all want to do it, and in some ways they must to be competitive, if the administration of justice creates selective exceptions.

And too many in the States are yearning for a strong leader, someone who will tell them what to do. A great man, who will exercise authority with a directness and little or no discussion. Someone who will 'put things right.' The primary question seems to be less policy than fashion, whether to wear brown shirts or black, and whether torchlight is too 'retro.'

On a brighter note, the Noveau beaujolais for 2009 is rather nice, dry almost to a fault, but not too tannic. A little more 'fruitiness' would have been a highlight.

[Nov 19, 2009] Steve Meyers: A Rolling Top in US Stocks

Equities are floating on thin volumes and thick liquidity.

It may float further, and await any event to end this rolling top and spark selling.

Here is Steve Meyers view.

[Nov 19, 2009] Written Testimony Submitted To The Congressional Oversight Panel « The Baseline Scenario

Ted K

IF (I say IF) the rumors about Geithner asking for Sheila Bair’s firing are true, it’s obvious the guy not only is working for big banks’ interests, but he is out to destroy those who care about Main Street people. This story reported recently by Mary Williams Walsh of NYT is also reason to question what Geithner’s REAL AGENDA is. http://www.nytimes.com/2009/11/17/business/17aig.html?_r=1&dbk

Whose side is Geithner on??

Bayard

Simon, this is exactly the thing that Congress needs to hear. The problem is that they need hearing aids to do so. Thusfar they have turned their deaf ears (both of them, all of the time) to such congent testamony in favor of supporting the oligarchy/plutocracy in which they willingly, nay, gleefully participate. The way things are going, by the time (a couple of years) passes until the next dam burst, they are likely going to be out of office, and so why try to do the right thing now and cost them valuable private sector careers after they leave Congress.

The oligarchs will continue to support (oops, bribe I meant) their way to further prosperous differentials until then, and carefully send their ill-gotten gains to parts of the world less likely to fall as we will.

I would love to see some strong leaders in the administration and Congress act on even a little of the good advice that you and many others (Stiglitz, Ferguson, Volker, et al) have offered up, but thus far the public hasn’t spoken loudly enough to conquer the Congressional deafness, and, even if that happens, I believe that many of them know, or believe that their days of glory on Capital Hill are numbered.

I don’t ever speak of violence as a solution, but I guaranty you that if the high rate of unemployment continues, their will be many within out borders who will be thinking of violent solutions, as many already are.

[Nov 19, 2009] Crisis Porn: SocGen Says ‘prepare for ‘global collapse’ By Barry Ritholtz

Under the French bank’s “Bear Case” scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.
November 19th, 2009

As long as I am here in Europe, I might as well give you some flavor of what has become known as Recession Porn: The most dire forecasts expecting the most egregious outcomes.

Today’s “Crisis Porn” comes to us via Société Générale by way of the UK’s Telegraph, and its Pretty grim:

“In a report entitled “Worst-case debt scenario”, the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.

Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of “deleveraging”, for years.

“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.

Under the French bank’s “Bear Case” scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.

Note that the report is a “worst case scenario.” That’s your recession porn for the day . . .

[Nov 19, 2009] Economy of Losers The Big Picture#comments

call me abab:

“In an economy full of losers, everyone is fixated on hating the winner.”

wow- what a douchbag- would Goldman “suck off the government” Sachs- be in business right now w/o taxpayer assistance and inside “sweet” info to guarantee almost 100% trading success-

those ass holes could burst in flames and i would not do one thing to put the fire out

Through the Looking Glass Says:

I just finished listening to the 1994 tape version of The Creature from Jekyll Island. Its amazing how prophetic it is . It explains everything going on today in the financial system to a T. I encourage everyone to listen to this or buy the book . Its basically the bible for the plutocracy, you know, its god’s work outline.

When you have an hour to sit in a quiet place put it on and listen will full attention. I wish I had remembered it last summer . I would have seen that I forgot the blueprint but they didnt, all a part of their cyclical plan.

http://video.google.com/videoplay?docid=6507136891691870450#docid=-8484911570371055528

Pass It on.

HarryWanger :

Nothing stokes the fire like some GS talk. They are the winners – they are, after all, doing God’s work. Like money missionaries. We don’t hate them for that. How could we? If all those lazy unemployed folk would get off their asses, get accepted to Harvard, graduate, preferably with a law degree, and get a job with God’s chosen company, they too can be winners. See it’s that simple.

Me, I’ll just sit out here with all the losers, watch the chosen stock price and maybe see if it bounces once it hits that 100 support area. About us simpletons can do when you don’t have a direct line to the Fed and Treasury Secretary to phone up when money gets a bit tight.
 

[Nov 19, 2009] Mortgage Delinquencies Reach a Record High

2010 can be down year for the markets as stimulus dissipates, states are almost bankrupt and Obama administration lacks firepower. High unemployment will translates into foreclosures in prime sector. Construction loans will gradually come home to roost. Some leveraged buyout loads will also hit the fan in 2010 but the most dangerous, which were made in 2007 are probably due in 2012...  Can we talk about lost decade ?
NYTimes.com

Nearly one in 10 homeowners with mortgages were at least one payment behind in the third quarter, the Mortgage Bankers Association said Thursday.

Clearly the results are being driven by changes in employment,” Jay Brinkmann, the association’s chief economist, said on a conference call with reporters. Five million more unemployed people over the last year has turned into about two million more overdue loans, he added.

The association’s delinquency numbers do not include those who are actually in foreclosure, a figure that also rose sharply, to 4.47 percent of all loans. A year ago, it was 2.97 percent.

The combined percentage of those in foreclosure as well as delinquent is 14.41 percent, or about one in seven mortgage holders. About 52 million homeowners have mortgages.

In previous recessions, homeowners who lost their jobs could sell the house and move somewhere there were better prospects, or at least a cheaper lifestyle. This time around, many of the unemployed are finding that the value of their property is less than they owe. They are stuck.

[Nov 19, 2009] Obama Debt could cause a double dip recession

"It is this unreconciled bad debt that will pull the economy down by sucking good capital into the black holes their accounting tricks call balance sheets."
naked capitalism

mmckinl:

Obama is exactly half right …

Debt is the problem … but not government debt. The problem is the bad debt that isn’t being reconciled by banks, specifically Wall Street Banks.

Naked Capitalism has covered this topic continuously for well over a year, calling for de-leveraging of bad debt in the private sector.

It is this unreconciled bad debt that will pull the economy down by sucking good capital into the black holes their accounting tricks call balance sheets.

Obama has truly been captured by the banksters thinking and it will spell Japan style economic misery-stagnation for a decade or more, ballooning the US, state and local deficits because of the drop in tax revenue and business activity.

I see no way out unless we get radical change in the way we do business and government … But the big money is pressing Congress and the White House to do what is in the best interest of the very criminals that got us here.

Ed:

Someone here or on another blog pointed out that a factor usually missing in these articles is that the US ran large deficits and had a large amount of government debt BEFORE the recession or depression. This is quite different from the scenario during the 1930s when Keynes was writing, and changes things significantly.

People look to the history of US policy during the Great Depression, but the US was the world’s creditor at the time. The country that is in a similar situation to the 1930s US is now China. The current US situation approximates that of 1930s Britain. But then 1930s Britain didn’t try to outspend the other countries in the world combined on defense.

Sigmaseek:

The difference between private and public credit is that typically private credit has to be secured by something tangible and public credit is secured by claims on private assets and the future productivity of taxpayers. Adding public domestic credit on top of private domestic credit just runs up the credit on what are already leveraged private domestic assets. There is a limit on interest paying capacity of assets as we are now seeing.

The government has been capitalizing interest since Bush took office and it has only gotten worse with Obama.

If the government were private it would have had its credit cut off long ago, but since tax levies are senior to any bank credit it gets the ok to crowd out private credit. As your equation goes, Foreign sources of capital is the only source of credit as the private assets and thus the private credit is getting market to market. The foreign claims on public/private assets are therefore declining in value. Public debt repudiation or default are the only answer to any sustainable recovery despite the financial engineering the Fed is undertaking.

So it’s clear to me that you obviously have no idea how our credit system works. Someone’s gotta pay until they can’t or there’s nothing backing the credit.

pebird:

“If the government were private it would have had its credit cut off long ago …”

by whom, that other government (the banks)?

Public debt is used for interest rate and exchange rate maintenance and political reasons – that’s it. There is NO future claim on taxpayers or the unborn. The only constraint is the real capacity of the economy to produce goods in demand.

If foreigners don’t have the dollars, they can’t buy the debt – it’s just a way to sop up excess dollars – it is NOT a financing mechanism at all.

With what do you think China buys US debt? Yuan? No, they have excess dollars and they want to maintain a currency peg. They could spend the dollars (which would be great for the US but would blow their peg), or they can buy Treasuries and use them as collateral and get some leverage when they borrow to purchase raw materials and goods, and still maintain the peg.

What happens when the Treasuries mature? – we rip up the bond and give them back their dollars with some interest. Big deal, they will probably roll over to new Treasuries anyway.

So the world population has increased by almost a billion people in the last 10 years. World GDP has increased from 30.5 trillion 1999 to 60.5 trillion USD in 2008. And everyone is upset that the world’s reserve currency government debt has gone up from 5.7 trillion in 1999 to 12 trillion USD today during a financial crisis. Why? Are we going to run out of numbers? Ooooooh, scary.

So there is going to be a run in the dollar? To what? The Euro? The RMB? Yen? Gold? Are countries going to start trading in physical gold instead of electronic account balances?

The TOTAL money (government and banking) in the system has been drastically reduced over the last year. Everyone looks at the “big” government spending but doesn’t complain about the bigger private banking non-spending.

This debt hysteria is out of control – it’s a political attempt to keep the Administration hamstrung and to NOT engineer a recovery – the banks would rather foreclose on real property than be paid back – remember the loans they made were garbage – and they were fully aware they were toxic. To be paid back with real property (real estate, commercial buildings, businesses) at “pennies” on the toxic debt dollar is the steal of the century.

lark:

Obama at times seems like the “mainstream media” in giving equal time to right and left approaches, even though we tacked right for decades and we are exactly here, right now, with Obama as president, because the right wing ideas have failed.

Thus we get tax cuts as stimulus. “Strong dollar” rhetoric. No aggressive pro-jobs policy. Bailouts for Wall Street insiders. No action on making it easier to unionize. Weak action to help homeowners facing foreclosure.

Now, in the midst of a collapse in demand and soaring unemployment, he tells us he’s worried about the deficit. Thanks, buddy.

It’s always time for takeaways for the working folk and giveaways to the rich in this country. I am sick of it.

This weak gruel is Reagan lite. Not what I voted for.

[Nov 19, 2009] Why the Stock Market Should Crash

Seeking Alpha

I'm not saying the stock market will crash, only that if it had any relation to the real U.S. economy that it should crash, and soon.

The current politics of experience is so warped by misleading statistics and orchestrated propaganda that it feels strange to state the obvious and find it is "that which cannot be spoken" -- the credit-dependent, consumer-dependent U.S. economy is going down, and going down hard, and the trillions of dollars borrowed and spent by the U.S. government and Federal Reserve to crank up a recovery have failed completely, utterly and totally.

The basic idea of Keynesian policy is simple: when the wheels fall off the private, quasi-free enterprise economy the government borrows and spreads mountains of money around like fertilizer which will stimulate "green shoots" of recovery.

The forgotten key to successful Keynesian policy is a government should not have been borrowing and spending trillions of dollars during an era of so-called "prosperity." When a government like that of the U.S. has been propping up "prosperity" with trillions in borrowed money for a decade, then doubling or tripling the "stimulus" in the hopes that the green shoots will be enduring is truly farcical.

If the economy needed several trillion dollars in deficit spending to eke out the meager jobless growth of 2001-2007, then why does anyone think that doubling or tripling that deficit spending will create an enduring boom?

The truth is the U.S. economy has been dependent on Federal stimulus for years, both the indirect stimulus of artificially low interest rates and unlimited liquidity, and the direct spending of hundreds of billions of borrowed dollars.

Even before the financial crisis, the Federal government was borrowing and spending $400 billion a year to prop up "prosperity." All that spending simply papered over the rot at the core of the economy:

1. The primary support of the U.S. economy is consumer spending which is ultimately based on household income and assets.

Earned income has been flat to down for most Americans for years. The median income has been skewed upward by the top 10% whose earnings have risen significantly. According to the Bureau of Economic Analysis, real disposable personal income-- income adjusted for inflation and taxes--declined 3.4% in the third quarter after increasing 3.8% in the second quarter.

In an economy dependent on consumer spending for 70% of GDP, how can GDP rise by 3.5% while personal income plummeted by 3.4%? Assuming that boost in GDP is real and not just statistical legerdemain, then where did it come from? From borrowed money, of course-- the Federal government borrowed and spent over $1.4 trillion in fiscal 2009.

In the good old days of 2002-2007, households would have borrowed and spent hundreds of billions as well. But the consumer, beset by declining assets ($13 trillion lost in the past two years), declining income (see above), falling housing values and worrisome employment trends (17% unemployment/underemployment, broadly measured), is actually cutting back on borrowing. (Revolving Consumer Credit Drops 13.1% in August.)

Consumer credit decreased at an annual rate of 5-3/4% in August 2009. Revolving credit (credit cards) decreased at an annual rate of 13%, and nonrevolving credit decreased at an annual rate of 1-1/2% --the longest decline in consumer debt since 1991.

So while households are still burdened with almost $2.5 trillion in credit card and nonrevolving debt (auto loans, etc.), they are paying debt down, not adding more.

And let's not forget that homeowners pulled out about $5 trillion in home equity in 2001-2007, and the home equity ATM is closed for good. That brings us to:

2. The primary asset in most U.S. households is a home, and home values are still dropping, foreclosures are still rising and the only force keeping the market from falling faster is the Federal government's de facto nationalization of the entire U.S. mortgage market.

Of the $1.5 trillion mortgage securities issued in 2009, a mere 1% ($15 billion) have been issued by banks; 99% are backed by the government. The government owns over half the nation's $10 trillion in mortgages via its de facto ownership of Fannie Mae (FNM) and Freddie Mac (FRE), and it has guaranteed virtually all the mortgages originated in the past year via FHA or VA.

The residential mortgage market is now effectively owned lock, stock and barrel by the Federal government and its private "central bank," the Federal Reserve.

Should the Fed and Treasury reduce their subsidies (that wonderful $8,000 giveaway tax credit to new home buyers or anyone claiming to be one), guarantees and outright purchases of mortgages ($1.2 trillion this year alone), then the mortgage market would instantly freeze up or start pricing in the very real risk that housing is not "recovering" and that anyone holding a mortgage could suffer huge losses if real estate continues declining in value.

Here are a few charts to ponder:

3. So how have companies "surprised" with higher profits? By slashing payrolls, R&D and various accounting tricks. Actual revenue growth is missing in action. So how do you keep "surprising to the upside" after you've slashed headcount, burned R&D and turned every accounting trick in the book?

You don't. A stock market rising on the hopes of an actual, real, tangible recovery in household income, home equity and creditworthiness is seeing mirages and hallucinating that the lake just ahead is deep and wonderful and stretches to the horizon.

Only we never reach the "lake," do we? "Stabilization" is a chimera; the reality is the government is propping up the economy via unprecedented borrowing and spending, and there is absolutely no evidence that private capital, credit or spending are rising from the "stabilization."

We are walking through the desert, kept alive by the sugar-water drip of Federal stimulus, guarantees and subsidies. The "so near, yet so far" mirage of "recovery" has been propping up the stock market for nine months, and when a slight breeze blows away the thermal illusion, then the market will crash back to the March lows, or perhaps even lower. That crash will simply reflect the state of the real economy.

[Nov 18, 2009] The next meltdown is coming in 2012 by  Paul B. Farrell 

MarketWatch

It's coming in 2012: Another, bigger meltdown of Wall Street's "too-greedy-to-fail" banks. No, this is not another fanatical warning about that Dec. 21, 2012 end-of-days prediction based on the Mayan calendar, though you may well ask "Who will survive?"

Here is what's happening: History is repeating itself. Wall Street's soul-sickness is setting up a new meltdown. Dead ahead. Be prepared.

Since 2000, my columns have covered many warnings of major debt accumulation, market meltdowns, and the psychological failings of Wall Street's greedy, myopic brains. Last June we summarized 20 predictions made between 2000 and 2007 warning of a subprime meltdown coming. Oddly, no one seemed to be listening to all the warnings from leading minds like Buffett, Grantham, Gross, Faber, Shilling, Roubini, Fed governors, and many more. Was that a repeat of 2000 with no one listening?

Suddenly it hit me: It's just the opposite: Everyone is listening and everybody knew a crash was coming -- but we were in a trance, including Washington's bosses. Bernanke, Bush, Paulson, Greenspan all heard it. So did Wall Street, and Main Street.

Unfortunately America's collective brain was addicted to the adrenaline rush of gambling in a risky bull. The euphoria is intoxicating. We were caught up in a game of musical chairs, squeezing out every last dollar of return, blind to the catastrophe ahead until caught by surprise. Unfortunately, Wall Street lacked a moral compass and stole trillions from American taxpayers. Today, the only lesson Wall Street has learned is "greed is good." Now the beginning of the end has become a moral tragedy that is setting the stage for an implosion of Wall Street, capitalism and our economy circa 2012.

Everyone's still listening, still in a trance

Yes, another meltdown is coming; it's inevitable. This time, I've decided to do more periodic updates -- a watch list of alerts, warnings and predictions. Just like the updates done for over a decade, except this time we're more aware that few in power will listen, not Wall Street, not Washington, not Corporate America. But you must.

Recently a bright idea came to me: a new way to present these predictions. My wife was working all day at a hospital in Templeton, Calif., so I parked myself in the Café Vio in nearby Paso Robles, with two huge briefcases of research files on bubbles, debt, derivatives, behavioral economics and lots more. While trying to make sense of the materials, the headlines themselves started telling a fascinating story. Here's an edited montage of their staccato warnings. Read fast and "feel" the message:

Financial Times: "Second Great Depression [is] still possible."

The economy's "spiral is captured in a Titanic metaphor ... unsinkable."

BusinessWeek: "Next bubble could come sooner than you think."

From Reinhart and Rogoff: "This time is different." But it never is.

Bloomberg: "Citi's 'near death' hoard signals lower profits."

Citi hoarding $244 billion in cash "as if another crisis were on way."

Wall Street Journal: "Three decades of subsidized risk."

Gasparino's "The Sellout:" Greed, mismanagement killed financial system.

SeekingAlpha: "Crisis lessons forgotten in new speculation."

We prop up trash stocks Fannie Mae, Freddie Mac, AIG; learned nothing.

USA Today: "Wall Street bailouts ... business as usual"

Warning: "Too big to fail" protections guarantee another crash down the road.

Boston.com: "Why capitalism fails ... why it will happen again."

Economist says American capitalism "contains seeds of own destruction."

MarketWatch: "Einhorn bets on major currency 'death spiral.'"

Hedger bet against Lehman. Now against dollar. Says "break up too-big-to-fail" banks.

Forbes: "Be prepared for worst ... repeating Great Depression."

Expect "GD2" says Congressman Ron Paul, author, "The Revolution," "End the Fed."

New Republic: "Next financial crisis coming; we made it worse."

Former IMF economist: "Bernanke soft landing, sowing seeds of next crisis."

Wall Street Journal: "The economy is still at the brink."

Moral hazard: No CEOs of failed banks indicted ... even paid millions.

 

BusinessWeek: "What happens if the dollar crashes?"

Trade wars break out, banks collapse. Cheap dollars are killing us.

Pimco Investment Outlook: "On the course to a new normal."

Gross's "new normal:" spending, stocks down, savings up, banks riskier.

Economix, New York Times: "Finance gone wild."

Simon Johnson: Wall Street's "pathological" power over Washington.

Vanity Fair: "Wall Street lays another egg."

Ferguson: "Math models ignored history, human nature," failed, repeating.

Clusterstock: "10 bubbles in the making."

Fed's toxic debt, gold, emerging markets, ETFs, China, securitization, more!

Rolling Stone: "The great American bubble machine."

Taibbi: Goldman's a giant vampire stealing trillions with "gangster economics."

Temasek Hedge: Roubini predicts bubble, hates equities.

Economist sees "bigger bubble than before" as Fed wastes taxpayer trillions.

CNN/HuffPost: "Wall Street made mess, big bucks on clean-up."

Michael Lewis says "they're too powerful ... we're in for day of reckoning."

Vanity Fair: "Wall Street's toxic message: capitalism failed."

Stiglitz: Wall Street writes self-serving rules, puts global economy at risk.

MarketWatch: "Wasting our chance to fix the banking system."

America's got a "banking system that's just a ticking time bomb."

Mother Jones: "Could cap'n'trade cause new meltdown?"

Yes, and Goldman sees huge profits if this $1 trillion market is created.

Fortune: "We owe what? The next crisis, America's debt."

Yes, "chronic deficits are putting America on the path to fiscal collapse."

Time: "America and its deficits: Are we broke yet?"

Justin Fox, author, "Myth of the Rational Market:" "We'll soon find out."

HuffPost.com: "Main Street jobs? First kill Wall Street jobs."

"Looting of America" author: Wall Street got rich destroying Main Street.

The Nation: "Creative destruction on Wall Street."

Greiner: They treats problem as "psychological," solved by "happy talk."

Kiplinger: New black swan triggers next financial crisis.

Money manager Bob Rodriquez: "Next bubble already growing."

The Atlantic: "Why Wall Street always blows it."

Blodget learned a lesson, but Street chief executives still clueless, no lessons learned.

Questions for today: Do you believe a new crash is coming in 2012, give or take a year? Will it trigger the "Second Great Depression?" And how big a factor is Wall Street's greed and lack of morals?

[Nov 17, 2009] Stocks Overvalued, Recession Will Return Meredith Whitney - Financials US News Story - CNBC.com

Stocks are overvalued and the US economy is likely to fall back into a recession next year, well-known analyst Meredith Whitney told CNBC.

"I haven't been this bearish in a year," she said in a live interview. "I look at the board and every single stock from Tiffany [TIF 43.01 0.77 (+1.82%) ] to Bank of America [BAC 15.87 -0.11 (-0.69%) ] to Caterpillar [CAT 60.40 1.62 (+2.76%) ] is up. But there is no fundamental rooting as to why these names are up — particularly in the consumer space."

In a wide-ranging interview, Whitney, CEO of the Meredith Whitney Advisory Group, also said:

"I don't know what's going on in the market right now because it makes no sense to me," she said.

"The scariest thing about the Fed's program is that the money on the sidelines isn't going to support that asset class," she added. "So the trillion dollars of Fannie (Mae), Freddie (Mac) and mortgage-backed securities that the Fed is holding—there's no substitute buyer there."

[Nov 16, 2009] Special Inspector General- NY Fed Screwed Up AIG Bailout

No surprise here: The Federal Reserve Bank of New York, in a desperate headlong rush to rescue American International Group, screwed the pooch. Despite holding all of the cards, cash and power, they still managed to manuver themselves into a corner with “little negotiating room.”

So says the most recent audit from the Office of the Special Inspector General (SIG) for the TARP program (full embed here) :

“SIGTARP concludes that: (1) the original terms of federal assistance to AIG, including the high interest rate it adopted from the private bank’s initial term sheet, inadequately addressed AIG’s long term liquidity concerns, thus requiring further Government support; (2) FRBNY’s negotiating strategy to pursue concessions from counterparties offered little opportunity for success, even in light of the willingness of one counterparty to agree to concessions; (3) the structure and effect of FRBNY’s assistance to AIG, both initially through loans to AIG, and through asset purchases in connection with Maiden Lane III effectively transferred tens of billions of dollars of cash from the Government to AIG’s counterparties, even though senior policy makers contend that assistance to AIG’s counterparties was not a relevant consideration in fashioning the assistance to AIG; and (4) while FRBNY may eventually be made whole on its loan to Maiden Lane III, it is difficult to assess the true costs of the Federal
Reserve’s actions until there is more clarity as to AIG’s ability to repay all of its assistance from the Government.  SIGTARP also draws lessons that should be learned regarding the importance of transparency andratings agencies had on the AIG bailout.”

In other words, the deal that was cut in November 2008 with AIGs counter-party banks resulted in those banks being paid off in full for high risk credit-market bets.

Had AIG gone bankrupt, these firms would have recieved pennies on the dollar.  The banks that benefited the most included Goldman Sachs Group Inc., Merrill Lynch and large French banks Société Générale and Calyon. (See table below)

The New York Fed said its goal was to “prevent a system-wide collapse” and not obtain the best deal possible. So they got played for patsies.

Selected comments

bsneath:

There is going to be a revolt in this country as more of this information comes out and as more people lose their jobs, homes, way of life, self esteem, chance to send their children to college, you name it.

It is common for people to want to find someone else to blame for their misfortune. In this instance they will have legitimate reasons, persons and organizations to blame.

I suspect this will get very ugly before it is over, because it will take fear before the greed-entrenched elitist class agrees to make the changes that are needed to save our economy and society.

They can bemoan all they want – with their derogatory indignation -about the rise of “populism” – of a class of individuals who are less than their equals. Before this is over, the populists will prevail. There is simply too much information, too widely available, with too many watchdogs for the elitists to conduct business as usual, behind closed doors, through obfuscated legislation and governmental rules.

The times they are a changing.

bsneath:

So, $40 billion went to foreign banks, $14 billion to Goldman Sachs and $8 billion to other American banks?

Am I reading the chart correctly?

Was it ever made public that nearly 2/3rds of the $62 billion bailout went to foreign banks?

Was it ever made public that Goldman Sachs was the recipient of nearly 2/3rds of the remaining 1/3rd amount that went to domestic banks?

TakBak04:

I remember reading that we had to bailout the foreign banks because they had bought our crap on “good faith” from our ratings agencies.

Paulson and the rest were carrying on that the “Global Economy” would implode. That was the basis for the bailout. At least that’s what I remember reading from articles at the time, and watching CNBC an the House Vote which vetoed the bailout on first round…but Senate sent it back after CNBC caterwalled loudly that the fate of the world was on Pelosi’s shoulders. After it was voted through with Senate pressure, I remember CNBC for a few days was trashing Congress. They shut up and went along with it all once they saw that Goldman got bailed out.

It was a boondoggle. But, one can’t blame the foreign banks for not pressuring us when we sold them crap. Are they culpable in not doing due diligence? Sure…but it was such a mess and web of tangled financial instruments how could they sort it out when to this day, we don’t even know if our banks, the Fed and the SEC have been able to track it all down.

So, it’s good to see the numbers on this, but what good does it do at this point? Until there’s a real investigation (a cold day in hell before that happens) and someone is held accountable what does it matter? Goldman Wins. They have “friends in high places.”

bsneath:

http://www.cnbc.com/id/33972133

Meredith Whitney is calling for a second recession. Credit contraction is accelerating and the contraction will be greater than during the Great Depression, banks will need to raise more capital. Fun Fun Fun

[Nov 16, 2009] Beware the Ides of December Consumers Hold Key to Recovery Gary Shilling Says

Shilling thinks that the next year will be relapse, substantial sell-out.  The real question is sustainability of the rally and according to Shilling the answer is negative.
Yahoo! Finance

Excluding autos, October retail sales were up 0.2%, half the expected rise, while September's drop was revised down sharply to 2.3% from 1.5% originally.

These disappointing sales data fit squarely with Gary Shilling's grim economic outlook.

"The whole gist of what's going on [with recovery] is in the hands of the U.S. consumer," Shilling says, and that's a problem for the bulls for three major reasons:

Add it all up and Shilling says the "V-shaped recovery" is largely a function of "special factors," most notably the government stimulus package and the cash-for-clunkers program. "What do you do for an encore?," he wonders.

In sum, Shilling predicts the holiday shopping season will disappoint investors, prompting them to rethink the idea of a sustainable V-shaped recovery, "precipitating a substantial selloff."

Editor's note:The accompanying video was taped prior to the release of Monday's retail sales data.  

[Nov 16, 2009] The Coming Private Equity Default Crisis by Joshua M Brown

November 15, 2009

There’s a book out called “The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis” and before you derisively sneer at what at first sounds like hysterical hyperbole in the subtitle, consider this bit of logic from Josh Kosman writing in today’s New York Post:

“You better sit down,” the secretary says. “I’ve got bad news…”

The Treasury Secretary is talking about private equity. It’s not the private equity firms themselves but the companies they own that are defaulting. During the boom years of 2001-07, private investors bought thousands of US companies. They did it by having the acquired companies take on enormous loans using the same cheap credit that fueled the housing boom. That debt is now starting to come due.

“Considering what we have already been through, how bad can it be?” Obama asks.

Now here’s where things get interesting.  In the hypothetical scenario, the writer does not for a minute think that the private equity firms themselves are in trouble (or perhaps he is simply dismissing the importance of them in the equation).  Rather, the crisis he is about to allude to concerns the underlying companies owned by these funds, and there are thousands of them:

“Well,” says the Treasury Secretary, “PE firms own companies that employ 7.5 million Americans. Half of those companies, with 3.75 million workers, will collapse, between 2012 and 2015. Assuming that those businesses file for bankruptcy and fire only 50 percent of their workers, that leaves 1.875 million out of jobs.

“To put that in perspective, Mr. President, NAFTA caused the displacement of fewer than 1 million workers, and only a slightly higher 2.6 million people lost jobs in 2008 when the recession took hold.

“A spike in unemployment will mean more people will lose their homes in foreclosure, and the resulting nosedive in consumer spending will threaten other businesses. The bankruptcies will also hit the banks that have financed LBOs and the hedge funds, pensions and insurers who have bought many of those loans from them.”

“Is this bigger than the sub-prime crisis?”

“It is similar in size to the sub-prime meltdown. In 2007, there were $1.3 trillion of outstanding sub-prime mortgages. As a result of leveraged buyouts, US companies owe about $1 trillion.

You’re probably not laughing now.  I personally did not have a handle on just how big the world of private equity had gotten but now I’ve got about trillion reasons to look into this stuff.

Do yourself a favor and head over to the Post to read the rest:

The Next Bubble  (NYP)

[Nov 16, 2009] Obama Wants Spending Cuts, He Should Start With Military

Massive Defense Spending Leads to Job Loss

The Center For Economic And Policy Research says Massive Defense Spending Leads to Job Loss.

Defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs.

Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased. Construction and manufacturing were especially big job losers in the projections, losing 210,000 and 90,000 jobs, respectively.

The scenario we asked Global Insight to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low.

The projected job loss from this increase in defense spending would be close to 2 million. In other words, the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run.

For some reason, no one has chosen to highlight the job loss associated with higher defense spending. In fact, the job loss attributable to defense spending has probably never been mentioned in a single news story in the New York Times, Washington Post, National Public Radio, or any other major media outlet. It is difficult to find a good explanation for this omission.

"We just marched in we can just march home"

Please consider Ron Paul on Forbes: Be Prepared For The Worst; On Larry King Discussing Michael Moore
"We just marched in we can just march home. Besides, I will win this argument. We are bankrupt and cannot afford it."

"Let's quit this militarism around the world. We are in 130 countries and 700 bases around the world and we cannot sustain these. It's pumped out by the left and the right. There is conservative Keynesianism and liberal Keynesianism which always fails and gives us the financial crisis we are in."

Ron Paul has it correct.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

[Nov 15, 2009] Nine states risking California-style fiscal peril

Los Angeles Times

A new study from the non-partisan Pew -- "Beyond California: States in Fiscal Peril" -- looks at nine states that the organization asserts aren’t far behind the Golden State in suffering havoc from the Great Recession. The nine, alphabetically: Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin.

[Nov 15, 2009] The Ghost in the Recovery Machine

Economist's View

...stories of highly profitable banks paying huge bonuses to their executives have also inspired people to think that things are not so bad in the business world. Anger at these profits and bonuses only tends to increase the contagion of the story.

But any such speculative boom is inherently unstable... It was, in fact, an excessive speculative boom in the stock market and the housing market that got us into this financial mess in the first place.

To be sure, governments and multilateral institutions made some reasonable attempts to restore confidence. But they did not “engineer” a recovery. They got lucky, and the G-20, as well as the governments that instituted stimulus packages, are currently in a honeymoon period of apparent success.

Where our still-ailing world economy goes from here is as uncertain as the speculative markets that played such an important role in both the financial crisis and the recovery. We can only wish that formulating economic policy were as clear-cut as, say, mechanical engineering. It is not: a host of poorly understood natural cyclical factors play a role, and so do the vagaries of human psychology.

Josh Stern:
The title of the essay have me wondering whether for Shiller, does the primitive "ghost" element map onto

a) the "animal spirits" of behavioral economics or

b) our heavy reliance on the securities markets for setting the direction of the global macro economy?
 

bakho
There are 2 recoveries that are needed. One is the economic recovery. If an economy plummets enough, eventually it will reach a bottom where it can grow again???? This is not a useful insight for our current situation.

We have had MASSIVE job loss and the ROSIEST projections are that HIGH UNEMPLOYMENT will continue for YEARS. The task find productive endeavors for available labor until the economy creates enough new jobs. FAILURE to address idle labor is ignoring the HUGE negative effects of unemployment and accepts a massive opportunity cost.

Wealthy elites think it is entirely acceptable to have millions of young people out on the streets with no educational, job training or employment opportunities. The wealthy elites need to think again.

Bruce Wilder:

in reply to paine...

I agree: Mark Thoma is misreading Shiller, who is advocating mildly for modesty, if not exactly prudence (for or against? he doesn't say).

We are looking at the consequences for knowledge and collective action, of failing to exclude, or marginalize, fools and crackpots. Neither Thoma nor Shiller is a crackpot, and neither is inclined to any more than garden variety foolishness. But, economics honors, indeed features, fools and crackpots galore, while our mainstream political discourse is dominated by professional fools, posing as "serious people".

So, even though they don't contribute any text above, John Cochrane and Edward Prescott and Greg Mankiw, David Broder and Robert J. Samuelson and Larry Kudlow, provide contextual fog, that make any sensible conversation extremely difficult.

Thoma has to defend the very concept of an interventionist policy, because it is under constant aerial bombardment.

Personally, I'd like to see Shiller in an extended conversation with, say, Elizabeth Warren.
http://www.pbs.org/now/shows/546/index.html

The dubious wisdom of "restoring confidence" by a policy re-inflating asset prices could become the turning point of an enlightening dialectic, if the Hoover Institution and Cato types could be safely ignored.

Shiller's point, that the "success" of such a policy depends on processes with a life of their own, might find useful grounding against Warren's critique, which takes note of declining wages and welfare.

[Nov 15, 2009] Freddie and Fannie Outside Supervisor Ousted

Nov 13, 2009 | naked capitalism

Notice the complete lack of any investigation into fraud in the financial crisis? And notice the flurry of activity to bust insider traders? Yes, insider trading is a serious abuse and should be prosecuted, but that is mere side show compared to the abuses in the credit markets. No one wants to let anyone look under that hood.

Roberspiere:

Yves: “No one wants to let anyone look under that hood.”

The reason is that the past fraud and the present fraud most likely touches high government officials and bankers. The first thing I noticed was how little it was done to investigate fraud. Compare this with the S&L and notice the difference.

This administration (and the previous one) have come to realize that the best way to protect themselves and their crony friends is by not even investigating for wrong doing. I also noticed that this administration was as bad or worst after Obama took office and his first words were: “lets not act in anger” when referring to the bankers. We the people are pretty much screwed…

Hugh:

We used to have these discussions during the Bush years: Was it incompetence or criminality? After a while it became a distinction without a difference. It is all about looting and cronyism. Administrations would rather shoot the messenger and accept the abuses than lose the good PR.

It just goes to how corrupt the system is.

[Nov 15, 2009] State Finance Directors Warn of More Trouble Ahead

WSJ

I looked as hard as I could at how states could declare bankruptcy," said Michael Genest, director of the California Department of Finance who is stepping down at the end of the year. "I literally looked at the federal constitution to see if there was a way for states to return to territory status."

[Nov 15, 2009] Rational and Irrational Exuberance in Property Markets

Nov 14, 2009 | The Big Picture

He expects a further decline in CRE property values next year (office, retail and industrial), but envisions an upturn in 2011.

That’s the good news; The bad news is a “massive repricing of all commercial real estate;” Zisler warns of a “crisis of unprecedented proportions”approaching:

“Of the $3 trillion of outstanding mortgage debt, Randy points out, $1.4 trillion is slated to mature in four years, and he estimates another $500 million to $750 million of defaults. Maturing debt will have a tough time finding lenders. Debt that has been or will be marked to market, he predicts, will render many banks, especially of the regional and community kind, insolvent, since much of the debt is worth half or even less of par value.”

Zisler’s Slide Show was included in the California State Controller’s Office report on the state’s finances; You can download it at their site; more of Zisler research can be found at their own website.

Neil C Denver:

Isn’t $750 million divided by $1.4 trillion only 1/2 of 1%? That doesn’t sound like a crisis. Perhaps he meant $750 billion.

Mark E Hoffer:

“…Lastly, consider the plight of the commercial property arena in Southern California. Distress among the legion of white collar firms has resulted in a hemorrhage of office property thrust upon the market. The region is bleeding enormous office space. Almost 51 million square feet of office space in Los Angeles County, Orange County, and the Inland Empire is now empty. That is more than 17% of the total. The exodus from office buildings that began in late 2007 has actually accelerated during 3Q2009. No recovery there. The anemic business climate continues to take its toll on the commercial real estate rental industry. Vacancies stand as a direct reflection of unemployment. Companies cut back on workers, end leases, and struggle to survive. Some shut down and liquidate.

The volume of idle office space in four counties is staggering. The vacant office space is a mind-bending 1200 to 1300 square miles of vacancy in just four counties of Southern California. The problems in commercial real estate are so huge, that they are hard even to grasp.

Worse, bank losses have yet to hit the balance sheets on such commercial loans. Does an interest rate hike come amidst vast acreage of vacant office space, led by Southern California? Never confuse Wall Street liquidity revival with economic revival.

Copyright © 2009 Jim Willie, CB
Editorial Archive
http://www.financialsense.com/fsu/editorials/willie/2009/1106.html

Steve Barry:

I will add that bubbles pop at their weakest spots…so while the Federal gov’t thinks they have saved us from the brink with their money printing, I do see on spost that has been left uncovered…state governments…I posted this week an article that 10 states are in deep doo doo, accounting for 30% of the US population…and that list did not even count NY, where the governor stated this week that “We’re going to run out of cash in four and a half weeks. We are going to run out of money. Unless we do something about it, (it will) threaten generations…”

b_thunder555@yahoo.com:

November 14th, 2009 at 11:11 am

Zisler wrote:

“Debt that has been or will be marked to market, he predicts, will render many banks, especially of the regional and community kind, insolvent, since much of the debt is worth half or even less of par value.””

Yes, but only IF Chairman Ben and Secretary Tim don’t get their way and don’t devalue the dollar as much as they hope to. They only have to drop the value of the USD by 2011 to below 50% of what it was worth in 2006/2007, and the debt that’s now worth 50% below par will magically be @par again(in NEW dollars of course.)

And guess what? Ben and Tim will be praised for averting the CRE crash, Cramer will scream about the new bull market (with securities priced in worthless dollars,) and bankers will up their bonuses by 100% in order to “keep up” with bank earnings…. 295million of “other americans” – those who draw most of their income from somewhat fixed salary, pension, social security, unemployment benefits, etc (but not from investments banks, CRE, oil futures trading, or insider tips on penny stocks) will grumble, but will go on.

The new American Sheep… A hurd led by The O-team of Ben, Tim and Larry… praying that Lloyd & Co. continues to do G*d’s work here on Earth…. booyah indeed.

[Nov 14, 2009] Ron Paul: "The Fed Is Part Of The Plunge Protection Team"

[Nov 13, 2009] SP 500 Volumes and Cash Flows Fading

Banana equities ? "This rally is a Ponzi scheme thinly disguised even by US Wall Street standards"

They got the Dollar General IPO out the door and a few more deals were done so its "Mission Accomplished" for Wall Street. The SP 500 looks to be completing a hand off to the retail crowd of overpriced paper in this cycle of the price pump. Time to dump the bids and let it drop, with maybe one more push higher at most to suck in a little more money from the productive economy, or at least what is left of it.

Be aware. This rally is a ponzi scheme thinly disguised even by US Wall Street standards. But do not try and get in front of it, to short it prematurely.

The Obama administration is as asleep at the switch and coopted by its masters in New York as was the prior administration's regulators under Chris Cox, and that is a real accomplishment in a failure to reform.

People forget what the markets were like in the late 1970's when the pits were dead and the average person wanted nothing to do with the US equity markets. The creation of 401k's and more gambling tables like the options exchanges helped to perk things up. This latest generation of jokers will not stop until they have trashed the markets once again.

Expect more token reforms like position limits out of this crew in key commodities, with loopholes big enough for a vampire squid to slip through without inconvenience like the other 'reforms' being crafted by Barney, Tim, Larry, and Chris.

America, what are you becoming?

"How are the mighty fallen, and their devices of empire perished..."

[Nov 11, 2009] Fixing Wall Street's 'predatory capitalism'

To steal millions, you need a top team of armed robbers. But to steal billions, you need PhD's with color charts and economic projections made of fairy dust and eye of newt.

Author of Hoodwinked John Perkins explains why Wall Street CEOs have been engaging in "predatory capitalism", the exploitation of the entire system to benefit a small number of the very rich.

Former economic hit man John Perkins has experienced today’s economic collapse before. The banking industry and sub-prime mortgage fiascos, the rising tide of unemployment, and the shuttering of businesses are all too familiar in the Third World countries where he worked. He was both an observer and a perpetrator of events that have now sent the US – in fact the entire planet – spiraling toward disaster.

The real cause of our global financial meltdown is what Perkins calls predatory capitalism – the mutant form of an economic system that encourages widespread exploitation of the few to benefit a small number of already very wealthy people. A new geo-politics has emerged; today the CEOs of big corporations, rather than governments, control human and natural resources around the globe, as well as politicians and the media. Their arrogance, gluttony, and mismanagement have brought us to the perilous edge. The solutions will not be “return to normal ones”.

[Nov 11, 2009] Low Savings, Bad Investments by James Kwak

There are several additional problems here. First of all this is inflation which realistically can be assumed around 3% per year. That means that for all practical proposes real 401K returns for investors using cost averaging returns will be zero or negative.

The second problem is that losses of 401K investors using stocks (even without self-defeating moves like selling low and buying high) for the last 15 years are substantially higher then the author assumes.  My calculations had shown that for 401K investors who started in Jan 1996 and used cost averaging investing 100% in S&P500 underperformed Vanguard stable value fund approximately 30% (assuming today's S&P500 value 1100). For PIMCO Total Return it's even more. That tells us something about Siegel.

If we assume that stable value returns match average inflation, 401K investors who use S&P500 can lose close to half purchasing value of their savings before retirement. So assumption of positive returns (after inflation) in 401K in my view is pseudo-science and assumption of positive returns in S&P500 in case of cost averaging is even worse (Lysenkoism ?).

In stock universe all profits will be stolen by executives (profits will be siphoned off via stock options) and Wall Street, the role of 401K investors will limited to the role of bag holders. As Jake Chase noted in his comment: "No published financial statement of any bank or public corporation is anything but a trap for the gullible, a convenient fiction, an outright fantasy. Any investment decision is nothing but a bet, and we might as well all be monkeys throwing darts at the financial pages."
The article below first appeared in our Washington Post column yesterday. I’m reproducing it in full here because there is an important correction, thanks to a response by Andrew Biggs. I’ve fixed the mistake and added notes in brackets to show what was fixed. Also, I want to append some additional notes about the data and some issues that didn’t fit into the column.

Recent volatility in the stock market (the S&P 500 Index losing almost 50% of its value between September and March) has led some to question the wisdom of relying on 401(k) and other defined-contribution plans, invested largely in the stock market, for our nation’s retirement security. For example, Time recently ran a cover story by Stephen Gandel entitled “Why It’s Time to Retire the 401(k).”

However, the shortcomings of our current retirement “system” predate the recent fall in the markets, will not be solved by another stock market boom. The problems are more basic: we don’t save enough, and we don’t invest very well.

We ran several scenarios of what a typical two-adult household that entered the job market last year at age 22 might expect to receive on retirement at age 65 in 2051. For each scenario, we assumed that our household would earn the median amount for its age group every year. We began with data from the U.S. Census Bureau on 2008 earnings by age group, and assumed that real incomes would grow by 0.7% per year (the average growth rate for the 1967-2008 period). According to analysis by Andrew Biggs, medium earners typically accumulate Social Security benefits equivalent to 52% of their pre-retirement income, which comes to $40,265 per year. (All figures are in 2008 dollars.) For our scenarios, we used different estimates of the household’s savings rate and of the rate of return it would earn on its savings. [Correction: I initially used the online Social Security Social Security benefits calculator, which says it provides estimates in "today's dollars," but actually uses wage-indexed dollars. See Biggs's explanation of the difference.]

For the first scenario, we assumed the average economy-wide savings rate of 2.4% over the last ten years (1999-2008) and a real rate of return of 6.3% — the long-term average real return for the stock market. (In his book Stocks for the Long Run, Jeremy Siegel calculates the annual real rate of return from 1871 to 2006 as 6.7%; updating that figure through 2008, we get 6.3%.) At retirement, this yields accumulated savings of $298,064. Today, a 65-year old couple could convert $298,064 into a joint life annuity of $18,467 (we did an online search for annuity rates), meaning that they would receive that amount each year (not indexed for inflation, however) as long as either person were still alive. (Anything other than buying an annuity is gambling that you won’t outlive your money.) $18,467 is only 24% of the household’s income at age 64. Combined with Social Security, the couple would receive $58,732 per year, or a respectable 76% of its pre-retirement income of $77,432. [Correction: Originally this was 59%; all later figures were also 17 percentage points too low.]

Savings were unusually low over the past decade. The current savings rate (first three quarters of 2009) is 3.6%. Plugging this into our spreadsheet, we get an annuity of $28,092 and retirement income of $68,357, or 88% of pre-retirement income.

But this overlooks the fact that people do not earn the rate of return of the stock market. Even assuming that people are investing in stocks, most do so via stock mutual funds which, on average, do worse than the stock market as a whole. For example, in the 1990s the average diversified stock fund had an annual return 2.4 percentage points lower than the Wilshire 5000 Index (which reflects the performance of the overall market). The main reason for this underperformance is that mutual funds have to pay fees to their managers — who, on average, do not earn those fees through superior stock-picking (to put it mildly).

If we use a 3.9% annual return instead of a 6.3% annual return, now our annuity is only worth $15,347 per year, and combined with Social Security our household is only earning 72% of its pre-retirement income. But wait — it gets worse.

The average investor in mutual funds does not even do as well as the average mutual fund. The reason is that investors tend to chase returns. They take money out of funds that have recently done badly and move it into funds that have recently done well. Because of mean reversion (the tendency for trends away from the average to return back to the average), this means they take money out of funds that are about to go up and put it into funds that are about to go down. Among large blend stock funds (the category that includes S&P 500 index funds), research from Morningstar shows that the gap between mutual fund performance and investor performance ranges from 0.9 to 2.2 percentage points, depending on fund volatility. (It can be much higher — over 10 percentage points — for other types of funds.)

Taking an average gap of 1.6 percentage points, our expected annual returns are now just 2.3%. Now our cumulative savings are only $172,853 and our annuity is only $10,709; combined with Social Security our household is only earning 66% of its pre-retirement income.

Now, you can get close to that 6.3% expected return through a simple strategy: buy a stock index fund and don’t touch it. But this has another problem — you are 100% invested in stocks, the riskiest of the major asset classes. Whatever your expected cumulative savings, there is a 50% chance that your actual savings will be lower, and they could be a lot lower.

Since we’re talking about survival in old age, ideally our household would not take any risk at all. The closest you can get to this is to invest in inflation-protected Treasury bonds. 20-year TIPS (Treasury Inflation-Protected Securities) currently yield 1.96% on top of inflation. [Note: In the Post column I used 2.4%, the yield at the latest auction; however, that was back in July, and long-term bond yields have come down since then, so this is the current yield according to Bloomberg.] This provides a final annuity of $9,925; combined with Social Security, that’s 65% of pre-retirement income. That’s not very much. And the only way to get higher returns is by taking on risk.

Bear in mind that we’re assuming that Social Security will be around in its current form, as will Medicare (or else seniors will have sharply higher health care costs than they do today). Also, we’ve made a number of optimistic assumptions along the way: that life expectancies do not increase by 2051 (this would reduce the annuity you can get with the same savings); that median-income households save money at the average rate for all households, which is untrue (richer households save at a higher rate, making the average savings rate higher than the median savings rate); and that the savings rate is constant over age (since older people in fact save at a higher rate, the money has less time to build up). In addition, we haven’t started talking about below-median households, who save at a lower rate. [Note: I assumed you can get an annuity yielding 6.2%, from this online site; Biggs, who probably knows better than I, uses 5.4%, which yields lower annuities for the same amount of savings.]

The problems, in short, are that we don’t save enough and we don’t invest very well. One could argue that these are a matter of choice. People could save more, and they could make smarter investing decisions. But given that they don’t, we could very well see tens of millions of seniors without enough money to live decently in retirement. Given that prospect, perhaps we should question leaving retirement security to individual choices and free markets.

***

Andrew Biggs argues that the numbers show that the retirement system is doing OK. After all, if you assume just a 2.4% savings rate and a 6.3% real return, you get 76% of your pre-retirement income. The system is doing better than I thought it was before Biggs pointed out my error, but that’s almost entirely due to Social Security. Social Security is replacing 52% of pre-retirement income (not 35% as I initially calculated) and private savings are replacing anywhere from 13% to 24%, depending on the scenario. I think the 13% scenario is the most accurate, since is the lowest-risk option; anything else is not retirement saving, it’s retirement gambling.

Biggs also thinks (email to me) that my savings rates are too low, especially with auto-enrollment into 401(k)s on the rise. This is a plausible point; we don’t really know where the savings rate will end up after this recession. If the median worker is auto-enrolled in a 401(k) — and, even better, if he gets an employer match — he may be OK. Then we may be talking about a problem that affects a significant number of lower-income households (who are less covered by 401(k)s and employer matches than higher-income households), though not the median household.

This is the spreadsheet with the scenarios. WordPress.com won’t let me upload an Excel file, so I embedded it in a Word file and uploaded that.

There’s a legitimate question about 2008 vs. 2051 living standards. For example, in our most pessimistic scenario, we still end up with an annuity of $50,190 in 2008 dollars. That might not seem so bad. After all, median income in 2008 was only $53,303, and this is all in real terms, right? However, I don’t think that’s the right approach to take. Living standards will improve on average between now and 2051, and therefore an income of $50,190 2008 dollars will feel very different in 2051 than it felt in 2008. This is why I think the right comparison is to pre-retirement income; that tells you the drop in living standards that people will suffer at retirement. (In practice, most people probably won’t buy annuities, and won’t adjust their living standards down immediately — but that just means they have a higher chance of outliving their money.)

Another possible objection is that we’re leaving out capital gains from housing. Even if the average return that investors get from stock mutual funds is only 2.3%, the fact is that many people invest in their houses and seem to get higher returns. However, I think that we can’t count on these higher returns. First, these returns are largely a product of leverage and subsidized interest rates; real housing prices underperform the stock market. Second, a given house doesn’t really change in real value (the utility it provides to people), even if its price changes; in general, its value goes down, unless you put money into it for maintenance and improvements. If the price of equivalent houses goes up in real terms, that just means that (on average) one generation of home owners is taking money from the next generation of home buyers in the form of higher prices. In other words, it’s a multi-generational Ponzi scheme that can’t go on forever. Third, of course, not everyone owns a house.

In doing the research for this column I came across a paper by Andrea Frazzini and Owen Lamont called “Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns.” They find that, at least when looking at historical data, you can make money by doing the opposite of what investors do with their mutual funds. That is, money flowing into mutual funds is a valid predictor that the stocks in those funds will, on average, go down relative to the market. The real beneficiaries are corporate issuers of stock, who are able to issue stock at high prices when demand for it is high. I also like the way they put their findings into context: “These facts pose a challenge to rational theories of fund flows.  Of course, rational theories of mutual fund investor behavior already face many formidable challenges, such as explaining why investors consistently invest in active managers when lower cost, better performing index funds are available.”

Finally, I hate making mistakes. So I wholeheartedly endorse Biggs’s call for the Social Security Administration to fix its misleading calculator.

By James Kwak

spencer

By using current real data you are ignoring inflation that would make the situation worse than you describe.

You are assuming a savings rate of 2.4%.

If you ignore inflation that yields a constant saving stream in real terms.

But in an inflationary environment of for example 2% to 3% annually, and go back and apply a 2.4% savings rate to nominal earnings some 20 years the dollar savings you get are only about half of current earnings in real terms. To achieve the 2.4% average real savings in an inflationary environment in savings rate in earlier years has to be higher to offset the impact of inflation on averages wages.

jake chase

When you assume the financial future will be roughly like the past, you disregard the sea change in financial markets caused by swaps and OTC derivatives: over leveraged risk is a guerrila army bearing nuclear grenades moving in quantum jumps through the investment landscape. They can blow up anywhere, any time. Exposure is entirely hidden. No published financial statement of any bank or public corporation is anything but a trap for the gullible, a convenient fiction, an outright fantasy. Any investment decision is nothing but a bet, and we might as well all be monkeys throwing darts at the financial pages.

In the past ten years, a stock index fund returned nothing. To the extent corporations achieved growth in profits, the dough was siphoned off in executive stock options. Today, you get nothing in government bonds, unless you want to take thirty year risk. If you want a good investment, buy a laundromat (and a gun).

Tom S

I think the biggest mistake in your estimate is that you assume people will begin saving at age 22. From what I have seen of the typical college graduate, they will often spend maybe six months unemployed and often spend the first couple of years paying off debt and getting on their feet. Alternatively, there are many young people (like myself) getting graduate degrees which means more years of no saving. If I did such a calculation I would assume no saving begins until at least age 25, maybe 28. This will really crunch your already low values.

[Nov 11, 2009] Cascading theft … compounding misery by Peter Souleles

October 21, 2009 | PrudentBear

I used to think that "civilized society" was defined as people collaborating and in the process of doing so, providing each other with goods and services, mostly for reward but at times – either through taxation or volunteerism – for free to those less fortunate. In the process of this collaborative exchange, man was supposed to become more enlightened, thus ensuring optimum outcomes could be secured with fewer natural resources and less labor, abetted by invention, cooperation and innovation. Each generation was to leave behind a legacy of capital formation (roads, bridges, schools, etc.) as well as an intellectual legacy in the arts and technology.

Over time, a compounding of these positive developments would endow each successive generation with a higher standard of living, without the good earth being gutted and polluted beyond recognition.

But something, unfortunately, has gone wrong, and it may possibly become far worse than we can imagine. What has been the source of this failure to compound progress?

The answer is theft. Earthquakes, tsunamis and other such natural phenomena, as well as diseases, are of miniscule consequence compared to theft. Theft throughout history has manifested itself in the same forms again and again and each time it has resulted in resources either being destroyed or re-distributed in the process.

It is my thesis, in this brief essay, that theft is supplanting value in both the medium of exchange as well as in the exchange itself. Theft has become the manifestation of greed and moves in when the conscience moves out. As a result, we are faced with the phenomenon of cascading theft – that is, theft that leads to more theft. In the end, the concept of "value added" is transformed increasingly into "value lost."

War
War, which has often been described as organized theft, most probably occupies equal top spot in the rankings. History has repeatedly cast conquerors as liberators who bring some form of democracy/freedom to the downtrodden, when in fact a closer examination shows that the conqueror either carts off the spoils and/or leaves behind a corrupt and compliant democracy or dictator that allocates favorable concessions to the bankers and capitalists of the conqueror.

War not only vanquishes the loser, but also has the effect of weakening the ally. A study of how a financially cash-strapped Great Britain was made redundant as an Empire is fascinating as it is telling about who your friends are. According to a recent article by economist and historian Zachary Karabell, Great Britain in 1946 asked for a loan of $5 billion at zero percent interest for 50 years. What she got was a $3.7 billion loan and a set of conditions which effectively installed the United States and the U.S. dollar as the linchpins of power and finance. As someone once cleverly quipped, "I want to thank the U.S.A. for coming to our assistance in 1941 when we really needed them in 1939."

To maintain its Empire, the U.S.A. has installed bases all over the world. According to Hugh Gusterson, professor of Anthropology at George Mason University, the United States has over 1,000 bases worldwide which constitute 95% of all foreign bases in the world. So we have the U.S. citizenry largely footing the bill for human and material resources so that major corporations can extract "profit" which is often not even taxed in the U.S.A. Can anyone estimate what those resources would have yielded the American people had they been deployed in the U.S.A? Moreover, has there ever been an instance in history where a nation has spent so much to make so many enemies? Perhaps it was only a coincidence that the United States invaded Iraq a few months after it announced that it would refuse U.S. dollars for the sale of its oil. It is clear here that business must be protected against "unreasonable" foreigners.

Unfortunately, the matter does not stop there and as part of the cascading effect, additional theft is warranted through the implementation of the Department of Homeland Security and other such measures.

The Banking System
The banking system, which is war's grotesque Siamese twin, is the greenhouse, factory and laboratory of every paper alchemy known and unknown to man. Is there any wonder that this is the case? A recent Wall Street Journal report stated that Wall Street firms would be paying out $140 billion in bonuses this year as opposed to $130 billion a year before the meltdown. Amounts of this size are neither payment nor reward; they are bribes to buy the intellect of America's best without the inhibition of conscience. At least New York might be saved by the infusion of these bonuses.

The credit creation system, which is the heart of banking, is by all accounts nothing more than a debt pyramid that, in combination with opportunistic mortgage brokers, accommodating government-sponsored enterprises (GSEs), clever bankers and gullible investors, gave rise to an unprecedented orgy of buying, speculation and manipulation. Manufactured income details and low upfront interest rates gave the perpetrators of this theft the means to initially create dreams for the clueless home buyers – and to subsequently substitute those dreams with nightmares.

The cascading effect of this theft has led not only to loss of homes, but also bankruptcy, loss of jobs, breakdown of families and the gutting of so many industries that sprung up in the wake of a building boom struggling to keep up with demand. The game was good while it lasted, but the day arrived when even the banks were brought to the brink as a result of losses being generated by the subprime fiasco. This was no doubt greatly complicated by derivatives, which still remain more deadly than the unaccounted for nuclear-bomb briefcases of the USSR.

It is no secret that the Federal Reserve has more or less provided astronomical amounts at a virtually zero rate of interest to a raft of top banks in an attempt to counter horrendous losses, and to therefore save them from annihilation. Has the Fed's largesse flowed to the struggling home owner? According to a recent Bloomberg News report, a total of 937,840 homes received a default or auction notice or were repossessed by banks, which represented a 23% increase from a year earlier. So there is your answer.

Fear not, as not all is lost. Goldman Sachs reported a $3 billion profit in three months just days ago. Is this a sign of recovery or massaging the truth? I am afraid to say the latter after reading various commentators and in particular the piece by Dylan Ratigan in the Huffington Post. Some $64 billion received through the Trouble Asset Relief Program (TRAP), AIG, the Fed and the FDIC was exponentially leveraged to buy distressed assets, which has led to their reflation.

The taxpayers, of course, have received precious little in return but the politicians did better. According to the Center for Responsive Politics, major banks and financial institutions in receipt of $295 billion in TARP money reciprocated with $114 million to Washington for lobbying and campaign contributions. As Andrew Cockburn puts it, "at 258,449 percent, it has been called the single best investment in history."

The mutually parasitic relationship goes further, in that the major banks are also keen buyers of U.S. Treasurys sold at auction. And what they cannot lend out, they deposit with the Fed at interest. Generations of future economists, analysts and commentators will scratch their heads in disbelief at this fiasco which is so brazen that it defies any modicum of common sense.

Whether the assistance afforded by the Fed to banks can outrun the pace of foreclosures and rising unemployment remains to be seen, although the signs are not encouraging. Either the unfolding internal collapse or the external refusal to continue funding the United States while its dollar slides will inevitably bring on a resolution unlikely to be palatable to anyone. In the meantime, depositors are subjected to laughable rates of interest on their savings as well as the ignominy and insult of potentially having their bank closed by the FDIC on a Friday afternoon.
 
Government
If war and banking are the terrible Siamese twins then surely government is the mother of these two creatures. Whilst I do not consider myself to be a member of some lunatic fringe advocating the dismantling of government, I nevertheless consider most of its activities to be wasteful and many without purpose and therefore a form of theft. (Here the astute reader will correctly point out that war is their doing also).

Do I need to remind readers that Social Security contributions disappear into the unified budget and replaced with increasingly worthless IOU's in the forms of government securities? Through inflation, their value diminishes until retirement resembles imprisonment. Government will either tax or borrow in increasingly larger vicious circles to both placate the masses but also to cement its position and authority. As the vicious circle grows, so does the amount "skimmed" by corporate America which provides the bulk of the services. Where otherwise would the Halliburtons of this world be without Uncle Sam's generosity?

Consumption
The final member in the quadriga of theft belongs to consumption. No doubt the Renaissance and the Industrial Revolution transformed the world of consumption, but it has been in the last couple of decades that consumption took on a hideous conspicuousness that has in its own right threatened the viability and stability of the system. Whereas only the rich in previous generations could flaunt their "toys," in the world of today, anyone armed with a credit card could create a veneer of affluence. As Warren Buffet once exclaimed, "price is what you pay, value is what you get." It is clear that whilst price and value are rarely identical, nevertheless the hiatus between the two has never been so disturbingly wide.

Housing values up to the time of the bust were the major but not the only example of this rift. No doubt the siren call of easy credit and the interest-ree loans of retailers also proved extremely powerful and effective. The reality is that the real wages of Americans had not increased since the 1970s, and in an effort to keep the lid on their wage demands and propensity to strike, credit became a common currency. The ability to borrow not only gave the masses the ability to buy, but also blurred the distinction between needs and wants. Consumption was fast-tracked well beyond the normal trajectory of the economy to the point that it now constitutes some 70% of U.S. Gross Domestic Product (GDP).
 
To repeat an earlier point in a different manner, the price of a need more closely tracks value than what the price of a want does. When wants are satisfied in increasing measures, another cascading sequence of "thefts" occurs. A simple example would be the consumption of high-sugar carbonated drinks and fatty foods, which are simply wants. The effects are well documented and the results highly visible when one looks at the youth of America as it claims close to top spot (if not top spot) on the obesity charts. The effects of such over consumption on their health and by extension on the health system cannot be overestimated. Nor can the effect on their education, employment, income earning capacity, relationships and mental well being be discounted.

Possible Solutions
Between wars, the banking system, government and consumption, one can safely say that the four have combined to bring a great nation to its knee. Should the United States go down on both knees, the ramifications for world prosperity and peace will be greatly jeopardized. The United States has but little time and very few options to counter the present descent in its economy. Creative destruction has largely been thwarted by the interference of government in banking and the car industry, as well as by providing stimulus checks. It may well be that the White House has a chaotic solution in mind should it be faced with doomsday economic scenarios. The reasoning may be that if you cannot get back on top of your affairs, then at least cause as much chaos to your rivals as is possible, to even out the net result. No doubt the U.S. dollar could become a refuge by default.

In my view, the United States can reclaim the high ground in five ways. Whilst its capitalist system has been abused beyond comprehension, it is nevertheless a far better foundation than any communist or socialist system that relies on squeezing and restricting its citizens. In brief the five approaches are as follows:

In conclusion, it should be noted that entrenched structures, force of habit, vested interests and a population that has led the high life on debt for too long, make any changes highly difficult.  All hope, however, must be kept alive through strategies that can be followed step by step and brick by brick. Failure is not an option, because if compounding misery gets the upper hand, the nation will break apart. Value must be reinstated in transactions if value added is to return to the system. Progress is predicated on value added rather than value lost, and no amount of alchemy, printing, legislation or oratory will ever be able to reverse or supplant that truth.

Peter Souleles, an economics and law graduate, ran a private accounting practice in Sydney, Australia, until retiring in 2000.

[Nov 10, 2009]  Mish's Global Economic Trend Analysis

There is a 70% historical inverse correlation between the direction of government deficits-to-GDP and the price-earnings multiple in the equity market. So we will make no bones about the government’s ability to create growth by either borrowing money or taxing the public in the future, but the major point is that government-led growth deserves a lower-than-average multiple, not an above-normal multiple. And yet, even on a Shiller normalized basis, we have a market that is still overvalued by roughly 20%. While momentum and speculation are keys to the current rally, these are never alluring or enduring features for a fundamental economist and strategist. There remains too much risk in equities for our liking, as impressed as we are with the Dow managing to just reach a 13-month high.

[Nov 10, 2009] Is Our Whole Banking System Catastrophically Insolvent

"I truly believe that if we could do an accurate forensic accounting at all the big banks, especially Goldman, JPM and Citi, it could be shown that they are all fraudulently overvaluing their assets and thus catastrophically insolvent. "
November 6, 2009 | The Golden Truth

A good friend on mine works for a real estate consulting firm in NYC. One of his deals is evaluating a client's investment in an insolvent commercial property. The deal has $110 million bank loan funded by Bank of America. My friend said the property is worth $30-40 million. What I found interesting, and which confirms that banks are not even close to marking their assets properly, is that my buddy said that B of A is carrying the loan on its books at the full $110 million.

I just did a "drive-by" on B of A's latest 10-Q. It has $2.1 trillion in assets, not including cash. It is reporting $257 billion of shareholder equity. Now, BAC is over-marking the above-referenced asset by 70%. Assume across all of its assets, BAC is being generous in its marks by only 10%. This exercise implies that a true mark-to-market of BAC's balance sheet would wipe out BAC's shareholder equity.

Is this unrealistic? I think, if anything, my analysis errs in the favor of BAC. Why? BAC has $159 billion of home equity loans on its books. We know that, in general, most home equity loans are probably worth nothing. Let's say BAC's are worth 50 cents on the dollar (this is generous). That adjustment alone would reduce BAC's book value by nearly $80 billion.

The bank has a loan loss reserve of 3.8% of its $914 billion in loans. But the charge-off ratios for residential mortgages and credit cards (not including commercial r/e) was 4.73% in the latest quarter for mortgages and 12.9% for credit cards. Clearly, BAC is unequivocally under-reserving for the purposes of managing earnings and maintaining its vital capital ratios. And we know that the banks are undeniably stretching out their declarations of delinquencies, defaults and charge-offs.

My point here is that between the home equity loans and the anorexic loan loss reserve, I can demonstrate that BAC's shareholder equity is overstated by at least 50%. I haven't bothered addressing the larger balance sheet items of residential mortgages (a large portion of which come from its acquisition of Countrywide, which we know was the goliath of toxic mortgage lending) and commercial loans. Imagine what a realistic assessment of those items would do to BAC's book value.

Then there's the off-balance-sheet toxic waste (like SIV's, CDO's, VIE's and derivatives). I said I did a "drive-by" on BAC's latest 10-Q, meaning I spent a couple hours digging through the footnotes looking for the obvious accounting exploitations the bank used to pervert its accounting presentation. I wanted to show that Bank of America is technically insolvent. If someone wanted to spend the time dissecting the derivatives disclosures and special purpose financing vehicles, I'm sure it could be shown that Bank of America would collapse tomorrow without the Federal Reserve and taxpayer support tossed its way (please note, most of the Fed support has taxpayer guarantees - you can thank Paulson, Geithner and Bernanke for that goody tossed at the banks).

This whole exercise was started after my "catch up time" phone call with one of my best friends from NYC. After I got off the phone I realized that I had just received an inside look at how distorted the book value of just one of BAC's non-menial commercial loan assets was. Based on this simple analysis, I truly believe that if we could do an accurate forensic accounting at all the big banks, especially Goldman, JPM and Citi, it could be shown that they are all fraudulently overvaluing their assets and thus catastrophically insolvent.

[Nov 10, 2009] NY Governor: "Unprecedented financial challenge"

Nov 9, 2009 |  Calculated Risk

From the NY Times: Paterson Paints Grim Picture of N.Y. Budget Crisis

"We stand on the brink of a financial challenge of unprecedented magnitude in the history of this state,” Mr. Paterson told lawmakers as he warned that New York was rapidly running out of cash ...

While the state faces a deficit of more than $3 billion for the remaining four and a half months of this fiscal year, the greater worry among state officials are the unprecedented deficits the state faces in 2011 and 2012, after federal stimulus financing and a temporary tax increase on the wealthy expire.

“We’re going to fall off a cliff unless we get our revenues and our expenditures in true sync,” said Lt. Gov. Richard Ravitch ...

The Rockefeller Institute recently released a report showing most states have seen a precipitous decline in revenues.
Total state tax collections as well as collections from two major sources — sales tax and personal income — all declined for the third consecutive quarter. Overall state tax collections in the April-June quarter of 2009, as reported by the Census Bureau, declined by 16.6 percent from the same quarter of the previous year. We have compiled historical data from the Census Bureau Web site going back to 1962. Both nominal and inflation adjusted figures indicate that the second quarter of 2009 marked the largest decline in state tax collections at least since 1963. The same is true for combined state and local tax collections, which declined by 12.2 percent in nominal terms.
 
Nemo

And that is why we need Wall Street bankers to receive record bonuses this year.

Josh:

Patterson was on CNBC in the morning before the opening last week or the week before. I found what he had to say compelling, but consistent with what you and posters here have been pointing out. He basically was saying that New York was at the point where the gap was so large that it could not be made up by taxation alone, or even substantially by taxation. He was basically saying that New York needs massive cuts.

I'm not a fan of almost any politician, but Patterson at least came across as being somewhat honest in his remarks.

Basel Too:

October Tax receipts, YoY

Mi: -15.7% http://www.senate.michigan.gov/sfa/Publications/MonthRev/mrroct09.pdf
CT: -24.7% http://www.ct.gov/drs/lib/drs/research/09comparstate/mon_stmt_oct_2009.pdf

NOTaREALmerican:

Shine on you Jamie Dimon wrote:

cut social programs

How about all programs. Close all the overseas bases. Cut the military by 75%.

Citizen AllenM:

Arizona drop in Tax Revenues was 22.9% over last years dismal take.

http://www.azleg.gov/jlbc/mfh-oct-09.pdf
Page 5
Sept. 2009 $673 million
Sept. 2008 $873 million
Sept. 2007 $945 million

A drop of $272 million in two short years!!!
A 28.7% drop!!! Whooooosh

Um, still looking for a bottom to heave into sight.

And beginning to wonder if the Obama administration is going to let us fail to be a lesson to the political gridlock in other states. I hope we don't end up the bad example.

Someday this war's gonna end...

bearly:

NOTaREALmerican wrote:

Close all the overseas bases. Cut the military by 75%

Are you serious ? That is our only competitive advantage. Now if you suggested that we charge for protection, that might make sense. The only exports we have with enough margin to bother are weapon systems related. Not to mention, the world would descend into chaos without a cop on the beat. Sheesh.

Byzantine_Ruins:

Citizen AllenM (profile) wrote on Mon, 11/9/2009 - 7:42 pm

And beginning to wonder if the Obama administration is going to let us fail to be a lesson to the political gridlock in other states. I hope we don't end up the bad example.

Only bankers get bailouts, honey. You're a sovereign, you can default and hide behind sovereign immunity. You'll be expected to. That's the velvet fist of government tapping on your old back door there. Just make like a Republican congressman and assume a wide stance.

sm_landlord:

Rajesh wrote:

You say that as if it's a bad thing.

Some say that the point of U.S. activity in the Middle East and Africa is to ensure continued chaos.
If so, Mission Accomplished! But if that little problem would take care of itself without the expenditure of blood and treasure, well....

Byzantine_Ruins:

 Not to mention, the world would descend into chaos without a cop on the beat. Sheesh.

Too fuckin bad? Your country went bankrupt. It happens to every empire because empires are just a way to socialize expenses. Where are the British now?

Yes, the bankers patted you on the head and told you was a hero. Awesome. Also so last year. Now they are moving on to China. Get over how indispensable you pissing away billions to the military industrial complex is and start making a rational cash flow model for your bankrupt nation. Let me underline that bankrupt part again. Haven't you spent enough of your children's future massaging your ego with a sense of global proprietorship? If not, too bad, 'cause you appear to have run out of tether.

JimPortlandOR:

I'm in favor of Pirate Ransomes: collect all the folks in FIRE that make more than $100K, and tell them and their employers they will get the thieves back when they pay 60% of all income (including bonuses and options) earned since 2001.

In the meantime, put the FIRE hostages to work cleaning parks, working in retirement homes, and cleaning public transit vehicles, at CCC wages ($1.00 a day, $25.00/mo sent to state in lieu of taxes, $5.00 mo. for MJ)..

Rob Dawg:

NOTaREALmerican wrote:

Rob Dawg wrote:

Imagine a national 5% VAT.

Ok you convinced me. Make it a 20% VAT.

Imagine an underground economy. Imagine a well armed underground economy. Imagine a well armed underground economy with a genetic predisposition to oppose authority. Imagine a mobile well armed underground economy with a genetic predisposition to oppose authority. Imagine a mobile well armed underground economy with a genetic predisposition to oppose authority with a sympathetic populace. Imagine a mobile well armed underground economy with a genetic predisposition to oppose authority. Imagine a mobile well armed underground economy with a genetic predisposition to oppose authority with a sympathetic populace and a long history of aversion to taxation.

NOTaREALmerican

Rob Dawg wrote:

Imagine an underground economy.

Bah. That's what the anti-tax people always say. These are historic times, requiring historic measures. You've convinced me. VAT = 30% now.

Angry Saver:

We should institute a windfall profits tax on the financial industry. Seriously. The FIRE sector isn't earning money. They are just the beneficiaries of the greatest re-flation attempt in history.

We instituted a windfall profits tax during WW2 as it was widely recognized that high profits were the result of Government borrowing and spending. The country fared quite well.

Also, Sean Hannity and Rush Limbaughtomy are economic ignoramouses.

 NOTaREALmerican:

Byzantine_Ruins wrote:

How to fail a state in one swift stroke.

Insubordination. VAT = 40%. Plus Department of Homeland Security personal as VAT inspectors.

[Nov 10, 2009] How the Government Is Swallowing the Economy

What's really funny is that a lot of tea-baggers are on Social Security and get Medicare....

Yahoo! Finance

Economist Gary Shilling has calculated that 58 percent of the population is dependent on the government for "major parts of their income," including teachers, soldiers, bureaucrats, and other government employees; welfare and Social Security recipients; government pensioners; public housing beneficiaries; and people who work for government contractors. By 2018, Shilling estimates, an astounding 67 percent of Americans could be dependent on the government for their livelihood. The implications aren't comforting.

[See 4 problems that could sink America.]

Tea-party ranters might cite this as evidence of liberal policies run amok, but the growing-government phenomenon transcends party politics. In 1950, the starting point for Shilling's analysis, just 29 percent of the nation depended on government for its income. By 1980, that had risen to 61 percent--higher than it is today--thanks to demographic factors and the needs of a changing nation. The military got larger and defense spending grew as America took up its role as a superpower. Baby boomer kids required many more schoolteachers. The number of Americans receiving payouts from Social Security, enacted in 1935, increased 10-fold. Food stamps and other safety-net programs of the 1960s and '70s began to reach millions of Americans.

From 1980 to 2000, Americans became less dependent on government. California and other states cut their budgets and reduced spending. The military got smaller after the Cold War ended. Welfare reform in the 1990s kicked many people off the dole. And the private sector boomed during those two decades, accounting for a larger share of the labor force. By 2000, the portion of the population dependent on government had drifted down to 54 percent.

But it reversed course after that, and it seems poised to keep going up. The size of government has generally held steady since 2000, but globalization, technology, and other factors have led to weak private-sector job creation over the past decade. And that was before the recession destroyed more than 8 million jobs. So the government has employed an increased share of Americans. The other big change since 2000 has been a near tripling of food-stamp recipients, as low earners got left out of the housing and stock-market booms and then suffered worse during the recession.

[See 9 signs of America in decline.]

The next big shift will come as baby boomers begin to retire, boosting the number of Social Security recipients 27 percent by 2018 and threatening the solvency of the program. Shilling has another dire prediction: Economic growth will be so weak for the next several years that without government support, the unemployment rate will rise to 23 percent in 2018. Since that's politically intolerable, government will continue to spend money to create jobs, he predicts, with nearly 25 million additional Americans employed as a direct outcome of government spending by 2018.

If that happens, more than two thirds of the nation will owe their livelihood to the government, which is unsustainable for a number of reasons. It will require federal deficits far larger than the $1.4 trillion bogy we've got now, which is already alarmingly high. If irate voters don't rein in America's debt binge, market forces will, perhaps because foreigners will stop lending us the money or the rates they demand will rise and effectively bankrupt the country. Higher taxes would help solve the problem--and are probably inevitable--but enacting them on rich people alone won't be enough. At some point not too far off, the U.S. government will have to close the vast gap between its income and its spending, and the pain will be widespread.

[Nov 10, 2009] “Free Market” Capitalism Gets Thumbs Down in 27 Countries, Including US

The key problem is that ideology dominance is sticky
November 9, 2009  | naked capitalism

pigeon:

Actually where does free market capitalism exist so that people get a feeling how it works? Not to say I’m an advocate of it but especially the US is as far away from free markets as can be, given the numerous interventions of the government. I would call it a financial oligarchy but not a free market system.
But, lest you get me wrong: As far as I know some free market capitalism was prevailing during the time of industrialization and then it showed its cruelty towards the mass of people who were working in the factories and the mines.
 

Yves Smith:

The reason I oppose the use of the term “free markets” is that the benefits ascribed to markets, generally speaking, hold only when no buyer or seller has much (any) power, meaning they are small, buyers and sellers have equal access to information, and goods are more or less commodities (having a specialized product that people want or need gives the seller power). That setting is horridly unattractive to businesses. So the real world of commerce bears very little to the idealized world of economists in which markets produce wonderful outcomes.

Then we have the libertarian version of “free markets” where no rules apply. That quickly produces outcome like the ones you describe: the powerful exploit the weak. You get abuse of workers, shoddy, even dangerous products (think of toxic toys and toothpaste out of China, or the adulterated meat out of the old Chicago slaughterhouses per The Jungle).

The use by moderates of the first view of markets is too often in the US taken as an endorsement of the latter construct.

pigeon:

You say that “I see a fundamental ideological change has taken place in the US government.”

I think that’s a false reading of the situation. There has been “a fundamental ideological change,” or more likely a reassertion of values and beliefs that were always there, but hidden away. But this change has been on the part of the public, not “the US government.”

The US government seems to no longer represent the wishes and values of the people. Poll after poll shows a majority of Americans want healthcare reform with a robust public option, it wants healthcare reform paid for by additional taxes on the rich, it wants the US out of Iraq and Afghanistan, it wants the government to invest in jobs because “we cannot solve the deficit problem without getting people back to work and getting our economy growing again,” and by more than a 3-to-1 margin believes investing in “job creation, education, and energy independence” is more important than “cutting government spending and reducing the deficit.” http://epi.3cdn.net/4fc2e76fd3593d283f_qtm6bx19l.pdf

And yet the US government is hell bent upon pandering to the whims of handful of teabaggers, who work hand-in-glove with powerful economic, political and media elites to create the fiction that greed and selfishness is the dominant ethic in America.

Costard:

Yves – a few disagreements on syntax.

How do you define the “benefits” of any political economy? What is the value that you believe an economy must be beneficial in achieving? Keeping people fed? Happy? Does freedom matter? How do you quantify these abstractions? Isn’t there some legitimacy to the argument that people should be free precisely because we have no common goal?

If you’re going to distinguish between products people want and products they need, can you provide a way to tell one from the other? What precisely are the needs of a human being? Can you provide a list that holds for every one of us?

If my possession of an object that you want qualifies as power, then what exactly is your working definition of freedom? Superior force? The ability of theft?

Is access to information ever equal? Wouldn’t this depend A) on your definition of what constitutes information, and B) on your personal ability to understand and appreciate that information? How do you establish that a party is ignorant, and that therefore they should not be allowed to satisfy their desires in the marketplace?

Are you alleging that “powerful” Chinese producers are exploiting “weak” American consumers? If you believe that catering to the demands of consumers is exploitation, then how can a free market be anything but exploitive, by your own definition?

I know you weren’t making a thorough case for your views, but I would still point out that arguments beginning with circularities and assumptions generally come full circle. If you believe people will, in a free state, be ignorant and exploited – and this is no more than a belief, as it cannot possibly be proven – then your conclusion on free markets will be such as it is. But where does this leave you? How do you expect free voters to be any different? Doesn’t political economy become, for you, just a question of who exploits who?

Yves Smith:

Free markets is an intellectually bankrupt concept. How would you buy a computer in a society with no rules on commerce? You as a buyer cannot assess at the time of purchase whether the computer really has the functionality specified (memory, chip speed, etc.) So you need to hire an expert to make sure the computer has the promised functionality and bring him with you when you intend to make the purchase. You will also need to pay cash.

But how do you know your exert is any good? You cannot assess your expert. And your expert may be getting a kickback from the seller to recommend a deficient computer. And if you tried claiming in court that you had been cheated (say you determined it had happened) how much does it cost you to find a new expert and evaluate the computer again, then go to court and try to get your money back? And if the other side does show up, it will of course product its own witness saying the computer was fine.

The usual recourse of the “free markets” extremists is to rely on courts, but that is far too costly a remedy (in hard dollar and time terms) for comparatively small purchases. Anonymous, arm’s length commerce becomes very costly on a transactional basis without enforcement mechanisms beyond contract law.

DownSouth:

Your abiding faith in the capitalist ideology which Adam Smith gave birth to has many historical parallels.

That powerful, unempirical belief systems like capitalism or Christianity can “work” regardless of their untruthfulness is a known fact. Smith’s “invisible hand” a.k.a “rational choice theory” has about as much basis in factual reality as the Garden of Eden.

Spain provides a prime example of how counterfactual ideologies can work. Its ascent was due to an economic model dependent on conquest and plunder in combination with a strong faith in Christianity, which lent the economic model purpose and meaning.

But in the 17th century Spain fell from preeminence and many of the true believers couldn’t figure out why, as set out here by J.H. Elliott:

Seventeen-century Castile had become the victim of its own history, desperately attempting to re-enact the imperial glories of an earlier age in the belief that this was the sole means of exorcising from the body politic the undoubted ills of the present. That it should have reacted in this way was not inevitable, but it was made the more probable by the very magnitude of the country’s triumphs in the preceding era. It was hard to turn one’s back on a past studded with so many successes, and it became all the harder when those successes were identified with everything that was most quintessentially Castilian. For had not the success derived from the military valor of the Castilians and their unwavering devotion to the Church?
–J.H. Elliott, Imperial Spain: 1469-1716

A more recent and perhaps more apropos parallel can be found in the rise and fall of Great Britain, as explained here by Aaron L. Friedberg:

What reasons did contemporary British observers give for their superior material success? The nation’s citizens may well have thought of themselves as more vigorous, more inventive, more in harmony with the wishes of the Almighty, than any of their competitors. But judging by the outcome of some of the more important public debates of the period, most of them also believed that their good fortune resulted in the first instance from wise policy, in particular from the triumph of laissez-faire notions of political economy.

Following the publication of Adam Smith’s treatise, “An Inquiry into the Nature and Causes of the Wealth of Nations,” in 1776, the idea that minimal government interference in trade and production meant maximum wealth and well-being gained ground at a rapid pace. Smith’s theories regarding the benefits of free trade were embellished by scholars like David Ricardo, and they entered the popular vocabulary through the speeches and pamphlets of Richard Cobden and John Bright. But the middle of the century, after a series of intense struggles that tended both to demonstrate and to increase the political power of the new middle classes, most existing government constraints on commerce and in particular, on overseas trade had been removed. What had begun as “a purely utilitarian and piecemeal involvement thriving on the mild modification of import duties,” had become “a doctrinaire force making for complete freedom of trade, backed by a whole philosophy of commercial liberalism and anew popular faith in the virtues of free competitive enterprise.”
–Aaron L. Friedberg, The Weary Titan: Britain and the Experience of Relative Decline 1895-1905

As Friedberg goes on to explain, Great Britain, like Spain, also became a victim of its own history. The “ardent defenders of the financial faith” could never grasp the fact that the “dominant financial orthodoxy” that had served the nation so well in its rise to preeminence was helpless to arrest its decline. The world had changed, but the economic religion had not. The true believers clung to the old faith, in defiance of all countervailing evidence, and rode it to near oblivion in WWII.

Siggy:

Just what is meant by “Free Market Capitalism” is the issue. If it means no rules of conduct, then anarchy is being promoted. Just what is meant by any applied label is the critical issue.

I prefer markets with rules of conduct. I prefer that contracts be honored. I prefer that financial fraud be prosecuted. I have simpler labels, capitalism, socialism and communism. I prefer capitalism. I prefer as little government intervention in the market as possible.

In the case of instruments such as CDS, it is clear that at least one side of the transaction is gambling, speculating if you wish to ’spin’ the concept. It is also fairly clear that the transaction is a form of insurance against contingent events. We have regulation of futures and option contracts for commodities for precisely the reason that at least one side of the contract is speculating. History is redolent with adverse impact on society of unbridled speculation. To some extent, we have learned our lesson. As to CDS, we have yet to fully apprehend the negative aspect that the contract may have on society. It may well be that that the contract should outlawed. This would especially be the case were the buyer could not demonstrate ownership of an insurable interest. The current failure of AIG and several ‘primary dealer’ banks is the result of abrogated regulatory authority. It is not that any institution too big to fail, it is that we, thru our government, are unwilling to bear the apparent cost of an orderly dissolution of the offending institution. So long as we support failed institutions we will have unwarranted bonuses and profligate speculation.

I am leery of polls generally and this one doesn’t tell me something that I wasn’t generally aware of. What it does tell, and it is well enforced by the commentary in this thread, is that we are having less of a dialogue and more of a diatribe.

Costard:

Would you care to explain the difference between a “counterfactual ideology” and an ideology that you personally disagree with? Is there some higher arbiter than yourself that you’re appealing to? What system of belief doesn’t argue that the facts line up in its favor?

That Spain and England “fell” according to a historical analysis centered on their economic and military dominance, proves nothing at all about the validity of their economic models or cultural values. This is simply speculation and judgment based upon your own peculiar values, and if nobody argues with you it’s because, hundreds of years after the fact, nobody cares and the issue isn’t relevant.

Similarly, that an animal goes extinct does not prove that God didn’t love it, or that it was an inferior creature. It proves only that, given an absolutely identical series of events, the animal would go extinct again.

Finally, though you may harp on ideologies, your assertion of a hierarchy of truth, a “factual reality”, the supremacy of empiricism all mark you as an ideologue. You cannot prove these things exist, you can only argue that believing in them has some practical value – and then you have to define “practical”. We cannot argue or even interact with each other without making certain assumptions, so therefore we are all ideologues. Which is why none of us is qualified to tell another person how to live, what to think, or what to buy. The actions of individuals (singularly or in markets) cannot be judged by anyone but themselves, because we NECESSARILY apply our own value judgments in preference to theirs. People should be free.

DownSouth:

You are advocating an extreme form of postmodernism that treats science as equivalent to any other belief system without any special claim on what counts as knowledge.

For a thorough rebuttal of this type of “thinking,” I recommend the book Fear of Knowledge: Against Relativism and Constructivism by philosopher Paul Boghossian.

And as to your request that I “explain the difference between a ‘counterfactual ideology’ and an ideology that you personally disagree with,” there’s really no need for me to do so. People much smarter and better versed in these intricacies of junk science have already done so:

The collapse of our economy for lack of regulation was preceded by the collapse of rational choice theory. It became clear that the single minimalistic principle of self-interest could not explain the length and breadth of human behavior. Economists started to conduct experiments to discover the actual preferences that drive human behavior. The field of experimental economics was born and two of its founders (Vernon Smith and Daniel Kahneman) were awarded the Nobel Prize in 2002.

Actual human preferences are all about regulation. A microcosm of America’s economic collapse can be created in the laboratory in a single afternoon. Yank a group of people off the street, give them a task that requires cooperation, and most of them will play along as solid citizens. Unfortunately, a few will game the system if there is any way to cheat. Once the solid citizens realize that they’re being ripped off, they withdraw their cooperation as their only defense. Provide them with an opportunity to punish the cheaters, and some (but not all) punish with zeal. Even the cheaters punish other cheaters with zeal! Once the capacity for regulation is provided in the form of rewards and punishments that can be implemented at low cost, cooperation rises to high levels. Regulation is required or cooperation will disappear, like water draining from a bathtub.
http://www.huffingtonpost.com
 

The Rage:

Anybody that pays attention knows that “Capitalism” is totalitarian in nature. Any materialist ideology is.

Without the state to keep the Bourgeois under control, they would have lost the lower caste’s support and resorted to direct genocide at least a century ago. You could argue, the little regimes have already. The US has through sneaky ways, killed as much as Bolshevism, but the brain dead white population doesn’t think it could be them. How little do they know.

“Free enterprisers” and “Libertarians” real goal is the destruction of the “state” (much like the socialists). However, unlike Socialists, they pursue mercantile caste domination. The rules are set by them, the natural elite should even follow them nonetheless they are inferior. That is pure anarchy in any worlds. Most Americans don’t even have a furthest out clue of this. They merge it with their sickness of Calvinism and become so called “outlaws” against statism……but yet, they basically are forming a goverence that is statistic themselves. Which in turn promotes and destroys the fabric of society of the mercantile caste.

Most of the business elite in America have long dropped the notion of “free markets”. Because they do not exist. They understand with America now the numero uno economic nation in the world, they need the state to function as a pole for their empire. The “Liberatarian packs” that still exist no matter if they have the lame “paleo” word in front of it(such as Lew Rockwell, a decadent jew in his prime and financed by global jewish money) are people that just don’t want their empire in America, they want a global empire stretching totalitarianism globally with the gold merchants deflating away the national economies of the world. Then they will strip off their true face, a ugly one that is for sure.

The “Bourgeois” have their fole in society, but it is not at the top.

kievite:

I think Yves missed the bigger point here.

There is no single meaning of “free market”. It changed during the last 30 years or so. Initially it was a legitimate counter reaction which reflected the opposition to excessive government intervention and excessive centralization. It also stressed the difference of Western Societies with over centralized and stagnant Soviet Block and as such was supported by the US state machine.

But very quickly it was perverted into a sticky and destructive ideology of “The dictatorship of the market” or as John Kenneth Galbraith aptly put it “In Goldman Sachs we trust” by several players (Reagan, Friedman, Ann Rand as the most prominent). Which was essentially a stealth way to ensure dominance of financial oligarchy that we now have with “casino capitalism” as an established social system. It was attempt to convert the USA into Switzerland of sort with dominant in the world financial sector on the base of dollar as a reserve currency. Destruction of unions and outsourcing of manufacturing also led to the deterioration of the balance of power when there was no countervailing force for financial oligarchy. Results are obvious and were to a certain extent inevitable.

The real problem is that when any ideology even as intellectually bankrupt as “The dictatorship of the market” takes hold in the society it is very difficult to get rid of it. It took the former Soviet Union 70 years to disintegrate. In no way it’s enough to have an intellectual and moral revolution to get rid of the old ideology.

We have what we have and now need to face consequences for years if not decades to come.

[Nov 9. 2009] Putting the MERS Controversies in Perspective

So what does it take for a homeowner to win a foreclosure case?

To win in the short run, the homeowner needs to show something wrong with the paperwork – an incomplete or untimely chain of assignments, a lost note, or a violation of whatever peculiar requirements may exist under the local foreclosure law. In order to win in the long run, the homeowner probably needs to be able to show some type of harm beyond the foreclosure itself. Bankruptcy cases are a little different, but in foreclosure cases the vast majority of judges simply aren’t going to start canceling mortgage debt without a very good reason. Here are some potential issues a homeowner might be able to raise to stop or seriously slow down a foreclosure

Selected Comments

lawyerliz:

See, the thing is these guys pushed the idea of ownership to infinity and beyond maybe.

  1. You have mtges in a pool.
    Okay.
     
  2. You sell a 1% interest in the pool to 100 people/entities and everybody gets 1% of the gains & losses.
    Okay.
     
  3. You chop up the pool and squish the pieces together with other pools, before selling the 1% to 100 people. Then you chop those frankenstein pieces into AAA and ZZZ and sell those in 100 pieces

    Maybe ok.
     

  4. You cause the different pieces to be paid off at different times and different rates having little to nothing to do with the initial note rate. Who ever is getting the money--and at this point who knows? -- have conflicts with other people in different tranches.

    Ok, not ok?
     

  5. Somebody hedges losses on some of the losses on some of those fragments and some of the somebodies get paid off by honest, non-broke or gov't backed counterparties and some don't. So some pieces of pieces of pieces are actually paid off.

    Say 5% of your mtg is actually paid off and you are not underwater. You can't pay 'cause you lost your job. Shouldn't you at least get 5% of the proceeds of the house is foreclosed and sold?

Actually, 2 steps are missing here:

A. Borrower makes a mtg.

B. Mortgagee assigns the mtg.

Shouldn't they tell you if somebody paid off part of your mortgage?

How do we know these idiots haven't lost track of who they owe all these little pieces to? How do we know whether any proceeds of the foreclosure sale will go to the right people? How do we know the counterparty won't get po-ed, and in some especially egregious case, sue the borrower (s)?

albrt:

The parties that paid off on the CDS might be entitled to collect on the mortgage. But the chances are slim anybody ever endorsed a note over to them, so they probably couldn't use an ordinary foreclosure process. Plus, keep in mind that anybody could buy a credit default swap. AIG probably doesn't even know which of the people who bought credit default swaps actually owned a piece of the underlying mortgage pool.

Even worse, a lot of the swaps were written on a "Markit" index, so the seller may not have any way to make a claim on a particular pool of mortgages.

One of the hazards of letting people sell something as "insurance" when it is not subject to any of the rules that cover insurance.

dryfly:

 albrt wrote:

One of the hazards of letting people sell something as "insurance" when it is not subject to any of the rules that cover insurance.

What is the chance of that changing? Not necessarily via court ruling, regs or legislative requirement but because future CDS won't be written w/out the option of taking claim over the collateral [prior to pay out]? I certainly wouldn't sign on to a blank check authorization to take me to the cleaners unless I could touch & feel what caused me to have to 'accept' that loss. The smartest guys in the room should at least be smarter than me.

Any ideas?

Nanoo-Nanoo:

Gawd: Did Madoff or Gramm come up with this bright idea? How did this get so distorted and mixed up at such a MASSIVE scale? Is this what the 'best and brightest' do and how the hell didn't a regulator, the fed (or any central bank) anyone with a grain of sense see a problem with this?

.lawyerliz:

They clearly weren't smarter then you. Oh, maybe they could do equations you couldn't solve, but the common sense was clearly missing in action.

dryfly:

Nanoo-Nanoo wrote:

Did Madoff or Gramm come up with this bright idea?

Gramm's only 'idea' was to keep Gubbmint Reggalaters out of the process - other than that he was an empty vessel.

albrt:

I definitely think anything sold as insurance should be regulated as insurance. That would mean they would need to maintain reasonable reserves, they would probably only sell it to someone who has an insurable interest, etc.

If they want to sell somebody an instrument that is a naked option on the secondary mortgage market, they should call it that.

But I don't see any sign that anyone in authority is moving in this direction. The most they are currently talking about is making some small fraction of these deals trade on some type of exchange.

NorkaWest:

albrt wrote:

One of the hazards of letting people sell something as "insurance" when it is not subject to any of the rules that cover insurance.

"No subrogation for you" said the Soup Nazi.

lawyerliz:

The best and brightest used to do exotic math, or worry about string theory, or add weird chemicals together or look for the vanishing yeti, or dig holes in the ground and analyze pottery. None of this required too much in the way of an intuitive understanding of what motivates people.

People who work for banks need to understand people, bless their greedy little hearts.

albrt:

 I don't have a blog. I am just generally referring to the fact that the CDS written by AIG and others have resulted in some investors (such as Goldman Sachs) being repaid for their mortgage investments, and I think a homeowner being foreclosed might be entitled to inquire whether the debt has already been paid off. Especially if it was the taxpayers that paid it.

CDS refers to credit default swaps, which were sold as "insurance" to protect mortgage investors in case their mortgage securities went bust. But they were also sold to anyone else who wanted to make a bet against mortgage securities. The banks then used the revenue from the swaps to create "synthetic" credit-backed securities, and on and on. It was quite the house of cards, and it appears the Obama administration's main goal in banking reform is to set the house of cards back up again. I don't think they can do it because it basically didn't work.

NorkaWest:

Rob Dawg wrote:

i think you hit bullseye with the discussion of insurance like products without insurance oversight.

But they aren't insurance like products. They are "bets", pure and simple. You just hope that your bookie isn't an AIG without the Federal backstop.

albrt :

Norka - I agree these products don't have any of the important characteristics of insurance, but if you looked at the marketing materials from Markit and many others circa 2006, they were blatantly advertising it as insurance, with the marketing message being repeated over and over in the financial press.

mock turtle:

albrt

thanks. i readd the post and it just didnt register the by line "CR Note: This is a guest post from albrt."

I am a dummy. great post and thanks

btw...i just did a search of naked capitalism...thinking liz was refering to... and it reminded me of the very incitefull observations you posted there a recent favorite

"I would agree with this comment, except that we are ignoring the elephant in the room:

Why is everyone so hesitant to suggest that a primary purpose of the Bush treasury, the Obama treasury and the Bernanke fed is to enrich bankers and bank bondholders?

By that standard they were wildly successful, and all their actions to date are well explained. They also succeeded in preventing this Potemkin system of large banks from being exposed as a fraud, but that is important only to the extent it preserves the ability to enrich bankers in the future."

from Naked capitalism nov 5th

lawyerliz:

One ummm, caveat, albrt, I doubt that any mtg got entirely paid off due to hedging swaps, what ever. Wouldn't it be only a piece of a mtg?

albrt:

Yes Liz, I think in many cases it would be just a piece. On the other hand, who knows whether some of the banks had "insurance" on non-securitized mortgages?

albrt:

That's a very good point about attorneys' fees. In some states the loser has to pay the other side's attorneys' fees in a case like this, and the mortgage itself probably says something about paying fees.

Anybody who is thinking about expanding litigation by asking about how the mortgages were securitized should take a hard look at the attorney fee situation.

lawyerliz:

I never actually expected to win a case, just to drag it out until cram-downs were legalized. And I've told everybody to expect to pay or move out eventually. Now, with mods. . . and what I've learned from y'all here, well, maybe I could actually win one??? Nahhhhh.

mock turtle:

it defies a reasonable sense of justice that investor could buy a CDS and then go massively short (and not too long ago naked short) and then add rumors in the hopes of driving the underlying investment into the ground thus profiting from the short and the insurance how is this different from insuring your neighbors house against fire and then committing arson

crazyv:

 albrt wrote:

CDS refers to credit default swaps, which were sold as "insurance" to protect mortgage investors

I think you will find that the seller's of CDS went out of their way to make sure that they wouldn't be considered insurance in the strict statutory sense. IMO a judge who deemed those contracts to be insurance from a statutory sense (something that would be necessary to consider whether the investors had been paid off) would be doing much more than just getting involved in a foreclosure proceeding.

It would expose the seller of CDS to possible criminal and civil liability for selling insurance without a license or approval of the state insurance commissioners. Talk about throwing a grenade into a crowd- it would threaten not only CDS but all swap transactions and over the counter derivative transactions.

lawyerliz:

Good question and no. Mortgage insurances basically stopped and were replaced by 80-20 mtges.
Or 80-15-5, where the borrower had to put some money down.

Mgic paid off only after the shouting was over; it really was insurance. If the 80% lender lost 30 % somebody was out of luck. Refresh my memory, somebody--did mgic buy the mtg from the lender, or just reimburse them?

crazyv:

mock turtle wrote:

Why is everyone so hesitant to suggest that a primary purpose of the Bush treasury, the Obama treasury and the Bernanke fed is to enrich bankers and bank bondholders?

hey Mock - when I said that yesterday in my denunciation of Obama you took great umbrage - what changed?

josap:

crazyv wrote:

it would threaten not only CDS but all swap transactions and over the counter derivative transactions.

Yes it would. And that is exactly what they need to do. Because it was fraud, it was a bet sold as insurance in a way designed to get around insurance law.

crazyv:

mock turtle wrote:

how is this different from insuring your neighbors house against fire and then committing arson

It is why when buying insurance you must have an insurable interest to purchase insurance. However, derivatives were not considered insurance they were considered financial products and therefore the statutory rules regarding insurance didn't apply. It is all about a continuum. pick two adjoining points and they are not very different. But the law requires that a line be drawn somewhere. If you didn't then paying somebody a fixed amount to shovel your driveway for the season (irrespective of how much it snowed ) would be considered an insurance product.

merchants of fear:

Liz - '...more time for answering the discovery...'

albrt - '...asking how the mortgages were securitized...loser has to pay the other side's attorney fees.'

So the lender is having their attorneys work for 'discovery'...this is where the attorney bills would add up as the lender has to do the work to find out what happened in the chain, securitization, or the 'lost' paperwork...the lender's bill could be quite large I would think...MERS isn't even really the lender...but they would have their attorneys?...along with the 'original' lenders themselves?...how many attorney fee bills would be accumulating?

Allen C:

"The smartest guys in the room should at least be smarter than me."

They effectively turned a relatively straight forward transaction (writing mortgages) into a high tech shell game garnering massive compensation. They have money. The poor sap who lost his house and job looks rather ignorant in comparison. Most of us prefer smart folks engaging in activities that result in some positive impact on society. Greedy smart and crooked smart are unfortunate combinations.

crazyv:

mock turtle wrote:

yep and that is the policy that we are criticizing here....CDS should have been regulated but were not...in fact were explicitly protected from reg under gramm leach bliley act of 1999

ok so why just credit default swaps but not all swap transactions. If you believe we should regulate all swaps as insurance why not put options on stocks. My point is whatever point you decide to draw the line - I can give you a transaction that is essentially the same. In determining whether something is insurance from a statutory perspective it matters a great deal who the counter parties to the transaction are. We have a long tradition that transaction amongst sophisticated investors have to meet a much lower regulatory threshold. I would suggest that the problem here is not with the regulation of CDS but many people who considered themselves to sophisticated were in fact not.

Allen C:

Great post and commentary! The lawyerliz commentary on ownership seems spot on. Makes one wonder if the entire mess comes grinding to a halt. High tech shell game...

crazyv :

Allen C wrote:

The poor sap who lost his house and job looks rather ignorant in comparison

Many of the people who are now losing their homes should never have been in them in the first place. Of the balance many of them would have lost their homes even if they had taken a conventional mortgage. There are some people who are losing their homes because the were pushed into an inappropriate mortgage and they deserve sympathy.

But that misrepresentation was not done by the Wall Street but rather your friendly mortgage broker or real estate agent.

For those complaining that I did everything right and my home is worth half as much -- my response it wouldn't have been worth twice as much without the the games.

Those folks would like to pretend that home prices would have reached the levels they did without the shenanigans.

For those who bought at the top - all I can say is if you had paid attention to CR and others you would have remained a renter.

ResistanceIsFeudal:

Hey, careful now, high-tech shell games are one of our only remaining growth industries!

Lobbyist Ben Dover:

How could you claim "you did everything right" and be substantially underwater. Market research including rent ratio's should have said run like hell especially when things near the top. Few victims from their own actions.

Allen C:

We do live in a Caveat Emptor society. In defense of the financially ignorant, a consumer could in the past count on a bank making a reasonably intelligent loan.

barfly:

 We do live in a Caveat Emptor society.

"Gotcha" capitalism

crazyv:

mock turtle wrote:

bad example.

Actually not- if you read the your states insurance statutes very literally that transaction is an insurance transaction. The point I was making is that there is a continuum of transactions all of which could be considered insurance via a narrow reading. Clearly we draw a line somewhere and two adjoining transaction on opposite sides of the line although functionally the same will be subject to completely different regulatory treatment.

As to regulation of CDS - no I don't believe that they should be regulated. I think in many respects this is same debate as gun control. If you believe in gun control then it would be consistent to believe in regulation of CDS. The problem was not CDS but the people who were using them. None of this would be an issue if we had not allowed commercial banks (back stopped by the tax payer and who play a pivotal role in the economy) to get involved in a derive so much of their profits from dabbling in these types of transactions. It was the shadow banking system that was the problem. If the major commercial banks hadn't been involved the damage would have been contained to essentially those playing in the casino. AIG's loss would have been GS gain up to the point where AIG could no longer pay Goldman.

Disempowered Paper Pusher:

barfly wrote: "Gotcha" capitalism

Or, IIRC from Goodfellas, "Screw you, pay up" Capitalism.

Allen C:

"CDS should have been regulated"

I have come to view derivatives as tail wagging the dog (exchange traded instruments). I really do fear a sudden stop when a critical mass of derivative products suddenly go south.

Lobbyist Ben Dover:

No we had a break down of honesty on all economic and social levels. Everybody screwed each other and thought they could pass it along. The education level of many was high as still played the game.

EvilHenryPaulson:

albrt

• Where is the other half of the post ? : )

re: Loss of claims and defenses. That seems like an extremely easy, and therefore un-law-like, way of shielding oneself from liability. Liability must end up somewhere in a way that encourages responsibility, and if it doesn't that feels like a supreme court case to me. If I buy a stolen car in good faith, and then the car is found out to be stolen I will lose the car and it will be up to me to recover the money I paid to the thief

double recovery. That idea will stay with me, thanks for sharing the legal precept. What about all the big banks that had legacy assets 'insured' by the Federal Reserve, or the smaller banks that bought similar legacy assets guaranteed by the FDIC?

edit: answer to double recovery is that CDS is a naked put, gambling. ? imagine the tax revenues --

crazyv:

Disempowered Paper Pusher wrote:

In the past, if the borrower took a loss(foreclosure) the bank took a loss as well.

Now the bank, or more precisely the loan originator, wins if the borrower wins or loses.

That is exactly right - and that is what needs to be addressed because it is at the core of all subsequent transactions. Rather than going into massive regulatory overload we would have a simple rule- Depository institutions with FDIC guarantees and all entities subject to ERISA can only buy a securitized asset if at least 20% of the underlying assets is owned and on the books of depository institution that is overseen by the FDIC, OCC .

mock turtle:

crazyv said

"As to regulation of CDS - no I don't believe that they should be regulated. I think in many respects this is same debate as gun control. If you believe in gun control then it would be consistent to believe in regulation of CDS."

--------------------------------------------------------------------------------

the right to keep and bear arms is part of the bill of rights

writing a CDS contract is not

a CDS is not like a rifle or a pistol

a CDSs are like a weapons of mass destruction

the lack of regulation and transparency of credit defualt swaps, and fraud, and leverage are at the core of our destruction

by the way even constitutional rights may be subject to limitations

you cant yell fire in a crowded theater where there is no fire

you cant carry your pistol into the the federal prison at joliet when visiting a friend who is an inmate

merchants of fear :

The tricky lure was to get renters (even with bad credit) or 'move-up' buyers to become 'home owners' with 'bait & switch' exotic loans that were easy to get into but impossible for many to continue making payments. The lending arrangements were not viable. Buyers were suckered. many have completely ruined credit now and lost down payments. There must be a fair way to resolve this 'consumer rip-off'.

Allen C:

"Caveat Emptor capitalism exists because exploiting another's lack of knowledge is virtuous and highly rewarded in our society. "

Caveat Vendor is inefficient. I conclude that many of these products were sold due to end-to-end control fraud. Imagine the fallout from all the voided contracts.

crazyv:

mock turtle wrote:

the lack of regulation and transparency of credit defualt swaps, and fraud, and leverage are at the core of our destruction

Then you must be very optimistic about our future - because the solution is so easy. I have consistently said and will say so again- most people have the cart before the horse. It is our underlying economic rot- median wages stagnant for almost a decade that precipitated the problems on Wall Street not the other way around. It serves the PTB to create a narrative that has Wall Street's melt down as the cause of the problem - how else can you get the tax payer to bail them out? If median wages had grown during the last decade by 2% (well under the productivity gains) there wouldn't have been a mortgage melt down because people would have been able to afford their payments.

sdtfs:

Buyers were suckered. many have completely ruined credit now and lost down payments. There must be a fair way to resolve this 'consumer rip-off'.

Generally I am sympathetic with "the common man", but there were adequate warnings which they choose to disregard or they were the recipients of bad advice from their friends and neighbors. The fair way to resolve this is foreclosure.

crazyv:

merchants of fear wrote:

There must be a fair way to resolve this 'consumer rip-off'.

Most people who now complain of being ripped off were begging to be allowed into the game. Many got to be in homes that they could only dream off. They saw and heard all about people who were getting rich in real estate and wanted in. There are a few and I believe that it is only a few who wanted to do the right thing but got caught in the fine print.

merchants of fear:

Globalization has killed wages and many jobs. Credit was used where the paychecks were short. The RE/CRE bubble was a scam to cash in on the leftovers of globalization, creating a fee and commission profit machine, an 'asset' timing pump and dump machine, and the means to drain banks of loan money to be taken away...and to be 'replaced' by 'bailout/stimulus' money...so a double hit to the public and a double take for the various profiteers of Bubbles/Busts...

crazyv:

mock turtle wrote:

where are the good jobs gonna come from

First we have to accept that what is good for Wall Street is not good for America. When health insurance company stocks rally following whatever happens politically people should have the sense to understand if the market thinks it is good for the insurers it probably is not good for me. Unfortunately everybody wants to get rich quick and some people do make it in the market but it hasn't dawned on people that those great profits that Wall Street loves - the flip side of corporate profits at all time highs relative to GDP is stagnant wages. We are a nation that is eating our seed corn and thinking we had a great harvest.

merchants of fear :

Globalization has killed wages and many jobs. Credit was used where the paychecks were short. The RE/CRE bubble was a scam to cash in on the leftovers of globalization, creating a fee and commission profit machine, an 'asset' timing pump and dump machine, and the means to drain banks of loan money to be taken away...and to be 'replaced' by 'bailout/stimulus' money...so a double hit to the public and a double take for the various profiteers of Bubbles/Busts...

crazyv:

mock turtle wrote:

where are the good jobs gonna come from

First we have to accept that what is good for Wall Street is not good for America. When health insurance company stocks rally following whatever happens politically people should have the sense to understand if the market thinks it is good for the insurers it probably is not good for me. Unfortunately everybody wants to get rich quick and some people do make it in the market but it hasn't dawned on people that those great profits that Wall Street loves - the flip side of corporate profits at all time highs relative to GDP is stagnant wages. We are a nation that is eating our seed corn and thinking we had a great harvest.

Allen C:

"Wall Street is not good for America. "

Somehow, many are/were convinced that financial services is more than an intermediary. In the end, there is no real, tangible production. The massive costs are ultimately borne by the real producers of tangible value.

barfly:

Ring of Fire Radio | Wall Street's Naked Swindle

Robert F. Kennedy, Jr. interviews Matt Taibbi

lawyerliz:

As far as I know, my discovery sits on a desk at the foreclosure mill, and the most that happens is that they object, or it is sent over to the bank/lender/somewhere where it sits on some paralegal/clerk's desk who has absolutely no idea what I am asking for or what any of it means, and then it just sits and sits. I have never got a meaningful response to any request to lenders, and I don't expect to get one now.

lawyerliz:

Of the ones I closed from say, 2004 to 2007, August, most put little or nothing down. Plus they lost a lot of closing costs. The borrowers don't seem to care about those losses, what they care about is being underwater.

Of course I have defensive pleading addressed to that but they care more about their credit score, which they accept to be trashed.

albrt:

EHP:

There are some additional topics that I would hope to explore at some point.

One is the concept of an innocent purchaser. In many contexts, the law does protect the innocent purchaser, and so the person who bought the stolen car would get to keep it. But you aren't considered innocent if you should have known from the title documents that the car was stolen. The same concept applies to real estate, so covering up the chain of title can have an important effect on who wins or loses in a mortgage lawsuit.

The double recovery issue is tough and very complicated. It is not necessarily clear that the homeowner should get the benefit of the lender's decision to buy "insurance," but it is also not clear that the lender should get bailed out by the taxpayer, and then go ahead and foreclose on the property anyway. This is especially difficult to resolve when it is not at all clear who owns what.

Xenos:

josap wrote:

When you get a mortgage of over 80% the buyer pays mortgage insurance on the loan.
If the buyer defaults, the lender gets paid by the insurance and gets the house.

I have not read the mortgage insurance documents, but my understanding is the insurance covers actual losses by the bank. So if they foreclose at a loss, that loss gets covered. I don't think you enter a double-payment scenario unless the bank takes payment under the insurance policy and then pursues a deficiency judgment on the former owner.

So a claim on the insurance would not be ripe until the bank realizes a loss on the security.. no naked options there.

Rob Dawg:

lawyerliz wrote:

If the judge decides that the Plaintiff has no standing they can dismiss the case. Typically you get 2 or 3 or 4 chances to amend your complaint so it can't be dismissed. So you are dismissed, but with the right to amend.

The docket is so stuffed I can see judges sending a message with dismissal with prejudice on a failed second bite of the apple.

lawyerliz:

Nah, that would get successfully appealed and they all hate being reversed.

lawyerliz:

There are now a lot of attys doing this, and some of them are actually litigators, which I'm not. It has now been at least 2 years since people started seriously defending and the banks have not changed their cheapskate posture one iota.

The foreclosure mills don't get paid enough. They only get 1.2, 1.3k a case. They have not changed their tactics any either.

I doubt any of them read CR.

Gosh, I hope not!!!

[Nov 8, 2009] Summary and a Look Ahead

The Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. The larger the asset bubble, the bigger is the crash.

[Nov 8, 2009] US consumers failing to spend, data show by Stacy-Marie Ishmael

The risk of a double-dip recession will probably increase when government stimulus started to fade -- the second half of 2010 or even earlier.
Nov 06, 2009 | alphaville

Proponents of the theory that there has been a secular shift in the American psyche — away for a culture of consumerism and toward a new-found frugality — will be heartened by the latest consumer credit data from the Federal Reserve.

On the other hand, anyone betting on a rebound in US consumer spending or hoping households would power future economic growth are in for a shock.

As Reuters reported on Friday, US consumer credit declined by a bigger-than-expected $14.8bn in September. Analysts polled by Reuters had expected the figure to fall by about $10bn.

As usual, there were revisions to the data for previous months; August’s figures were revised to show a drop of $9.8bn, compared with a previously reported decline of $12bn.

Still, the September numbers mark eight consecutive months of decline, the longest losing streak since the series started in 1943.

Americans cut back sharply on everything from cars to college to credit cards, according to Reuters:

[Nov 8, 2009] Krugman Declares "Mission Accomplished," Maginot Line Completed

Jesse's Café Américain

The genuine challenge in this era of fiat currency will be to avoid the 'zombification' of the economy, the appearance of vitality with none of the self-sustaining growth.

It may be discovered that the key to coming out of a crisis permanently is not how quickly and dramatically one inflates the money supply, or even how long one maintains it, and how many stimulus programs one can create, but rather how quickly and capably a country can reform, can change the underlying structures that caused the problem in the first place.

Japan has been doing it slowly because of its embedded kereitsu structure and government bureaucracy supported by a de facto one party system under the LDP. In the 1930's the impetus for reform was overturned by a strict constructionist Supreme Court and an obstructionist Republican Congress. The story of our time might be the perils of regulatory and political capture.
Before this Administration declares "Mission Accomplished" and high fives its victorious recovery, they may wish to consider that they have done the obvious quickly in one dimension, but have done very little to change the dynamics which created the crisis in the first place, choosing instead to support the status quo to a fault, partly out of ignorance and to some extent because of a pervasive and endemic corruption of the political process.

There are three traits that make a nominal bounce in production fueled by a record expansion in the monetary base a success: sustainable growth without subsidy, sustainable growth without subsidy, and sustainable growth without subsidy. And this can only be achieved by changing the game, reforming what was wrong with the system in the first place, if this is what caused the crisis.

Our forecast is that Ben and Team Obama are failing badly because they are fighting the last war, in the almost classic style of incompetent generals who lost the early stages of the Second World War because they were using the game plan from the First. And plans for a Vichy-style government establishing l'état financière seem to be well underway, in a general surrender of the goverance of the nation to the econorati.

For all its flaws, at least the Clinton Administration used to conduct polls to see which way the public was leaning, and took its cues from that. The Obama Administration blatantly ignores public outrage, and takes its calls from Wall Street, literally, and forms its policy and laws around what they want, or at most, will grudgingly accept.

[Nov 08, 2009] Empty boasts of glory by John Browne

Nov 6, 2009 | Asia Times

To the delight of its media cheerleaders, the United States government last week announced that economic growth had returned and the recession had ended. But before we start celebrating one quarter of modest growth, we should realize the only force driving this apparent recovery is an enormous increase in government spending.

To finance its largesse, the government is now borrowing at a rate that has ordinary citizens and the international community extremely concerned.

Leading into the first election season under Barack Obama's reign, this unprecedented government borrowing and spending is creating a false sense of security. The activity has allowed gross domestic product (GDP) to increase despite stagnation in corporate and consumer spending.

Small businesses, the most important creators of new jobs, are nervous. Due to uncertain economic conditions and a high degree of regulatory uncertainty, they are hoarding cash rather than investing. Indeed, their largest expenditures are often solely to replenish inventories.

Likewise, consumers are rationally hoarding their resources. Year over year, consumer spending, which constitutes 70% of GDP, is essentially flat. With such a large segment of the economy quiescent, the percentage increase in public sector spending has to be very large in order to push the GDP upward.

The new government spending spree has focused on major stimulus initiatives, including the new homebuyer tax credit and "cash for clunkers".

Early results are showing that spending on autos dropped to recession-levels immediately after "cash for clunkers" ended. Meanwhile, some reports are estimating that the program cost US$24,000 for every additional vehicle it caused to be sold.

The multi-billion-dollar tax credit for first-time homebuyers juiced real estate sales and provided a strong boost to GDP in the third quarter. But the net result is that many responsible young people, who had chosen to rent and save in the face of a declining housing market, are now saddled with mortgages they cannot afford. These "homeowners" will quickly join the ranks of the foreclosed.

Perhaps the most concerning aspect of GDP growth is that, even with a deeply progressive administration spending our children's children's money, the best we can achieve is a modest, fleeting boost in growth. Even the government's biggest apologists have a hard time explaining how these gains can last without continued stimulus. In short, this country is not just bankrupt today, but for generations to come. This is the real truth and should concern those with investments within the United States.

[Nov 08, 2009]  A Tsunami of Red Ink

"2010 looks like an unavoidable bloodbath for a multitude of 'zombie' borrowers, investors and lenders..." About $26.6 billion of CMBS loans were 60 days or more past due.  Add to this mess  credit card delinquencies and banks are in hot water again. “We don’t have a sustainable recovery yet,” Kenneth Rosen, a University of California economist, said in a panel discussion with Torto. “The problem is not supply, but how we get demand back.”
Nov 06, 2009 | Financial Armageddon

"Why This Real Estate Bust Is Different" (BusinessWeek)

What's striking is how quickly some big commercial deals have gone south.

... ... ...

Commercial lending mirrored mortgage lending in another way: Loans were made based on an unshakable belief that the market would never go down. An analysis by research firm REIS of mortgage securities created between 2005 and 2008 found that income projections for properties exceeded their historical performances by an average of 15%. "It was all based on assumption of cash flow," says Howard S. Landsberg of New York-based consultant Weiser Realty Advisors. "If you couldn't afford to pay the bank back now, in three years you could count on another $20 a square foot" in rent. When the numbers didn't add up, some lenders got imaginative. Says a banker at a large Wall Street firm: "If the cash flow wasn't there, you had to ignore it or find ways to create it."

"Gloomy Times for Commercial Real Estate" (San Francisco Chronicle)

No quick recovery is in store, the report said. "2010 looks like an unavoidable bloodbath for a multitude of 'zombie' borrowers, investors and lenders," it said. "The shake-out period may extend several years as even some conservative owners with well-underwritten loans from the early 2000s see their equity destroyed."

"$500 Billion Of Commercial Real Estate To Mature Soon" (The Atlantic Business Channel)

And that storm is coming. Greenlee also says:

Of particular concern, almost $500 billion of CRE loans will mature during each of the next few years.

$500 billion isn't a small number by anyone's standards. Don't expect these loans to be rolled over very easily either. Banks are still keeping clenching their wallets tightly, and the commercial mortgage-backed securities market remains largely closed. Speaking of CMBS, banks have a lot of it, and those delinquencies are increasing as well, says Greenlee.

"Fitch Conference: Commercial Real Estate Decline & Negative Credit Effects; Muni Market Downturn" (BusinessWire)

Fitch Ratings will host its annual Morning Credit Brief Conference on Tuesday, Nov. 17, 2009 at the Grand Hyatt in midtown Manhattan with a focus on the broad credit implications for the collapsing commercial real estate market.

The performance metrics of commercial real estate (CRE), an area with a significant risk exposure for financial institutions and the structured finance market, continues to deteriorate at an unprecedented pace. While CRE loans, excluding the more problematic construction and development portfolios, represent more than 125% of total equity for the 20 largest banks rated by Fitch, the risk is even higher for banks with less than $20 billion in assets, as average CRE exposure represents more than 200% of total equity for these institutions. The negative credit implications of the declining CRE market are widespread, affecting not only large and regional financial institutions, but also CMBS entities, insurance companies and REITs whose investment portfolios are seeing a sharp decline in value due to their exposure to falling real estate prices.

"U.S. Shops and Apartments Head for Record Vacancies" (Bloomberg)

Stores, apartment buildings and warehouses in the U.S. will set new vacancy records before a recovery takes hold in the job and commercial property markets, according to a forecast by CB Richard Ellis Group Inc.

Vacancies at industrial properties will climb to almost 16 percent in 2011 and apartment vacancies will top out at 8.1 percent this quarter, CBRE chief economist Ray Torto said in a presentation at the Urban Land Institute convention in San Francisco. The proportion of empty space at shopping centers and malls will increase to about 13 percent in 2010, he said.

U.S. commercial real estate prices have plunged almost 41 percent since October 2007, the Moody’s/REAL Commercial Property Price Indices show. The highest unemployment since 1983 has lowered demand for office and retail space and reduced consumer confidence and spending. Job cuts are also prompting tenants to move out of apartments.

“We don’t have a sustainable recovery yet,” Kenneth Rosen, a University of California economist, said in a panel discussion with Torto. “The problem is not supply, but how we get demand back.”

U.S. office vacancies are forecast to reach 18.6 percent in the first quarter of 2011, just shy of 1991’s 19.1 percent record, Torto said.

“Increasingly, investors are viewing office as a kind of non-core investment, which is a concern,” said Jonathan D. Miller, author of PricewaterhouseCoopers’s “Emerging Trends in Real Estate” report, released today. “Tenants come and go, and with these cyclical swings, it can be a troublesome investment if you don’t time it right.”

"Commercial Property ‘Long Way’ From Rebound, GE’s Pressman Says" (Bloomberg)

The U.S. commercial property market is far from recovery and needs job growth, sustained low interest rates and further government support, said GE Capital Real Estate Chief Executive Officer Ronald Pressman.

“We’re a long way from where we’d like to be,” Pressman said at the Urban Land Institute’s annual meeting in San Francisco yesterday. “The stakes are very big here.”

Defaults and late payments on property loans sold as commercial mortgage-backed securities jumped more than fivefold to 4.52 percent of the total in the third quarter from a year earlier, New York-based real estate researcher Reis Inc. said. About $26.6 billion of CMBS loans were 60 days or more past due.

Commercial real estate won’t stop falling for 18 to 24 months after the economy bottoms out, as the full effect of the recession hits landlords, Pressman said in an interview at the San Francisco event. The unemployment rate needs to drop to 5 percent to 6 percent before the property market rebounds, according to his presentation. Joblessness rose to 9.8 percent in September, the highest since 1983.

About $22 billion worth of transactions will be completed this year, or 5 percent of the 2007 market peak, Roy March, CEO of commercial brokerage Eastdil Secured, said at the same event. Deals are down 74 percent from 2008 for offices, 72 percent for apartment buildings and 60 percent for retail properties, he said.

Stores, apartment buildings and warehouses in the U.S. will set vacancy records before a recovery takes hold, according to a forecast by CB Richard Ellis Group Inc. Office vacancies will fall just short of the record set in 1991, it said.

And to make matters worse, the agency that oversees much of the bank sector has decided, as the Dayton Business Journal reports in "FDIC Makes Statement on Commercial Real Estate Workouts," that the way to deal with the problem is to encourage lenders to rely on a dangerously flawed approach that is nonetheless all the rage nowadays: pretend and extend.

The Federal Deposit Insurance Corp. adopted a policy statement supporting prudent commercial real estate loan workouts, it reported Tuesday.

FDIC’s statement emphasizes performing loans, including those that have been renewed or restructured on reasonable modified terms, made to creditworthy borrowers will not be subject to adverse classification solely because the value of the underlying collateral declined.

The policy statement gives guidance to examiners and financial institutions that are working with commercial real estate borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties, the FDIC said.

Agencies of the Federal Financial Institutions Examination Council said prudent loan workouts are often in the best interest of both financial institutions and borrowers, particularly during difficult economic conditions. Financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of borrowers' financial conditions will not be subject to criticism for those efforts, even if the restructured loans have weaknesses that result in adverse credit classifications, the FDIC said.

Click here to read the full policy statement.

[Nov 7, 2009] Why did Warren Buffett pay $44bn for a ticket to ride - Telegraph

Nigel Gault, of Global Insight, says the economic rebound has largely been a result of "vigorous fiscal and monetary stimulus" by the US government. He does not expect a recovery led by the private sector until 2011.

[Nov 7, 2009] CDS report Standing on the shoulders of the Fed

"Invisible helicopters" still at work and asset market still rising. But if something cannot go forever it will eventually stop. 
FT Alphaville

The knowledge that the Fed is standing behind the economy helped support the markets today in a difficult session. Of course, the glut of liquidity provided by the Fed and other central banks is helping financial markets rally across the board. It will need a significant negative catalyst to divert investors from their chase for yield.

[Nov 7, 2009] GM Backs Out of Magna Deal It's Each Nation to Itself

Seeking Alpha

Davewmart:

I am not too sure that it is economic nationalism that is the chief threat to our wellbeing.
Internationalism has largely operated as a cover for the most powerful nations to grab as much as they can, and has provided the cover for the decimation of working people's livelihoods, the creation of an underclass in the West, and the eventual impoverishment of everyone, as most people in the current recession simply have not got the income or surety of income to drag us out of recession.

This seems to have been the practical result of outsourcing, one manifestation of internationalism.

The results in the Third World have been even worse, with the classic example of crazed ideologes from the IMF demanding that The Haitian people remain responsible for loans taken out by dictators, granted by greedy bankers and used largely to finance excessive consumption by the dictator and the military means needed to maintain the oppression.
The IMF demanded that support for agriculture be eliminated, in the interest of the 'free' market, which lsimply meant that peasant farmers were destroyed by hugely subsidised US and European food.

The result has been a population living on mud biscuits.

The same band of happy and righteous intenationalists and 'free' marketeers have now reduced America to a position where 50% of it's children will be on food stamps at some time.

Not that their free market principles have stopped them socialising the losses of the connected oligarchs.

So forgive me if I can't see internationalism and the free market as the shining city on a hill.

At least nationalists are assuming some responsibility to look after their own.

That responsibility is sacrificed by the internationalists in service to an abstaction.

Leftfield:

Davewmart: So true.

Whatever the posturing, as the article says, Magna may have likely been just as bad for the workers as GM. Now, lots of politicians can huff over their turf in a combination of offended ego and vying for support from their marks, I mean, supporters.

Germans have plenty of ammunition as one of their banks was stiffed about 1/2 $billion on an overnight loan as Lehman went under. That used to sound like real money, remember? How could Obama throw Merkel into such a humiliating situation?

More layers of politicians, such as the EU probably is even more idiotic and wasteful than the League of Nations that did so much to prevent WWII.

[Nov 7, 2009] David Michael Green Can You Hear Us Now

As most 401K investors is sheeple that will be fleeced anyway and can do very little about it (gold is probably the only way to vote "non-confidence" in the current government but it is unclear whether it the price was manipulated by speculator who understand the level of dissatisfaction and mistrust of the government (aka "inflationary expectations in Bernanke speak). Still it make sense to try to understand the mechanic of the fleecing.  Obama didn’t win elections because of a populist uprising, but because he was one of the boys. and this alwyas is the case. But after becoming president Obama seems to remain a marionette in hands of the same powerful interests which secured his election. In ant case the phase " What does surprise me, though, is just how bad he is at playing politics, especially where his own self-interest is overwhelmingly at stake" is pretty naive and should be taken with a grain of salt... It is not simply the Obama Administration that is captured, there is a general capture of the entire beltway and state assemblies.

I am not surprised that Barack Obama – like the last two Democratic presidents – has turned out to be a conservative, corporate creature whose interest in the public interest is scarce and superficial.  What does surprise me, though, is just how bad he is at playing politics, especially where his own self-interest is overwhelmingly at stake.  Can this really be the same person who ran such a remarkable campaign last year, stealing the presidency from two of the great figureheads of American politics?

Obama is one of the most articulate politicians in American history.  And yet, his communications strategy is the absolute worst I’ve seen since Carter.  In fact, what’s most stunning about it is that his team seems to have dismissed all the lessons learned over the last three decades – especially from masterful Republican administrations – about how to market presidents and policies from the White House.  This is no longer rocket science, if it ever was.  How can a guy this sharp be so clueless and, thus, adrift?

Obama is also one of the smartest people ever to sit in the Oval Office, but he has demonstrated astonishing levels of cluelessness about what the public wants, about the nature of his opposition, and about what makes a presidency successful.  He doesn’t understand that the public will follow you if you lead them, especially if you do so with passion.  He doesn’t get that the conservative movement is a lethal cancer seeking to commodify, monetize and profitize every aspect of America, and therefore is committed to the destruction of all else, including this administration, despite even that it is essentially staffed by Goldman Sachs.  He doesn’t understand that the most successful American presidents were the ones who brought a vision to the table, and fought for it.

Fundamentally, Obama is an anachronism.  He is essentially a nineteenth century president operating in a crisis era, as the early twenty-first grapples with cleaning up after the late twentieth.

Historians sometimes debate over whether history makes the man or the man makes history.  Leaving aside the sexist construction of the question, I think, manifestly, it has to be both.  Almost all the great presidents served during time of great crisis, usually war.  But that doesn’t guarantee their place in the historical pantheon.  You have to also meet those challenges of your time.  Lincoln is widely considered America’s greatest president.  His predecessor, James Buchanan, is generally thought to be the country’s worst.  Both faced the same crisis of Southern secession, but they responded to it very differently, earning their respective places in history.  On the other hand, had the civil war come twenty years earlier or later, we’d hardly even know their names, except as the answer to trivia questions.  “Who was the first president from Illinois?!”  “Who was our tallest president?”  And so on.

Obama could be Lincoln – or better still, FDR – if he wanted to be.  He has chosen instead to be Buchanan.  Faced with crisis scenario after crisis scenario, the candidate of ‘change’ repeatedly and instinctively homes in on the weakest, most centrist, most useless response possible.  His stimulus bill probably stopped the economy from continuing its free fall, but it leaves the country stuck in months or even years of unyielding recession at worst, and jobless recovery at best.  His healthcare bill helps in some important ways, but does nothing to hold down costs in a society that utterly wastes one dollar out of every three it spends in this area, and it does nothing to make healthcare more affordable for most Americans.  He seems to have some interest in a global warming bill and a banking regulation bill and maybe even doing something about civil rights for gays.  But in none of these areas is there any sense that he will do what is morally necessary.  Likewise, with Afghanistan, all the indicators seem to suggest that he will opt for some numbingly anodyne middle ground.

The guy is a leaky bucket at a time when the boat has been swamped.  He’s an pressureless fire hose when the house is in flames.  A tattered parachute when the ground is coming up fast.  A rusty musket as the Huns come over the ridge.  At a time when America needs a bold, powerful and wise leader in the White House – principally to undo the damage of the bold, powerful and sociopathic guy who was just in there – we have instead Mr. Rogers’ pet gerbil.  Complete with cardigan sweater and barbiturate-laced water supply.  Obama seems to want nothing more than to be liked.  In the neighborhood called Earth.

The great irony, of course, is that he is accomplishing just the opposite.  Gallup recorded his job approval ratings right after his inauguration at 69 percent.  Today they are down to 50.  That’s not 35 percent, like his predecessor, to be sure.  But since when did being better than George W. Bush become the standard?  A backed-up toilet was more popular than Bush a year ago today.  Hell, even gonorrhea was more beloved.  But the point is that dropping fifteen to twenty percent in job approval in what is likely to be the best year of his presidency, at a time when the public is likely to be most generous, is a spectacular failure of the first order.  Even according to Obama’s own pathetic standards.  If all he wants is to be liked, he’s still blowing it.  This is the equivalent of having every fourth friend or family member drop you on Facebook.  Not a good sign, especially if you live for popularity.

It didn’t have to be this way.  He could have been both a great president, a popular president, and a heroic president.  All he had to do was be willing to treat the people who already hate his guts as political enemies.  All he had to do was be willing to treat the people who live to fleece the country as treasonous thieves.  All he had to do was to speak clearly, act boldly, and lead a broken country down the bright shining path toward repair that is obvious to anyone who is willing to look.  But since that group excludes most Americans right now, this notion of bold leadership is especially essential.

In fairness to Obama, the public doesn’t really know what it wants these days, and best of luck to the two new Republican governors trying to cut taxes without deficit spending.  If they can do it, they will only do it by slashing government services.  Idiotic voters love tax cuts in the abstract.  They will most likely feel a bit less enamored of closed schools, pothole proliferation, massive prisoner releases and state parks that cost as much to get in to as professional sports stadiums now do.  For the last several decades, these selfish citizens have been all to willing to be trained by one of the sickest regressive mantras of them all – that government is just some bloated pig wasting tax dollars, and therefore that they could have their tax cuts without any cost to service, or without deficit spending.  Apart from occasional lip service to Jesus, there is nothing closer to the core of the regressive/Republican canon than this tax-cutting chant.

It’s a complete lie, of course, and it took about five minutes into the Reagan administration to show that.  Reagan slashed taxes so much that he tripled the national debt in eight years time.  That problem wasn’t helped by the fact that Republicans actually blow through cash faster when they control the government than do supposed “tax-and-spend Democrats”.

But now the day of reckoning has arrived, especially for the states, which generally do not have the federal government’s capacity to tell gigantic lies through borrowing.  People in New Jersey and Virginia have been stupid, and all they had to do to see how stupid they were being is to look at what that “economic girly-man” Arnold Schwarzenegger has been doing to Caleefornya.  The state government is essentially conducting a going-out-of-business fire sale, and its creditworthiness is now about as good as Bernie Madoff’s.  Government services are being tossed overboard as if they were lead cannonballs in a leaky rowboat.

[Nov 7, 2009] Gasparino on "The Sellout"

RealClearMarkets has an interesting interview with Charlie Gasparino regarding his new book "The Sellout." There seems to be a consensus forming that something has gone seriously wrong with the US republic, and that the Obama administration is failing to address it, failing badly.

One has to wonder what it will take to give Washington a wakeup call. It seems that, when confronted by white collar crime, people lose all the perspective which they have when it comes to fighting crime and injustice. "It won't work, it can't be done, they will just come back and do it again."

Well, duh. If you make it worth their while, administer wristslap justice at worst, and let all the top dogs openly flout the law, of course they will be back. What the US needs is the reincarnation of Melvin Purvis with a minor in finance. I would put Eliot Spitzer in charge of the SEC with the right resources and let him rip through Wall Street like the wrath of God, and make the bankers howl.

But that probably won't happen, because there is too much dirt, too many scandals on both sides of the aisle for this crew to administer its oath to uphold the Constitution.

Here is an excerppide, it has to happen again--the "it" being another financial crash. Of course, it won't happen tomorrow or next week, or maybe not even two years from now. But when the memory of 2008 wears off, and mark my words it will wear off, excessive risk taking will be back in a form that evades all these alleged regulatory controls that have been established. Regulation can never cure the disease of excessive risk.

The only thing that can cure it is tough love--allowing firms to fail. That doesn't mean I wanted the Fed and the Treasury to walk away last year. That would have meant Armageddon. But they should have walked away before that, when the systemic risk was smaller and the damage would have been limited. 1998 would have been a great place to start. Let Long Term Capital Management fail; let Lehman, and as I show in my book, possibly Merrill to fail, because the trades were the most vulnerable to LTCM's bad bond market bets.

Instead, by arranging a bailout, and by using free money to juice up the markets, policy makers emboldened Wall Street to take even more risk. That's what they did then, and that's what I fear is happening all over again...

Now I'm not in the Goldman is the center of all evil camp. But I know a lot of really smart people who believe that Goldman's bankers and traders virtually control the federal government in order to advance their own notorious agenda.

In fact, as I show in The Sellout, there were far worse players whose risk taking led to last year's meltdown, starting with Merrill Lynch and Citigroup. They were equally powerful from a policy making standpoint.

Remember, after Robert Rubin fought to end Glass-Steagall's separation of investment and commercial banking, he didn't go back to his old firm, Goldman Sachs, he went to work for the firm that benefited the most from the law's demise, Citigroup.

But Goldman in many ways crystallizes all that is wrong with the financial bailout, started by the Bush Administration, but carried on and expanded by Obama's. Goldman has been declared a bank, not much different than the old Bailey Building and Loan, and yet they don't take deposits or offer checking accounts. So what do they do? They trade, and they are trading as a federally protected bank, meaning they get to borrow at cheaper rates and they are Too Big To Fail."

Read the full interview here.

[Nov 4, 2009] Guest Post Wall Street Journal Admits Economists Were Wrong, But Fails to Discuss their INCENTIVE for Being Wrong

naked capitalism
Barry Ritholtz has an excellent criticism of the article, pointing out:

There are many areas I would have liked to see the [journal's] article explore: The lack of Scientific Method, the mostly awful performance of economists, its misunderstanding of the value of modeling, the bias inherent in Wall Street variant of economics, and lastly, the corruption of economics by politics...

Let’s start with the basics. Hard “science” — Physics, Biology, Chemistry, and all variants thereto — begins humbly. They try to describe the universe around us by creating theories, and then testing them. These theorems are always preliminary. Even when testing validates them, Science is always prepared — even eager — to replace them with newer theories that are proven to be even more valid.

The humility of science begins with an admission: We know nothing. We seek to learn through experiment and logic, and constantly evolve more and more accurate explanations. Scientific belief evolves gradually over time. Nothing is assumed, presumed, or hypothesized as true. Indeed, research is a presumption that current theories are inadequate or incomplete. The practice of science is a an ongoing search for better explanations, more proof, further verification — for Truth.

Science is the ultimate “show me” state.

Economics has a somewhat, shall we call it, less rigorous approach. Indeed, the arrogance of economics is that it is the polar opposite of Science. It begins with a few basic assumptions, many of which are obviously untrue; some are demonstrably false.

No, Mankind is not a rational, profit maximizing actor. No, markets are not perfectly, or even nearly, efficient. No, prices do not reflect the sum total of all that is known about a given market, sector or stock. Those of you who pretend otherwise are fools who deserve to have your 401ks cut in half. That is called just desserts. The problem is that your foolishness helped cut nearly everyone else’s 401ks in half. That is called criminal incompetence.

Where was I? Ahhh, our sad tale of the practitioners of the dismal arts.

Starting from a false premise that fails to understand the most basic behaviors of the Human animal, economics proceeds to build an edifice of cards on a foundation of sand. (How could that possibly go astray?) Like a moonshot off by a few inches at launch, by the time the we reach further into time and space, the trajectory is off by millions of miles . . .

Economics … creates an illusion of precision where none exists. The belief in their models led to all manner of mischief, from subprime to derivatives to risk management…

The Behaviorists have been fighting the mainstream for decades now, trying to correct the errors of the basic building blocks of the dismal science.

But I would go further in my criticism of the economic profession by arguing that the decisions to use faulty models was an economic and political choice, because it benefited the economists and those who hired them.

For example, the elites get wealthy during booms and they get wealthy during busts. Therefore, the boom-and-bust cycle benefits them enormously, as they can trade both ways.

Specifically, as Simon Johnson, William K. Black and others point out, the big boys make bucketloads of money during the booms using fraudulent schemes and knowing that many borrowers will default. Then, during the bust, they know the government will bail them out, and they will be able to buy up competitors for cheap and consolidate power. They may also bet against the same products they are selling during the boom (more here), knowing that they’ll make a killing when it busts.

But economists have pretended there is no such thing as a bubble. Indeed, BIS slammed the Fed and other central banks for blowing bubbles and then using “gimmicks and palliatives” afterwards.

It is not like economists weren’t warning about booms and busts. Nobel prize winner Hayek and others were, but were ignored because it was “inconvenient” to discuss this “impolite” issue.

Likewise, the entire Federal Reserve model is faulty, benefiting the banks themselves but not the public.

Selected Comments

bobh:

The shameful state of academic economics is guaranteed by the process that selects and advances academic economists. This article mentions the mechanisms that keeps ambitious economists from criticizing the Fed, but the larger, overall biases favoring corporations, financial elites, and “free markets” are enforced at every step of a potential economist’s path to the happy comfort of a teaching job at a major university.

Graduate students or tenure candidates are screened and weeded out by their betters if they don’t embrace the ideas that are pleasing to the corporate and private donors who endow chairs and build new, named business schools.

The result is a privileged class of mandarins who are happy to keep their eyes carefully lowered and focused on their desks, studying equations and models, while economic crimes are going on outside the gates of academe.

[Nov 4, 2009] Trouble Ahead Can the Right Seize the Banking Reform Issue in 2010

November 3, 2009 | naked capitalism
Trouble Ahead: Can the Right Seize the Banking Reform Issue in 2010? Eliot Spitzer explains how the White House defense of the status quo will give Republicans powerful ammunition in the 2010 elections.

Few things are as potent in politics as calling for change at a moment of fundamental dissatisfaction with the status quo. Nobody should know this better than the current White House. Gauzy words describing the possibilities for change are always more comforting than defending the current dire straits. That is why — in addition to all the substantive arguments — the current White House plan for banking reform is so troubling.

Let us fast forward a couple of months. Momentary GDP pops notwithstanding, the economy next year is likely to be in pretty sad shape. Consumer spending is sagging; foreclosures are still climbing (and may surge as ARMs re-set); unemployment is likely to be hovering in the 9.5-10.0 range; federal deficits and state deficits will be soaring; and Goldman profits will still be setting new records.

Added to this toxic political brew will be a new, and perhaps counter-intuitive, but highly successful political attack from the RIGHT: break up the banks. Imagine this: by next spring, an intellectual consensus will have emerged that the concentration in the banking sector that developed from the 1980s until the crash of ‘08 was misguided. Voices as disparate as Former Fed Chair Paul Volcker, Bank of England Governor Mervyn King, meta- investor George Soros, and the Wall Street Journal editorial page will be in agreement on this point.

A few brave souls on the Right — recognizing that the Republican Party has been bereft of ideas in its attacks on President Obama — will then try to re-define a populist, conservative attack by asserting that the White House has been captured by Wall Street. Real populism and change, they will argue, will come from the Republican, not the Democratic, party.

The power of such an attack from the Right should not be underestimated. There will be a huge first mover advantage that goes to the candidates who grab the real banner of attacking the structure of Wall Street as having been the root of the crash of ‘08. We Democrats are spending way too much time wringing our hands over the new, “reformed” structure of regulation, and not nearly enough focusing on restructuring the banks. Congress continues to mediate the intramural battle among regulators who are defending turf in the next regulatory flow chart. Yet the real debate should be how to take the big banks and make them smaller: how to peel off proprietary trading and other high-risk endeavors that are now being funded and guaranteed by taxpayers.

squanto:

You say conservatives have the momentum in terms of getting spending under control. If that’s true, it’s only because they’re now in the opposition and they reflexively oppose everything Obama does. During the Bush Administration the national debt nearly doubled (from $5.7trn to $11.2trn) and you never heard a peep from the right about fiscal responsibility. Today’s Republicans are all for cutting taxes but they no are longer hawks re: spending. It’s like they want to drive the gov’t into bankruptcy.
 

kwark:

Froggy,

It appears to me that “Tea Party Republicans” are paid from the same deep pockets that own the movers and shakers in both parties. It’s clear that our so called “two party” system is so thoroughly corrupt that “change” – originating from either party – will prove to be nothing but smoke and mirrors. As with Bush 2 and Obama, we’ll see just one more swap of corporate dweebs for another set of corporate dweebs. Paranoia alert: I doubt that a third party candidate CAN be elected President, or for that matter, any sizable number of Senators and Congressmen – the Repub and Dem powers that be simply won’t allow it to happen. “They” don’t even have to resort to fraud or ballot-stuffing (although “they” are certainly not above those tactics). All “they” need to do is flood the airwaves with lies – fear will keep those voters voting for the anointed Republicrat or Demopublican.

timbo:

I know this much. Partisan squabbling about who was murder one, and who was the accomplice in this vicious murder scene to me is immaterial.

Both were at the scene of the murder with blood spatters on their clothes and murder weapons in hand, with plenty of motive.

When its all said and done, both parties oversaw massive credit bubbles, rampant spending increases, wars, corporatism and all its vices, a total disregard for the constitution, and total disdain for American ideals – whatever your definition.

So when the finger pointing begins in earnest, it’ll turn me off even more.

Kind of feel bad for the Dems, Obama didn’t even give his hopey-changey platform lip service.

If a real leader can ever take office, its gonna take a serious populist surge. Not the Oprah Winfrey style shit we saw in ‘08, more like Tiananmen square.

Hopin for the best

Michael Fiorillo:

I think there is a lot of insight in what Spitzer has to say, but I would only disagree on two things: the time frame and who exactly will seize the terms of debate.

My worry is not so much about any current Republican candidates, who all seem pretty hopeless.

My fear is that Obama’s captivity – willing or unwilling, it doesn’t matter – and cravenness, combined with the structural readjustment-by-another-name that is being forced down people’s throats, will fuel a backlash against representative democracy in general and a hunger for a strong leader.

What a burn that would be, having to take to the streets to defend these bastards from even worse bastards!

Bob Goodwin:

I am a libertarian and republican. This blog is (mostly) read by dems, so I will try to make my comments cogent, and not partisan.

I was mad as hell at Paulson and Bush. Not enough to become a democrat, but plenty happy to give all republicans a few terms in the wilderness. My Libertarian principles were in tatters, because the Wall street psychopaths clearly used our excess liberties to the detriment of the populace. Obama has not been an improvement.

Republicans have had a fund raising advantage until the last two cycles. Wall street suddenly had the funds to buy both parties. It is unclear how this will play out in the future.

The tea-parties are a running joke to the left, and rightly so due to their lack of sophistication. But one should be wary of waking activism. I have found they are largely full of people like me, who kinda liked free markets and were appalled by Tarp. And who were kinda republican too.

How out of touch are rupublican legislators who have taken Wall Street largess for years? A lot. But their base has flipped. I don’t think it will take them very long to flip too.

The democrats will howl with legitimate rage. And it won’t be fair. In a great historical irony, the mess that Paulson built will be blamed on Obama. Johnson’s great society was built on the ashes of southern bigotry. This is a smaller irony than that was.
 

Kevin de Bruxelles:

Spitzer posits an open, utopian political environment where politicians are free to calculate policies solely based on what is best suited to win elections. Of course the hermetically sealed two-party US political system is very much a closed system, and where only “two” choices are given. Elections are won by, on the one hand, blindly attacking the other choice, and on the other, making vague positive-sounding promises for the future. There is absolutely no need for the Republicans to threaten one of the most massive wealth/power nodes in the US to get a few dumb schmucks to vote for them. Why go after powerful Citi when they can so easily get the same results by pounding pathetic Acorn instead?

Spitzer plays the concern troll convincingly while simultaneously laying the ground work to head off any reform by stating the dangers of one tax proposal that was never going anywhere anyway. It seems the rumbling of discontent by the masses at the current state of the US is finally being felt at the top. The response is self-referential analysis; to try to convince the peasants that there is meaning in the fluctuations within the closed US political system; not mentioning that as any bird needs to keep its two wings moving to fly, the US system needs constant motion for both its wings to convince the citizens that our democracy is still soaring.

And why should Spitzer make any reference to an alternative? The closed US political system finds itself in a position of commanding authority. Not only is there no other international political system to challenge it; there is only miniscule domestic opposition to their monopoly on power; and it is divided on two extreme flanks; the Dennis Kucinich left and the Ron Paul right. As things stand, due to the animosity between these two positions, they can only serve as self-cancelling focal points of discontent and the closed US political system can destroy each in detail. Only if these two factions were to start actively working together could the closed US political system find itself facing a raging two-front political war for legitimacy. Sadly I’m not betting on this happening since both sides are fatally imbued with partisan booby traps that will make future broad growth and consolidation difficult.

With the Obama presidency giving the word underachieving new meaning, combined with the still fresh memories of the mal-achieving Bush Administration, the other lurking danger to the closed US political system is from cynicism from the broad center about the two-party system. Signs of such a movement have been appearing, among other places, on certain economic blogs. Not everyone looking for change will in fact be satisfied with monthly First Family portraits featuring a cute melanin-enhanced family unit while the President actually spends four years running a four corners offense to kill the clock on any substantive change. Nor will others be satisfied with pummelling the straw men of socialism and Acorn for the next three years as the country crumbles. And for these people the only solution the closed US political system has to offer is the distraction of tighter and tighter swings of the pendulum combined with massive amounts of inside-baseball analysis of where exactly the pendulum is heading. These discussions serve the purpose of focusing the public’s attention on the hypnotic effects of the swinging pendulum while denying even the possibility of activity outside the closed system.

Opponents of the system must create an alternative — yes a third party — that can act as a focal point of discontent, that can serve as a magnet for the many who are on the verge of abandoning the closed US political system. Just as it is hard to convince passengers to leap from a sinking ship directly into the rough waters in the middle of the ocean; it is difficult to convince people to abandon the current political system without at least the semblance of a sturdy lifeboat to carry them. And while discussions on Too Big To Fail are important; the even more fundamental problem that the closed US political system refuses to address is the on-going evisceration of US manufacturing capability. Two hundred years ago Alexander Hamilton found the intellectual arguments to protect infant industries, today we urgently need to save “geriatric industries”, while staying mindful of the dangers of outright mercantilism.

[Nov 4, 2009] Buffett, Tavakoli Flag Scheme Bigger Than Madoff’s (Update1) - Bloomberg.com

Read Chapter 10 In Chapter 10 of Dear Mr. Buffett author Tavokoli explains some of the events that led to the credit crash of 2008, and recounts how Buffett and other financial sages warned of the impending crisis [PDF].
March 5 | Bloomberg

Bernard Madoff could face 20 years in jail if convicted of what prosecutors are calling the biggest Ponzi scheme in history. But his $50 billion ploy pales next to the one created by Wall Street during the past decade: the securitization machine.

In “Dear Mr. Buffett: What an Investor Learns 1,269 Miles From Wall Street,” Janet Tavakoli explains that securitization process, and how regulators, politicians and the government ignored all kinds of warnings from people who saw it for what it was.

Tavakoli uses her 2005 lunch with billionaire investor Warren Buffett and their ensuing correspondence as the backbone of her analysis of the current financial crisis. Buffett, who read a draft of the book as early as last July, told Tavakoli he would feature it “prominently” at Berkshire Hathaway Inc.’s annual meeting in May.

“I think you’re in for a lot of fun,” Buffett wrote the author in a December e-mail.

Tavakoli, 55, spent 22 years working in the structured- finance departments of Wall Street firms, securitizing mortgages and other loans. She has been the head of her own small advisory firm, Tavakoli Structured Finance Inc., since 2003 and has written books about the mechanics of securitization including collateralized debt obligations, the most infamous of all.

Securitization consists of bundling loans and slicing them into packages with different risk profiles to be sold separately. Collateralized debt obligations take already securitized loans and further bundle them into packages. CDO- squared do the same process all over again.

How We Got Here

Rating agencies, which were being paid by the investment banks doing the securitization, would smack their best credit grade of AAA on the top tranches of these bundles. Many of those ratings have been cut to junk in the past two years as defaults surged.

Tavakoli doesn’t think the concept of securitization is flawed; she says it was abused by greedy financiers and turned into the monster that led to the collapse of the financial system.

In a telephone interview, the seasoned financial engineer talked about how we got here, and the future of securitization.

Tavakoli: It was a massive Ponzi scheme with many players involved. At times you’d have the CDO manager, an investment bank and a hedge fund involved, all of them knowing they were doing the wrong thing. These people all wanted to get in on the fees, so they all went along with this stuff. Some of the CDO- squared that came out in 2007 were nothing more than a way of avoiding acknowledging losses. It’s a scandal.

‘It Was Massive’

When you raise money from new investors to pay off old investors -- if you’re an investment bank and you have these rotting loans, and you package them up and feed them to new investors so you can pay your bonuses and dividends -- that’s a Ponzi scheme. By every definition, this is as bad as what Madoff was doing. It was massive, bigger in size.

Onaran: Why didn’t the regulators realize this?

Tavakoli: They were all sleeping -- the Securities and Exchange Commission, the Federal Reserve, the Congress, the Senate banking committee and a number of other people. I wrote the SEC in February 2007, complaining about rating agencies.

In August of 2005, the SEC was investigating Bear Stearns Cos. for mortgage securitization. Then they dropped the matter. The New York attorney general had an investigation and he dropped it too.

‘People Got Greedy’

Onaran: Why did you choose to use your correspondence with Warren Buffett as the peg for your analysis of the crisis -- besides the marketing power of his name, of course?

Tavakoli: I wanted to show that you can prosper in the financial world without ripping off other people. If I just told the story, it would be so darn depressing. But if you do it by comparing it to somebody like Buffett, you see that there’s a sane way to do finance.

The reason we’re in such a mess is that people got greedy. They were using leverage and structured products to hide problems, to make it look as if they were making huge profits when they really weren’t. These banks were paying high bonuses and high dividends on phantom profits.

Warren has always warned about leverage. His shareholder letters are a chronological history of his warnings. I thought maybe they won’t listen if I just talk about these things, but how could you not listen to Warren Buffett?

Onaran: How is the new government handling the problem?

Rewrite Mortgages

Tavakoli: One proposal I do agree with, although you might be surprised, is President Obama’s proposal to rewrite the mortgages. If you had a subprime option-ARM (adjustable rate mortgage), just turn it into a fixed-rate loan. We should redo these mortgages but not help out speculators and the people who bought a bigger house than they could afford.

Onaran: What’s the future of securitization? Will it ever make a comeback?

Tavakoli: What should happen with securitization, if we want to go back to using it as a tool of finance, we might have to bust up some existing securitizations. It might be unprecedented but we’ve already done a lot of unprecedented things.

We have to unwind, just completely rip apart, the CDO- squareds, the CDOs and go right back to the residential mortgage-backed securities but then vet all the loans in the portfolio. You have to do a rigorous statistical sampling of each lot. I would say bust up all the bad securitizations that have been done, then you can really value it, when you go back to the basic loans.

“Dear Mr. Buffett” is published by Wiley (282 pages, $24.95).

[Nov 4, 2009] Janet Tavakoli on Financial Meth Labs \

Amazing woman, amazing interview...  A lot bit too long (one hour). Still a couple of points she made are unique and the whole interview is very well done. 
Nov 3, 2009 | Mish's Global Economic Trend Analysis

Here is a lengthy but well worth listening to 59 minute interview of Janet Tavakoli on C-Span. The interview is from April 20, 2009 but given that Tavakoli's name is just now on everyone's radar, most will have missed it.

Selected quotes:

Janet Tavakoli is a straight shooter and an equal party basher. You have to like that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Selected comments:

CauseAnd Effect:

“Interesting comments by Janet about the reselling of mortgages through securitization. But I know for a fact that some of the most egregious loans like Alt-A option Arms, etc...were kept by lenders as portfolio loans. I took out of few of these loans because I could use them to flip houses, but I would never dream of keeping this loan. No one could meet the payments of these things. When my mortgage broker told me that these were the most popular loans on the CA market in 2005, I knew the market was gonna blow-up.

Leo Chen:

“The folks who voted for "Change We Can All Believe In" might want to send that Janet Tavakoli video to the African-American gentleman residing in the WH who acts like a white man deep in cahoots with the Wall Street Banksters.

We would do well to send a copy of that Janet Tavakoli video to EVERY Senator and Representative. Mish, how might that be effected? You can get ten years in the slammer for stealing a couple of hundred bucks, but you will be given a million dollar bonus [with taxpayer money] after you've trashed the American economy.

Erica Benjamin:

That was fantastic. This is the kind of information that needs to be in every American's face all day long. She used very accessible language for a lot of complicated concepts. 

[Nov 4, 2009] Wood warns of correction, says “key variable in the West is government policy”  By Edward Harrison

November 3, 2009 | naked capitalism

Christopher Wood, the well-noted market strategist at CLSA and writer of the classic Japan crash warning book “The Bubble Economy,” is now warning of a market correction in the West.  According to CNBC India, Wood believes that the markets’ extreme upward move is increasing the chances of a major correction.

Wood is still cautious. He says there is some initial indication of a technical breakdown in the US. “The US market will be vulnerable early next year the US market. If it becomes clear, after this inventory cycle, that consumption, employment is not really recovering, then the market will go down. You will then get renewed stimulus in the US and measures trying to generate growth. The key variable in the West is government policy.” CLSA’s best case scenario is 1,200 on the S&P 500 by year-end, he added.

I agree with Wood that underlying economic demand may indeed be weak and all we may be seeing is an inventory and stimulus induced cyclical upturn (see my July post “ISM: Is this the mother of all inventory corrections?”). Of course, the worry is about the employment cycle not turning up before these measures’ positive effect wears off.  This is the question for 2010. If this happens, we get  a double dip and a huge market-sell off. Even if the employment situation starts to improve slowly while stimulus and the inventory cycle recede, this will lead to a muddle-through scenario, again inducing a correction. This is the heart of Van Hoisington and Lacy Hunt’s call about partial recoveries and stock market weakness.

Brick:

I don’t think inventory is well understood and it means different things to different participants in the market. What I see going on at the moment is a reduction in raw material inventories on the back of a dollar decline. Once hedging effects begin to lapse then this will feed through to margins or prices. Manufacturing and wholesaling inventories have declined, which is the result of improved efficiencies and is permanent, so don’t expect a big turn around in the ISM inventories data. Retailers are currently building inventories for the Christmas period and taking a bit of a gamble that the consumer will turn up. Despite manufacturers view point that retailers are holding too little stock I have a suspicion that it is the other way round.

As for the employment improvement then I think once you take seasonal and cash for clunkers effects out there is very little improvement. As for seeing more stimulus then I have some doubts, why else would the treasury have ducked round trying to extend the debt ceiling, unless they know their will be a political backlash. Anyone looking for good news should have been looking at exports from the ISM data which does suggest a bit of a pick up. The problem is that the economic pick up is likely to feed into corporate profits with any upturn in US consumer disposable income likely to be a long way down the line.

Edward Harrison:

Good points on inventories and stimulus. Steve Keen made some similar points yesterday:

http://www.debtdeflation.com/blogs/2009/11/02/debtwatch-no-40-november-2009-have-we-dodged-the-iceberg/

He said if you strip out government expenditure growth and cash for clunkers, you get -0.5% for what was supposed to be a robust Q3. Clearly, underlying demand is weak.

As for inventories, both wholesale and retail inventories were still declining in October according to the ISM data released yesterday. So inventories are still subtracting from GDP at this point. I see wholesale inventories turning up in a month or two.

winterwarlock

The nexus mechanism, the marriage between agency, public and private, and inside stockholders, which promulgated demographic Ponzi scheme economies, served the purpose of populating the entire face of the planet. Because we have reached relative planetary saturation, that mechanism has become cancerous; it’s consuming itself to death.

[Nov 3, 2009] Be Prepared for the Worst by Ron Paul  

Forbes.com

What is more likely happening is a repeat of the Great Depression. We might have up to a year or so of an economy growing just slightly above stagnation, followed by a drop in growth worse than anything we have seen in the past two years.

As the housing market fails to return to any sense of normalcy, commercial real estate begins to collapse and manufacturers produce goods that cannot be purchased by debt-strapped consumers, the economy will falter. That will go on until we come to our senses and end this wasteful government spending.

Government intervention cannot lead to economic growth. Where does the money come from for Tarp (Treasury's program to buy bad bank paper), the stimulus handouts and the cash for clunkers? It can come only from taxpayers, from sales of Treasury debt or through the printing of new money.

Paying for these programs out of tax revenues is pure redistribution; it takes money out of one person's pocket and gives it to someone else without creating any new wealth.

Besides, tax revenues have fallen drastically as unemployment has risen, yet government spending continues to increase. As for Treasury debt, the Chinese and other foreign investors are more and more reluctant to buy it, denominated as it is in depreciating dollars.

[Nov 3, 2009] Bullish data, recoveries, crashes and the psychology of forecasting redux

The key fact on the ground is that unemployment is still increasing and high unemployment becomes structural as there is no industristries which can absorb this work force... Huge deficits state and local governments have to face for next year and the handling of the commercial real estate debts should also be taken into consideration.
November 2, 2009 | naked capitalism

What I believe is happening has much to do with Nouriel Roubini’s comments. U.S. economic policy is geared toward reproducing the status quo ante via reflation of asset prices (something Bill Gross thinks is the right policy and even Dilbert has made fun of). The policy has been wildly successful so far, with asset prices bubbling over globally. I have called this the fake recovery, but as recently as September I was on the fence about how much uptick we were to get. I never dreamed the recovery process could be so robust given the headwinds we faced.

Selected Comments

hbl:

There’s a lot to agree with here (including the inventory factor as said before), but I still disagree that this is not yet a balance sheet recession. See the latest Total Loans and Leases of Commercial Banks for one more data point.

I think the fall in the savings rate in recent months despite the broader debt reduction trend apparent in the credit data has to do with:

a) Wealthier people (with little or no debt) regaining some confidence and increasing their spending after the free fall in asset prices stopped. A new crash in asset prices would reverse this.

b) Temporary government-induced spending such as cash for clunkers.

The evidence as I see it still suggests that those with balance sheets in need of repair are doing so, despite volatile government stimulus and “wealth” effects. Japan’s economy showed positive growth and inflation for years after asset bubbles popped, but the underlying balance sheet recession dynamics were in play under the surface essentially the whole time.

Dan Duncan

... Why is the Institute of Supply Managers any different from other fact distorting trade groups (ie, the National Association of Realtors ? ...

mikkel:

Ed, thanks again for describing the dynamics of the GDP and possible surprises. I certainly was one that thought you were slightly crazy in your “imminent recovery.” Although I also have to say that that part of it could be an emotional response to the word “recovery.”

If you had written that there was an imminent increase in GDP coming I would have been rather sympathetic if skeptical (your post on the mother of all inventory corrections is a great example of changing my thoughts). However to me recovery means stability and increase in activity on the ground level. I am aware you are talking about it in a technical sense but still.

I am finding the state coincident indexes that the Philly Fed puts out to be fascinating. It really demonstrates how little a technical “recovery” means in the context of on the ground activity. The points in this post again demonstrate why we could get a blow out GDP number but change almost nothing on the ground. To me this is a completely insane way of trying to measure the economy…although I guess it’s about as insane as the actual theoretical underpinnings of the economy.

You definitely get credit as the only person I’ve read that has suggested stronger than anticipated growth AND a depression.

mannfm11:

You might note that these numbers are up from very low numbers. If inventories are still being drawn down, it means that capacity utilization is coming off very low levels. That is kind of like getting a heart beat after an electric shock. Capacity utilization includes stuff like electricity generation and oil refining, so the rest of the economy was down to very low levels.

My problem with recovery is how it is defined, which means I don’t believe we have one. To grow from 65% capacity utilization says very little. To get down to 530K unemployment claims after nearly a year of panic stimulus by the government and the Fed says the patient won’t be out of the hospital and might never be normal again. The fact that the world is in debt, not just the US, to the point that more debt is likely to be bad debt drives on the idea that not only is a recovery not likely for long, but may in fact be ill advised.

kievite:

I would like to support Dan Duncan rhetoric question  “Why is the Institute of Supply Managers any different from other fact distorting trade groups (ie, the National Association of Realtors)?”

But I will go further and suggest that economic statistic is now so politicized that it can easily make editors of Pravda proud for their objectivity. We should not believe any of them without deep analysis of the error bounds ( and I think for GDP they are at least +-30% ), hidden agenda and dependencies on other equally flawed metrics of economic performance.

I think most 401K investors are still living in a fool’s paradise and have yet to understand the gravity of the economic crisis we experience. This partial refund that Mr. Market (aka Uncle Sam) gave suckers in 2009 can be easily withdrawn on short notice.

Structurally high unemployment is in the cards for the USA and I do not see anything other then a new technological revolution that can change that. The bottom half of US consumers is already cooked and in this sense there can be no recovery, only gradual multi-year slide to the bottom. Structurally high unemployment in a service-oriented economy will have disproportionate overall sedative effect on economic activity due to hidden interdependencies (airlines-hotels-restaurants)

The fact that asset markets are so detached from reality only increases the gravity of the situation and chances for double dip.

As for GDP it is such a flawed measure that in the current circumstances anybody who pushes it as a valid indicator of the economy can be counted as a charlatan. GDP deflator can and always will be manipulated for political reasons in the same way as CPI.

Microsoft CEO IT spending won't fully recover - Yahoo! Finance

"While we will see growth, we will not see recovery..."

Microsoft CEO Steve Ballmer said Monday corporate spending on information technology will not recover to levels seen in recent years before the global economic slowdown.

"The economy went through a set of changes on a global basis over the course of the last year which are, I think is fair to say, once in a lifetime," Ballmer told a meeting of South Korean executives in Seoul.

Spending on information technology, which accounted for about half of capital expenditures in developed countries before the crisis, was unlikely to rebound fully because capital was more scarce these days, he said.

"While we will see growth, we will not see recovery," Ballmer said.

Ballmer was in Seoul to meet corporate and government officials and tout the Redmond, Washington-based company's new Windows 7 operating system. The latest edition of Windows, the software that runs personal computers, was released last month.

He said company purchases of PCs and servers were down about 15 percent globally.

[Nov 3, 2009] A ticking time-bomb or the mother of all carry trades

Nov 2 | FT Alphaville

kim:

Am I the only one who finds it hard to believe that QE, carry trades, blah blah account for this rally ? Are the proceeds from QE being recycled into equities ? Are people borrowing USD (and GBK) to buy "overseas" equities ? In sufficient amounts to account for this rally ?

Or do the market makers just believe that they are (or claim that they are) and mark things higher as they trade with each other, shuffling the deck but with an upward bias ?

Where is the data on funds flow ? The change in asset allocations, at least amongst those end-investors who are required to report such things.

I find the whole thing totally bewildering, it almost resembles a game of spoof. And so far the retail investor seems to be staying away from risk (and I'm one of them). So I get zero on cash. That looks like a good deal to me, and I can't be the only one.

Or maybe not. But whatever is happening looks very very odd to me.

[Nov 3, 2009] Top 20 Signs How Bad the Economy Is By Doug Kass

TheStreet.com's RealMoney

This blog post originally appeared on RealMoney Silver on Nov. 2 at 7:38 a.m. EDT. "We are rapidly approaching a pivot point," says Doug Kass, a general partner of Seabreeze Partners, "when all the stimulus factors -- such as abnormally low interest rates and government bailouts -- will be withdrawn, and investors will begin to discount that." Kass, who has grown more bearish recently, thinks that a continued weak consumer, an end to the cost-cutting that's fueled corporate-profit growth, and higher taxes, among other things, will mean self-sustaining earnings growth is "far less certain" than the market expects. -- Barron's (Nov. 2, 2009) Over the weekend, I was interviewed in Barron's Streetwise column by Vito Racanelli. As mentioned in Barron's and last Monday night on CNBC's "Fast Money," we are now approaching the point of maximum fiscal and monetary stimulus. That means that, statistically, we are moving ever...

[Nov 3, 2009] The S&P is heading for 800 by Neil Hume

There is a whole camp of analysts who predict that S&P500 will drop to 800  in 2010. While correction in S&P500 is expected it is unclear whether it will drop further. Any such predictions should be taken with a grain of salt...
Nov 02 | FT Alphaville

That’s the message from Bob Janjuah, RBS’s Chief Markets Strategist in his latest missive titled “Happy Christmas, Cold Turkey Time”:

We said in late Aug that S&P would get to 1100/1120 by end Oct/early Nov. We said growth would peak in Aug and then weaken (see above) into and in Q1. This is all playing out. As this plays out, I expect S&P to be in the mid-900s by y/e, and mid/low 800s by Q1 2010. Credit spreads will weaken materially, IG will do better than HY, QUALITY (strong balance sheets) will be the winner. I look for 750 Crossover by late 2009/early 2010, and then further weakness as Q1 unfolds. Govvies shud rally - I prefer BUNDS to USTs or GILTS. The USD will probably rally, but I dislike any currency where PMs are simply printing. GOLD please. GET DEFENSIVE RE RISK.

That’s right, 800 by the first quarter of next year.

Thereafter, Bob says it is all about the policy makers (PM):

MORE policy in the UK/US may help risky assets very briefly (2/4mths), but because growth weakness in the PS [private sector] is/will be a sustained feature (IMHO) for many many quarters, MORE policy will very quickly be seen as THE risk. The USD and GBP would then be at huge risk as (PM) CREDIBILITY, SUSTAINABILITY and LACK OF SUCCESS are exposed badly. Bond yields will then rise dramatically I think - NOT because of bogus CPI inflation, but because debasement/monetisation will be seen as FAILED POLICY and which will then be PUNISHED, as opposed to the current outcome, where such policy has so far been given the benefit of the doubt and ‘rewarded’.

This will lead to a truly ugly 2010 with New Lows in stocks (500-handle S&P), New/Near New Wides in HY, IG spreads another 50% wider.

The EURO and the Bund are where to be in this world, as well as the HIGHEST quality balance sheets in credit and equity land (global big caps). Gold goes to $1500. THINK ABOUT IT - this is the world where USTs, GILTs, the USD, the GBP AND risky assets ALL SELL OFF…….

This will also be the time to consider going massively OW USD/GBP, as well as OW USTs/GILTS. Why? Because 2010 and beyond will then see us FORCIBLY abandon Reckless Policy (the driver of the sell off) which would then quickly be followed by a new era of DEFLATION and AUSTERITY.

Of course, it might not turn out that way:

IF the PM response to the initial weakness over the rest of 09 and early 2010 is NO MORE POLICY, then the initial knee jerk will be +VE for the USD, the GBP, USTs and GILTS. The knee jerk will also hurt equities (S&P in the low 700s) and credit spreads (again, HY/bad balance sheets do worse than IG /Good balance sheets). BUT within mths, we will ALL LEARN TO ADJUST AND REPAIR OUR BALANCE SHEETS. The NEW Normal. 3/5yrs of US/UK GDP around 1%+/- 50bps and mild deflation/low inflation. A long period of REPAIR, REFUELLING, etc. This is the LEAST WORST OUTCOME. I really really really hope this is what we get. I FEAR, and Kevin expects, the dreaded MORE POLICY route.

As for the longer term, here’s how Bob sees it:

Near term I think the battle will be between Central Bankers, who deep down, and I think privately at least, FEAR bubbles, FEAR failure and FEAR FORCED abandonment if current policies are persisted with too long and/or added to, vs Fiscal Authorities, who by definition want short-term fixes (there is after all an election cycle in the UK & in the US next yr). This is like a rumble in the jungle between the VOLCKER-ites and the GREENSPAN-ites, with GREENSPAN representing the Fiscal Authorities (he was after all surely the most politicized central banker ever). Are the Volcker-ites up to a fight? I think so. I hope so. Kevin feels and I FEAR however that they aren’t/they won’t. In which case MORE policy and then, very soon thereafter DISASTER, will follow. In this rumble the inevitable outcome is deflation and multi-yr austerity. China will be the Ref in the boxing ring. The PS and the FS [financial sector] will be the Judges (who have I fear have already made up their minds (PS) or are soon abt to (FS)

The rest of “Happy Christmas, Cold Turkey Time” can be found in the usual place (if you have the stomach for it).

[Nov 2, 2009] Guest Post- Galbraith Says Administration’s Sole Goal is to Restore System of 5 or 10 Years Ago, But Confidence Won’t be Restored Unless Fraud Which Caused the Crash is Investigated

"The real question we need to be asking is where we are heading in the absence of reform."
November 1, 2009

Galbraith also pointed out – as many other experts have – that confidence in the system cannot be restored unless the fraud which led to the crash is investigated:

JAMES GALBRAITH: That’s the point about the crisis, is that it could have been prevented. The people in authority two, three, five years ago, knew how to prevent it. They chose not to act, because they were getting a political and an economic benefit out of the speculative explosion that was occurring.

BILL MOYERS: You mean, the people who could have prevented the dam from breaking were too busy fishing above it, and reaping big rewards to want to fix the crack in it?

JAMES GALBRAITH: Sure. The Federal Reserve, in particular, knew that the dam was cracking. Alan Greenspan, I think, almost surely knew this, and chose to wait until it had washed away.

BILL MOYERS: Why?

JAMES GALBRAITH: They let all of this run, because they were getting a superficially stronger economy out of it. The ownership society, all that was a scam, basically, designed to lure people who could never afford these mortgages into accepting them. And yes, I think they, any rational person, certainly people in the industry, knew that this was not going to last. There was a little industry code, I’ve learned, IBGYBG. “I’ll be gone. You’ll be gone.”

BILL MOYERS: Really?

JAMES GALBRAITH: Yeah.

BILL MOYERS: The industry being the securities industry?

JAMES GALBRAITH: Well, and the mortgage originators and the bankers, generally.

BILL MOYERS: But that’s criminal fraud.

JAMES GALBRAITH: Oh sure. There was a huge amount of it. The Bush administration did not actively investigate the fraud that they knew, that the FBI knew was occurring, from 2004 onward. And there will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that’s a process which needs to get underway.

Without a thorough investigation like the Pecora Commission, and without prosecuting those who are guilty, confidence and hope in the future will not be restored, consumer confidence will remain depressed, and we will remain in an economic slump.

Selected Comments:

[Nov 1, 2009] Nine More Banks Fail with CIT a Packaged Bankruptcy While Gold Shines in a Jobless Recovery

Jesse's Café Américain

It was the housing bubble and an explosion in unproductive financial activity crafted by the Fed and the Wall Street banks that provided the appearance of economic vitality. It was no genuine recovery despite the nominal GDP growth. It indicates a need to deflate the growth numbers more intelligently, if not more honestly, and future economists are likely to 'discover' this. The tech bubble was perhaps an unfortunate response to the Asian currency crisis and fears of Y2K. What was done to promote recovery from the tech collapse and create the housing and derivatives credit bubble was pre-meditated and criminal.

The current state of economics is most remarkable for its arrogant complacency in the face of two failed bubbles, a near systemic failure, a pseudo-scientific perversion of mathematics exposed, and an incredible capacity for spin and self-delusion. The people wish to believe, and Wall Street and the government economists are all too willing to tell them whatever they wish to hear, for a variety of motives. And there is an army of salesmen and lobbyists and econo-whores touting this fraud around the clock.

The Failure of Financial Engineering

The next bubble should provide the coup de grâce when it fails, although the fraudsters might try and spin ten years of a stagflationary economy as 'the new normal.'

There are good reasons for this failure of American "monetary capitalism," and it has to do with an oversized financial sector and a surplus of white collar crime that both distort and drain the productive economy. The current approach is to pump money into a failed system without attempting to reform it, to fix its fundamental flaws, to make an honest accounting of the results. The result are serial bubbles and the foundation for long duration zombie economy with a grinding stagflation that may morph into a currency crisis and the fall and reissuance of the dollar, as we saw with the Russian rouble. It will stretch the political fabric of the US to the breaking point. This is how oligarchies and their empires fall.

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War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda  : SE quotes : Language Design and Programming Quotes : Random IT-related quotesSomerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose BierceBernard Shaw : Mark Twain Quotes

Bulletin:

Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 :  Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method  : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law

History:

Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds  : Larry Wall  : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOSProgramming Languages History : PL/1 : Simula 67 : C : History of GCC developmentScripting Languages : Perl history   : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history

Classic books:

The Peter Principle : Parkinson Law : 1984 : The Mythical Man-MonthHow to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite

Most popular humor pages:

Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor

The Last but not Least


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Last modified: October 02, 2017