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Financial Skeptic Bulletin, December 2009

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Few people understood that Fed is so frightened and paralyzed so no rate increase will occur in 2010.

Two suggestions. [Dec 1, 2009] PIMCO - Dec Gross Anything but 01

 

Quotes Best Rest

Quotes

The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until.

Bill Gross

This is a first-ever occurrence in 200 years of banking history that losses stemming from bad collateral were not realized early on. They are time bombs with delayed fuses. To partially offset this day of reckoning in 2012, the Federal Reserve adopted a Zero Interest Rate Policy (ZIRP) to help the very same insolvent banks lever up the yield curve borrowing short and lending long to earn their way out of insolvency. But rather than letting these profits restore the banks impaired balance sheets, bank executives are redistributing these profits in the form of bonuses.

Worse yet, ZIRP is a financial hardship that hurts millions of saving Americans plowing their hard earned dollars into CDs and money market funds. In this way, a zero interest rate policy serves to undermine the financial security of millions of Americans. And still, the unanswered question is whether insolvent banks can successfully recap themselves before these Bouncing-Betty’s detonate. In a race against the clock, policymakers are simply buying banks time, hoping they can avoid mutually assured destruction when their eschatological date with destiny arrives.

Best

There are no markets anymore, just interventions

[Dec 1, 2009] PIMCO - Dec Gross Anything but 01

Raise interest rates with 15 million jobless and 25 million part-time working Americans? All because gold is above $1,100? You must be joking or smoking – something. We will need another 12 months of 4-5% nominal GDP growth before Bernanke and company dare lift their heads out of the 0% foxhole mini-bubbles or not. Instead, the heavy lifting or the charging of enemy lines in the case of this metaphor will likely be done by other central banks – already in Australia and Norway. In addition, and importantly, China may abandon its dollar peg within six months’ time and with it, its own easy monetary policy that has fostered more significant mini-bubbles of lending and asset appreciation on the Chinese mainland.

With renewed upward appreciation of the yuan may come potentially volatile global asset price reactions to the downside – higher Treasury yields, and lower stock prices – which the Fed must surely be leery of before making any upward move, of its own, and before moving on, let me state the obvious, but often forgotten bold-face fact: The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until.

To date that transition is incomplete, mainly because mortgage refinancing and the purchase of new homes is being thwarted by significant changes in down payment requirements.

The Treasury as well, has a significant average life extension of its own debt to foist on investors before the Fed can raise short-term Fed Funds.

OK, so where does that leave you, the individual investor, the small saver who is paying the price of the .01%? Damned if you do, damned if you don’t. Do you buy the investment grade bond market with its average yield of 3.75% (less than 3% after upfront fees and annual expenses at most run-of-the-mill bond funds)? Do you buy high yield bonds at 8% and assume the risk of default bullets whizzing at you? Or 2% yielding stocks that have already appreciated 65% from the recent bottom, which according to some estimates are now well above their long-term PE average on a cyclically adjusted basis?

Two suggestions.

[Dec 29, 2009] “2010- Foreseeable and Unforeseeable Risks ~ The Room For Policy Error is Enormous” by John Bougearel

"a zero interest rate policy serves to undermine the financial security of millions of Americans."
Dec 29, 2009 | naked capitalism
Charles Kindleberger tells us financial crises are “hardy perennials.” That is true, but traditional remedies for extinguishing panics in the financial system over the past two hundred years have more or less always followed Walter Bagehot’s prescript that you “lend freely and early, to solvent firms, against good collateral, and at high rates.” This is what the bank of England did to avert the Panic of 1825. It is exactly what JP Morgan did to avert the Rich Man’s Panic of 1907 ~ he liquidated the bad banks and recapped the good ones. This is roughly what FDR did in 1933 and what Sweden did in the 1990s. They all separated the good banks and good collateral from the bad banks and bad collateral, letting the bad banks fail, and backstopping the still solvent banks. The broader aim was always the same, to save the financial system rather than the bad banks and their shaky collateral. To do this, they let the under-collateralized banks fail, and lent freely to solvent banks against good collateral at a high rate.

The financial panic of 2008-09 stands in stark contrast to the extinguishing of previous financial panics. The most outstanding features to the financial panic of 2008-09 was that the policies set in place were to save the bad banks loaded with toxic collateral on and off its balance sheets rather than to save the financial system itself. Lawmakers effected this change in March 2009 when they eliminated the fair value accounting rule to allow insolvent banks to mark their toxic assets at full value rather than at market value. Effectively, they swept the toxic asset under the rug. They masked their toxic effect, but unresolved issues remain. These toxic assets are now being stored on the Federal Reserves and other off-balance sheets, loaded with unrealized losses. The Basel Committee and FASB are now allowing banks until 2012-2013 to put these assets back onto their balance sheets. This explosive timetable has been reset to 2012, the end of the Mayan Calendar. For those with an eschatological bent, this date with destiny might be the End Days of our financial system as we knew it.

This is a first-ever occurrence in 200 years of banking history that losses stemming from bad collateral were not realized early on. They are time bombs with delayed fuses. To partially offset this day of reckoning in 2012, the Federal Reserve adopted a Zero Interest Rate Policy (ZIRP) to help the very same insolvent banks lever up the yield curve borrowing short and lending long to earn their way out of insolvency. But rather than letting these profits restore the banks impaired balance sheets, bank executives are redistributing these profits in the form of bonuses.

Worse yet, ZIRP is a financial hardship that hurts millions of saving Americans plowing their hard earned dollars into CDs and money market funds. In this way, a zero interest rate policy serves to undermine the financial security of millions of Americans. And still, the unanswered question is whether insolvent banks can successfully recap themselves before these Bouncing-Betty’s detonate. In a race against the clock, policymakers are simply buying banks time, hoping they can avoid mutually assured destruction when their eschatological date with destiny arrives.

... ... ...

Domestic Risks and Uncertainties

1. The Bulk of the Option Arm resets trigger in 2010-2011 – “The reality is that these loans were never meant to survive the reset. Unless an alternative is created, the human pain and loss will be massive.” Institutional Risk Analyst Chris Whalen

2. The Black Holes at FNM and FRE and other GSEs continue to grow

3. Bank hoarding [cash] in 2009, with no end in sight until those option arm resets trigger and all toxic assets have been brought back onto their balance sheets by 2013

4. State and local governments defaulting on financial obligations. To meet financial obligations, austerity measures will be required, social obligations will suffer, meaning more unemployment and less teachers, firemen, and policemen. This burden will be another source of drag on the U.S. economy.

5. Credibility of the Fed and U.S. Treasury and White House Administration will be on the forefront on Investors minds in 2010 and beyond. If their credibility suffers, there will be negative ramifications in the financial markets

6. Stock Market Rescue Operations like the one that got underway in March 2009 tend to last roughly two years, and are followed by bear market resumptions. My models indicate the 2009 bear market rally may end sometime in 2H 2010 followed by a resumption of the secular bear market into 2012-2013.

7. My models also indicate the 2009 bear market rally in the Dow Jones may peak at 11,750-to 12,000, near the bull market crest in 2000. That leaves maybe 12% further upside in 2010 and implies that most of the gains from this bear market rally are already in place. As David Rosenberg pointed out throughout 2009, this is a rally for investors to ‘rent.’ What reallocations can they make as and when the rally ends?

8. Advanced Economies in America and Europe all face Pension liability nightmares with shrinking workforces to support the retiring population, recent examples are GM and YRC pension nightmares. Are taxpayers going to be obligated to fund all private and public pensions of bankrupt companies and state governments?

9. Risk Aversion, saving more versus spending more will be a drag on the economy

10. U.S. government mandate requiring 30 million uninsured Americans to buy health insurance will curb consumer spending and act as a tax on the economy. It will also curb hiring plans amongst U.S. employers further prolonging Americans sidelined from employment opportunities and exacerbating the unemployment rate issues.

11. Will the kindness of foreigners continue to fund the U.S. deficit spending? Eric Sprott and David Franklin noted in their December 2009 missive titled “Is it all just a Ponzi Scheme?” that the “household sector” bought $528 billion of the $1.88 trillion of U.S. debt that was issued to them. This sector only bought $15 billion of treasuries in 2008, where would this group find the wherewithal to buy 35 times more than then bought in the previous year. Sprott concludes that makes no sense with accelerating unemployment and foreclosures, so the household sector must be a “phantom. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.”

Global Risks and Uncertainties

12. Sovereign Risks of Default are increasing as is their fiscal credibility in countries with large debts

13. Asymmetries within the EMU could precipitate a possible breakup of the EMU. The solidification of the countries in the EMU may break-up like ice sheets in the Artic tundra as the global financial meltdown puts further stress on the EMU. Incentives to remain in the EMU, for many EU countries it might be better to leave the EMU than stick around for its constraints and austerity measures

14. The One-size fits-all monetary policy in the EMU may be derailed by this crisis

15. Germany may not want to subsidize weaker countries in the EMU if their exports to those weaker euro countries are falling off a cliff as the crisis rolls on

16. The ECB may not be able to accept sovereign collateral and assets from countries in the EMU that have a negative credit outlook and are later hit with further downgrades. That could have spillover effects into the banks-at-large, including the ones the U.S. government sought so frantically to save.

17. The PIIGS (Portugal, Ireland, Italy, Greece, and Spain) debt ratios are all expected to exceed the 3% GDP 1992 Maastricht Treaty requirement.

18. PIIGs negative 2009 GDP resulting from global export decline leaves them with little incentive to stay strapped to an expensive Euro.

19. Italy is expected to be the first country that will first kiss the EMU good riddance. Greece and Spain might not be far behind as a domino-effect takes hold.

Selected Comments

Ina Pickle:

The “household sector” buying treasuries is the 401(k) funds of the remaining employed in the middle class. They got burned in the stock market, in which they were FORCED to invest by their “betters” during the past decade when their pensions were liquidated and their only hope of saving for retirement was turned into a slot machine on Wall Street. Those people are looking at their retirement accounts, looking at the current stock market and the balanced funds that contain bonds, and are flocking to two options: money market or treasuries. Those are their only options. There are not any other funds for them to invest in!

So probably they are investing in treasuries, but it has nothing to do with faith in their country or with patriotic tendencies. These are not “war bonds.” This is supposedly a safe investment, for which they are willing to (apparently) accept negative returns. Some probably even understand that treasuries aren’t really safe, but figure that if the US government defaults on its debt, they will have much bigger fish to fry than worrying about the destruction of their nest egg. I have to agree.

The real mystery here is why the American people do not rise up and revolt. No one in my generation (born in the 1960s) expects to ever see a penny of social security money, despite paying into the fund our entire lives. The opportunity to actually diversify our forced savings in 401(k) funds is denied us: basically our “pensions” have just been used as fodder for market manipulation for the past 20 years. None of us will ever be able to retire, assuming that there is still employment for us when we’re 65.
 

Francois T:

traditional remedies for extinguishing panics in the financial system over the past two hundred years have more or less always followed Walter Bagehot’s prescript that you “lend freely and early, to solvent firms, against good collateral, and at high rates.” This is what the bank of England did to avert the Panic of 1825. It is exactly what JP Morgan did to avert the Rich Man’s Panic of 1907 ~ he liquidated the bad banks and recapped the good ones. This is roughly what FDR did in 1933 and what Sweden did in the 1990s. They all separated the good banks and good collateral from the bad banks and bad collateral, letting the bad banks fail, and backstopping the still solvent banks. The broader aim was always the same, to save the financial system rather than the bad banks and their shaky collateral. To do this, they let the under-collateralized banks fail, and lent freely to solvent banks against good collateral at a high rate.

The financial panic of 2008-09 stands in stark contrast to the extinguishing of previous financial panics. The most outstanding features to the financial panic of 2008-09 was that the policies set in place were to save the bad banks loaded with toxic collateral on and off its balance sheets rather than to save the financial system itself. Lawmakers effected this change in March 2009 when they eliminated the fair value accounting rule to allow insolvent banks to mark their toxic assets at full value rather than at market value.

Going against history is rarely a recipe for success. Yet, there was apparently no good collateral against which lending freely was possible, even at high rates.

This means that the decades of financial innovation were a scam, pure and simple. Yet, no investigation, no reform, and the same actors who destroyed this economy are still in place, collecting giga-bonuses with the benediction of Congress and the White House.

So, I’m asking our lawmakers and Administration: How much more pain and suffering must we endure before you wake up? Must we hit you so you guys wake up? How hard? Make no mistakes oh! powerful people out there. This is the stuff that, sooner or later, breeds revolutions.

You can only hope it’ll be a peaceful one.

Doug Terpstra:

“Those who make peaceful revolution impossible will make violent revolution inevitable.”
— John F. Kennedy

[Dec 23, 2009] "Insecure Securities"

As a result, European banks have suffered from massive write-offs on toxic American securities. According to the International Monetary Fund, more than 50% of the pre-crisis equity capital of Western Europe’s national banking systems, or $1.6 trillion, will have been destroyed by the end of 2010... Thus, the resource transfer from Europe to the US is similar in size to what the US has spent on the Iraq war ($750 billion) and the Afghanistan war ($300 billion) together.
Economist's View

Hans-Werner Sinn is unhappy with the US financial system. He says "Europeans trusted a system that was untrustworthy," and that resulted in big losses for European banks:

Insecure Securities, by Hans-Werner Sinn, Commentary, Project Syndicate: ...For years, hundreds of billions of new mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) generated from them were sold to the world to compensate for the lack of savings in the United States and to finance American housing investment. Now virtually the entire market for new issues of such securities – all but 3% of the original market volume – has vanished.
To compensate for the disappearance of that market, and for the simultaneous disappearance of non-securitized bank lending to American homeowners, 95% of US mortgages today are channeled through the state institutions Fannie Mae, Freddie Mac, and Ginnie Mae. Just as there was a time when collateralized securities were safe, there was also a time when economies with so much state intervention were called socialist.
Most of these private securities were sold to oil-exporting countries and Europe, in particular Germany, Britain, the Benelux countries, Switzerland, and Ireland. China and Japan shied away from buying such paper.
As a result, European banks have suffered from massive write-offs on toxic American securities. According to the International Monetary Fund, more than 50% of the pre-crisis equity capital of Western Europe’s national banking systems, or $1.6 trillion, will have been destroyed by the end of 2010... Thus, the resource transfer from Europe to the US is similar in size to what the US has spent on the Iraq war ($750 billion) and the Afghanistan war ($300 billion) together.
Americans now claim caveat emptor : Europeans should have known how risky these securities were when they bought them. But even AAA-rated CDOs, which the US ratings agencies had called equivalent in safety to government bonds, are now only worth one-third of their nominal value. Europeans trusted a system that was untrustworthy. ...
For years, the US had a so-called “return privilege.” It earned a rate of return on its foreign assets that was nearly twice as high as the rate it paid foreigners on US assets. One hypothesis is that this reflected better choices by US investment bankers. Another is that US ratings agencies helped fool the world by giving triple-A ratings to their American clients, while aggressively downgrading foreign borrowers. This enabled US banks to profit...
Indeed, it is clear that ratings were ridiculously distorted. While a big US rating agency gave European companies, on average, only a triple-B rating in recent years, CDOs based on MBSs easily obtained triple A-ratings. ... And according to an NBER working paper by Efraim Benmelech and Jennifer Dlugosz, 70% of the CDOs received a triple-A rating even though the MBSs from which they were constructed had just a B+ rating, on average, which would have made them unmarketable. The authors therefore called the process of constructing CDOs “alchemy,” the art of turning lead into gold.
The main problem with US mortgage-based securities is that they are non-recourse. A CDO is a claim against a chain of claims that ends at US homeowners. None of the financial institutions that structure CDOs is directly liable for the repayments they promise...
Only the homeowners are liable. However, the holder of a CDO or MBS would be unable to take these homeowners to court.   And even if he succeeded, homeowners could simply return their house keys...
The problem was exacerbated by fraudulent, or at least dubious, evaluation practices. ... The US will have to reinvent its system of mortgage finance in order to escape the socialist trap into which it has fallen. A minimal reform would be to force banks to retain on their balance sheets a certain proportion of the securities that they issue. That way, they would share the pain if the securities are not serviced – and thus gain a powerful incentive to maintain tight mortgage-lending standards.
An even better solution would be to go the European way: get rid of non-recourse loans and develop a system of finance based on covered bonds, such as the German Pfandbriefe . If a Pfandbrief is not serviced, one can take the issuing bank to court. If the bank goes bankrupt, the holder of the covered bond has a direct claim against the homeowner... And if the homeowner goes bankrupt, the home can be sold to service the debt.

Since their creation in Prussia in 1769 under Frederick the Great, not a single Pfandbrief has defaulted. Unlike the financial junk pouring out of the US in recent years, covered bonds are a security that is worthy of the name.

Selected Comments

kievite
"Hans-Werner Sinn is unhappy with the US financial system."

I do not think he is unhappy and I doubt that it's just him. It's a much stronger feeling, but truth be told if you look like a duck - walk like a duck - quack like a duck...

Loss on business confidence is quite natural reaction and due to the size of the losses is not that easy to overcome.

I would expect that the level of scrutiny of each and every US TBTF banks action now will be quite different for a generation or so. GS might suffer more then others as it is a symbol of everything that is wrong with the US investment banking. 

Mattyoung:

Historically the biggest fraud ever executed. Treasury under Bush, Goldman Sachs, and Moodys; all guilty. Once caught, the US is stuck with higher import prices, socialism at home, and serfdom for the household.

Cause? Bush, and that is why I call the Republicans the Communist Party of America.

Barkley Rosser :

Of course the outfit whose off-the-wall CDO operations were in danger of going bust that threatened all kinds of major European financial interests, requiring the US Fed to take on something like $600 billion of Euro junk during the crisis last fall was the American-based AIG. However, it was its subsidiary in London that was pulling all these shenanigans. Was the US financial system?

As for Republicans as Communists, it is amusing to keep in mind that the only signature by Karl Marx that is the property of the US government, kept in the Archives, Proclamation of Congratulations to the first Republican President of the US (Lincoln) on the occasion of his reelection as president in 1864 from the First International, signed by its Chairman, you know who.

cm said...

As for "Europeans" (or for that matter anybody else) should have known better, at least some of them probably did, but it is always difficult to resist cutting corners, or upholding your standards, when you have to compete with (and/or are compared to) others who are cutting them or play to lower standards.

The same can probably be said about quite a few recent home buyers. I myself got my earful and some mild ridicule for proclaiming discomfort with the housing market situation and refusal to buy a house. It certainly stopped after the bubble had crested.

Mark:

Two quick comments...

1. The "return privilege" has historically been on foreign direct investment, not portfolio investment...

2. One of the big reasons for the error on the part of ratings agencies was a big miss on how sensitive CDOs proved to be on the estimates of correlation among the "mortgages" in the portfolio and to the expected default rates. Make either of these just slightly higher, and formerly triple AAA tranches of a CDO-squared immediately became unmarketable junk. Saw an excellent presentation by Erik Stafford on this topic.

December

[Dec 31, 2009] Pimco CEO: We're Trained to Think the "Farther You Fall, The Higher You'll Bounce Back. We're Hostage to the V"-Shaped Recovery Model

El-Erian says that the economy is on a "sugar high" and its growth, fueled by government intervention, is "unsustainable".
December 29, 2009 | Washington's Blog

Barton Biggs and Marc Faber think that investors should move out of bonds and back into stocks.

On the other hand, the chief executive officer of bond giant Pimco - Mohamed El-Erian - says that most financial managers, investment officers and economists are erroneously assuming this will be a V-shaped recovery because they are "fighting the last war" instead of looking at what is really happening in the economy:

El-Erian says many of the bulls don't appreciate just how much the government props still under the economy are masking its weakness. Instead of focusing on the fundamentals today, he says, they're looking to the past, expecting a quick economic rebound because that's what's happened before.

We're trained to think the "farther you fall, the higher you'll bounce back," El-Erian says. "We're hostage to the V."

El-Erian says that the economy is on a "sugar high" and its growth, fueled by government intervention, is "unsustainable".

[Dec 31, 2009]  Are Homes now Cheap

Calculated Risk

House prices are not cheap nationally. This is apparent in the price-to-income, price-to-rent, and also using real prices. Sure, most of the price correction is behind us and it is getting safer to be a bottom caller! But "cheap" means below normal, and I believe that is incorrect.

... ... ...

Imagine this simplified example with a buyer willing to pay $1000 per month. With a 5% mortgage rate, the buyer could afford a $186,282 30 year fixed rate mortgage (principal and interest). But the buyer expects to sell the home in seven years, and he expects mortgage rates to be 7% then. That means the new buyer - who will also be willing to pay $1000 per month - can only afford a mortgage of $150,308.

So how does the affordability index account for this expected $36,000 loss? It doesn't.

It ends up in this simplified example, the current buyer would be willing to pay about $161,000 today because of the lower interest rate if he was planning on selling in seven years at $150,000 - excluding all expenses, transaction costs, tax savings, discount rates, etc. The actual calculation would be extremely complicated.

Sometimes it is smart to buy when "affordability" is low like in the early '80s when mortgage rates were very high - but smart buyers were expecting rates to fall. And sometimes it is smart not to buy when "affordability" appears high -- like say last year when Mr. Arends wrote in May 2008:

[I]nterest rates are low right now. ... you can get a 30-year fixed-rate mortgage under 6%. If the economy recovers that won't last. If you are shopping for a home, it is probably worth seeing if you can lock in one of these rates cheaply.
But the real key is to focus on supply and demand, and on the general fundamentals of price-to-income and price-to-rent (not perfect measures). House prices are not currently "cheap". They just aren't outrageously expensive nationally anymore.

[Dec 30, 2009]  Move Your Money A New Year's Resolution

From comments: "The problem I see with this plan is also a major plot element in "It's a Wonderful Life"—the small banks still have to do business with the large banks. So, while the big banks might lose some retail business, the increase in their wholesale business would pretty much take up the slack. It might even be better for them not to have to service all those little accounts." Don't forget, there is most of your money are invested in your retirement funds often serviced by financial companies closely connected with big banks. 
Arianna Huffington

Last week, over a pre-Christmas dinner, the two of us, along with political strategist Alexis McGill, filmmaker/author Eugene Jarecki, and Nick Penniman of the HuffPost Investigative Fund, began talking about the huge, growing chasm between the fortunes of Wall Street banks and Main Street banks, and started discussing what concrete steps individuals could take to help create a better financial system. Before long, the conversation turned practical, and with some help from friends in the world of bank analysis, a video and website were produced devoted to a simple idea: Move Your Money.

The big banks on Wall Street, propped up by taxpayer money and government guarantees, have had a record year, making record profits while returning to the highly leveraged activities that brought our economy to the brink of disaster. In a slap in the face to taxpayers, they have also cut back on the money they are lending, even though the need to get credit flowing again was one of the main points used in selling the public the bank bailout. But since April, the Big Four banks -- JP Morgan/Chase, Citibank, Bank of America, and Wells Fargo -- all of which took billions in taxpayer money, have cut lending to businesses by $100 billion.

Meanwhile, America's Main Street community banks -- the vast majority of which avoided the banquet of greed and corruption that created the toxic economic swamp we are still fighting to get ourselves out of -- are struggling. Many of them have closed down (or been taken over by the FDIC) over the last 12 months. The government policy of protecting the Too Big and Politically Connected to Fail is badly hurting the small banks, which are having a much harder time competing in the financial marketplace. As a result, a system which was already dangerously concentrated at the top has only become more so.

We talked about the outrage of big, bailed-out banks turning around and spending millions of dollars on lobbying to gut or kill financial reform -- including "too big to fail" legislation and regulation of the derivatives that played such a huge part in the meltdown. And as we contrasted that with the efforts of local banks to show that you can both be profitable and have a positive impact on the community, an idea took hold: why don't we take our money out of these big banks and put them into community banks? And what, we asked ourselves, would happen if lots of people around America decided to do the same thing? Our money has been used to make the system worse -- what if we used it to make the system better?

Everyone around the table quickly got excited (granted we are an excitable group), and began tossing out suggestions for how to get this idea circulating.

Eugene, the filmmaker among us, remarked that the contrast between the big banks and the community banks we were talking about was very much like the story in the classic Frank Capra film It's a Wonderful Life, where community banker George Bailey helps the people of Bedford Falls escape the grip of the rapacious and predatory banker Mr. Potter.

It was a lightbulb moment. And, unlike the vast majority of dinner conversations, the excitement over this idea didn't end with dessert. It actually led to something -- thanks in great part to Eugene and his remarkable team, who got to work and, in record time, created a brilliant, powerful, and inspiring video playing off the It's a Wonderful Life concept. Watch it below.

[Dec 30, 2009] Sprott Says S&P 500 Index Will Plunge Below March Low (Update3) By Matt Walcoff

Dec. 29, 2009 | Bloomberg

“We’re in a bear market that will last 15 or 20 years, and we’ve had nine of them,” Sprott, chief executive officer of Sprott Asset Management LP, which oversees C$4.3 billion ($4.09 billion), said in an interview Dec. 18.

... ... ...

Sprott said the Federal Reserve has kept bond yields and interest rates artificially low through its program to buy agency debt and mortgage-backed securities. The central bank expects the securities purchase program to finish by the end of March.

Expiration of the program would reduce demand for fixed-income securities, forcing up bond yields and interest rates and hurting economic growth, Sprott said.

... ... ...

Unjustified Optimism

Sprott says investors have been too eager to see the data as signs of recovery. While the S&P 500 added 0.6 percent on the day of the employment report, a 23rd consecutive month of payroll contraction was no reason for optimism, he said.

“We don’t have employment gains,” he said. “We have less of a decline. That’s a sign of weakness. The data is weak.”

[Dec 29, 2009] Pomboy: A Looming New Credit-bust By Barry Ritholtz

December 28, 2009

Stephanie Pomboy of MacroMavens was quoted extensively in this week’s Up and Down Wall Street column by Alan Abelson:

“The people necessary to drive the kind of increase in spending that would justify this year’s sizzling move in markets are consumers at the high end, the top 5% of households who own no less than 84% of equities. Yet, all the evidence suggests, they’re far from spending with their old abandon.

Stephanie speculates that one reason for their reluctance could be that while stocks have rallied, thus enriching their portfolios, dividends have been relentlessly shrinking: the $775 billion-plus annual dividend windfall the affluent had grown accustomed to has been slashed by a third or so. Or, it just may be that “even for the high-end, housing deflation outweighs equity inflation.”

Pomboy further notes that so far, we have only seen a temporary rebuild of balance sheets:

“Ben Bernanke has achieved through his unprecedented actions over the past year, it’s “only a pause in a broad deleveraging story.”

But, she warns, the game is far from over. “As the clock starts on the New Year, the likes of exotic mortgage recasts, small-biz failures and state and local tax hikes will take the field. And the realization will dawn that none of our fundamental problems — most notably excess leverage — have been solved…

And just as one could argue that markets were overly aggressive in discounting the end of existence as we knew it back in March, so, too, they may be guilty of anticipating our imminent arrival at Nirvana today.”

The agent of the great awakening will be gathering pressures on the credit market, as banks are “forced to re-provision, and resurgent delinquencies find Fannie and Freddie (and everyone else) putting ill-made mortgages back to lenders.”

Credit will grow dear and do so precisely as the demand for it from borrowers looking to roll over maturing obligations swells.

The numbers, Stephanie exclaims, are unbelievably big. Uncle Sam must roll over $2.5 trillion in debt during the next two years, banks worldwide have some $7 trillion due in the same stretch and commercial real estate will weigh in with another $750 billion.

Oh, dear . .

Selected Comments

The Curmudgeon:

“And the realization will dawn that none of our fundamental problems — most notably excess leverage — have been solved…”

Is that the same as saying that just because you printed more dollars such that we could enjoy the illusion of stability, monetary illusions are always eventually revealed as such? 2010 – the new 2008.

RiskAverseAlert:

Had no idea that, “the top 5% of households … own no less than 84% of equities.” I wonder what is the percentage for the top 1%? Likewise, I wonder what has been the trend in equity holdings among the top 1-5% of households over, say, the past 25-100 years.

My curiosity is to know how few people, relatively speaking, had to panic last year in order to bring about the result we saw, as well as to measure the cost incurred in the hope of assuring that even more among these relatively few do not similarly panic.

call me ahab:

. . .and lastly. . . blind optimism . . . why?

Nothing wrong with being hopeful -- but throw me a fucking bone so I have something to chew on. Where is the good news for this country?

And don’t tell me green jobs and education. And a related question-

how has the pursuit of the bottom line for American companies been helpful to American workers?

jc:

People have been high fiving without noticing it’s only the 4th inning

Steve Barry:

We need to focus more on debt growth than “printing money”…I have postulated that there is up to 50 Trillion in credit worldwide over and above what could be serviced by global GDP. It has taken more and more debt to produce GDP and the ability for the private sector to handle any more debt hit a wall last year. The govt responded by creating public debt, their only recourse to avoid a depression, but how can that logically succeed? Stephanie is correct. As existing debt goes bad and disappears, we will have a deflationary crash. The Fed is Wyle E. Coyote holding an umbrella up with an avalanche coming down. The “printing money” metaphor is not very useful…it would be flushed down the debt hole anyway.

wally:

Like a car sliding on ice… you correct, it kicks back and slides the other way, you correct… there is probably a perfect amount of correction, but I guarantee the wild thrashings of Ben B did not hit the sweet spot.

ACS:

It’s not just shrinking dividends, it is also current interest rates. Those that depend on interest income will continue to see it drop as maturing instruments are replaced with lower yielding ones, at least until reality sets in and rates soar.

investorinpa:

ACS…not just shrinking dividends…but what happens in 2011 when dividends are taxed at a much higher rate thanks to the expiration of the Bush tax cuts?

alfred e:

Obama will not allow the capital gains tax to return to reasonable levels.

Won;t happen on his watch.

[Dec 29, 2009] A ''Turning Point in U.S. Society''? by Mark Thoma

December 28, 2009 | Economist's View
Did Enron change everything?:
Might Krugman's polemic prediction about Enron vs. 9-11 ever come true?, by Michael Roberts: I look at our financial and economic system in dumbfounded awe as to how it all works.  We shovel trillions of dollars into banks, stocks and mutual funds, rarely knowing the first thing about how well the underlying companies are managed or how profitable they are or what they are truly doing with our money.  While I think I'm more informed than the average investor, I couldn't tell you which 10 CEOs are most responsible for my investments.  I couldn't even tell you the top 10 companies! ...

The fact that I do invest shows I have remarkable confidence in our financial system.  That confidence is based on history, the fact that firms and CEOs have been honest and transparent enough in their accounting and that, over the long run, the stock market has performed extremely well.  The long sweep of history says I'm crazy not to invest.

But then I look at recent history and I wonder how the long history came to be.  Honest and transparent are not adjectives that come easily to mind when looking at our modern financial system and events over the last decade.

This issue is in fact the lynch pin to modern capitalism.  At a fundamental level what makes it all work is to having institutions that deal effectively with asymmetric information (the econ jargon).  If one cannot see exactly what they are buying with their investment money, little investment will take place, and economies don't grow.  So modern capitalism requires rock solid institutions that reduce information asymmetries and allow dollars to flow toward investments with the greatest potential returns.

This is why, back in 2002, Paul Krugman made what I think was his most polemic prediction ever:

I predict that in the years ahead Enron, not Sept. 11, will come to be seen as the greater turning point in U.S. society.

Many, including me, thought this was a bit much, even if Krugman made some good points in that old column. His column today, a tribute the naughties, echos similarly to his 2002 prediction...

Krugman was worried about the collapse of our financial institutions and saw Enron as an omen. ... And here we are. Things didn't collapse completely but it wasn't pretty.  While we've begun to recover (barely) many problems still need fixing, particularly re-regulation of financial markets.

I still think Krugman overstepped when he made that prediction in 2002, not just because the Enron fallout blew over relatively quickly, but because the sweeping fallout of 9/11 has been so great. But today I do think there is a chance ... that Krugman's prediction might eventually turn out to be right after all. ...

What's disappointing is that after Enron, and after what just happened, things might not change, at least not by very much. As Krugman notes, we seem unwilling to learn from our mistakes:

Even as the dot-com bubble deflated, credulous bankers and investors began inflating a new bubble in housing. Even after famous, admired companies like Enron and WorldCom were revealed to have been Potemkin corporations with facades built out of creative accounting, analysts and investors believed banks’ claims about their own financial strength and bought into the hype about investments they didn’t understand. Even after triggering a global economic collapse, and having to be rescued at taxpayers’ expense, bankers wasted no time going right back to the culture of giant bonuses and excessive leverage.

Part of it is transparency, and more is certainly needed, and perhaps it is an inability to learn from mistakes, but a bigger problem is the distribution of economic and political power. Business interests are dominant in Washington, and these powerful interests will do what they can to resist constraints on their behavior no matter what lessons the rest of us may have learned from their actions in the past. It is not at all clear that the political will needed to overcome the opposition of business groups and make the needed regulatory and legislative changes is present. Unless and until the political will is there, and if this crisis doesn't do it I'm not sure what will, we'll be in danger of repeating the same mistakes yet again. Congress might surprise and take tough action if and when the financial reform process currently underway is complete, but I'm not expecting that to happen.

[Dec 29, 2009] Google's Monopoly Power

Dec 27, 2009 | Economist's View
It is not illegal to have monopoly power, but there are limits on how that power can be used. Has Google crossed over the line?:
Search, but You May Not Find. by Adam Raff, Commentary, NY Times: ...Today, search engines like Google, Yahoo and Microsoft’s new Bing have become the Internet’s gatekeepers, and the crucial role they play in directing users to Web sites means they are now as essential a component of its infrastructure as the physical network itself. The F.C.C. needs to look [at]... “search neutrality”: the principle that search engines should have no editorial policies other than that their results be comprehensive, impartial and based solely on relevance.
The need for search neutrality is particularly pressing because so much market power lies in the hands of one company: Google. With 71 percent of the United States search market (and 90 percent in Britain), Google’s dominance of both search and search advertising gives it overwhelming control. ...
One way that Google exploits this control is by imposing covert “penalties” that can strike legitimate and useful Web sites, removing them entirely from its search results or placing them so far down the rankings that they will in all likelihood never be found. For three years, my company’s vertical search and price-comparison site, Foundem, was effectively “disappeared” from the Internet in this way.
Another way that Google exploits its control is through preferential placement. With the introduction in 2007 of what it calls “universal search,” Google began promoting its own services at or near the top of its search results... Google now favors its own price-comparison results..., its own map results..., its own news results..., and its own YouTube results for video queries. And Google’s stated plans for universal search make it clear that this is only the beginning.
Because of its domination of the global search market and ability to penalize competitors while placing its own services at the top of its search results, Google has a virtually unassailable competitive advantage. And Google can deploy this advantage well beyond the confines of search to any service it chooses. Wherever it does so, incumbents are toppled, new entrants are suppressed and innovation is imperiled. ...
The preferential placement of Google Maps helped it unseat MapQuest from its position as America’s leading online mapping service virtually overnight. ... Without search neutrality rules to constrain Google’s competitive advantage, we may be heading toward a bleakly uniform world of Google Everything — Google Travel, Google Finance, Google Insurance, Google Real Estate, Google Telecoms and, of course, Google Books.
Some will argue that Google is itself so innovative that we needn’t worry. But the company isn’t as innovative as it is regularly given credit for. Google Maps, Google Earth, Google Groups, Google Docs, Google Analytics, Android and many other Google products are all based on technology that Google has acquired rather than invented. Even AdWords and AdSense ... are essentially borrowed inventions...
Google ... now faces a difficult choice. Will it embrace search neutrality...? Or will it try to argue that discriminatory market power is somehow ... harmless in the hands of an overwhelmingly dominant search engine? ...
Will the beginning of a new decade bring an end to the Great Stagnation?:
The Big Zero, by Paul Krugman, Commentary, NY Times: Maybe we knew, at some unconscious, instinctive level, that it would be an era best forgotten. Whatever the reason, we got through the first decade of the new millennium without ever agreeing on what to call it. The aughts? The naughties? Whatever. ...

But from an economic point of view, I’d suggest that we call the decade past the Big Zero. It was a decade in which nothing good happened, and none of the optimistic things we were supposed to believe turned out to be true.

It was a decade with basically zero job creation..., private-sector employment has actually declined — the first decade on record in which that happened.

It was a decade with zero economic gains for the typical family. Actually, even at the height of the alleged “Bush boom,” in 2007, median household income adjusted for inflation was lower than it had been in 1999. And you know what happened next.

It was a decade of zero gains for homeowners...: right now housing prices, adjusted for inflation, are roughly back to where they were at the beginning of the decade. ... Almost a quarter of all mortgages ... are underwater, with owners owing more than their houses are worth.

Last and least for most Americans — but a big deal for retirement accounts, not to mention the talking heads on financial TV — it was a decade of zero gains for stocks, even without taking inflation into account. Remember the excitement when the Dow first topped 10,000...? Well, that was back in 1999. Last week the market closed at 10,520.

So there was a whole lot of nothing going on in measures of economic progress or success. Funny how that happened.

For as the decade began, there was an overwhelming sense of economic triumphalism in America’s business and political establishments, a belief that we — more than anyone else in the world — knew what we were doing. ...

Let me quote from a speech that Lawrence Summers, then deputy Treasury secretary..., gave in 1999. ... [quote] ... Mr. Summers — and ... just about everyone in a policy-making position at the time — believed ... America has honest corporate accounting; this lets investors make good decisions, and also forces management to behave responsibly; and the result is a stable, well-functioning financial system.

What percentage of all this turned out to be true? Zero.

What was truly impressive about the decade past, however, was our unwillingness, as a nation, to learn from our mistakes.

Even as the dot-com bubble deflated, credulous bankers and investors began inflating a new bubble in housing. Even after famous, admired companies like Enron and WorldCom were revealed to have been Potemkin corporations with facades built out of creative accounting, analysts and investors believed banks’ claims about their own financial strength and bought into the hype about investments they didn’t understand. Even after triggering a global economic collapse, and having to be rescued at taxpayers’ expense, bankers wasted no time going right back to the culture of giant bonuses and excessive leverage.

Then there are the politicians. Even now, it’s hard to get Democrats, President Obama included, to deliver a full-throated critique of the practices that got us into the mess we’re in. And as for the Republicans: now that their policies of tax cuts and deregulation have led us into an economic quagmire, their prescription for recovery is — tax cuts and deregulation.

So let’s bid a not at all fond farewell to the Big Zero — the decade in which we achieved nothing and learned nothing. Will the next decade be better? Stay tuned. Oh, and happy New Year.

[Dec 29, 2009] “2010- Foreseeable and Unforeseeable Risks ~ The Room For Policy Error is Enormous” by John Bougearel

"a zero interest rate policy serves to undermine the financial security of millions of Americans."
Dec 29, 2009 | naked capitalism
Charles Kindleberger tells us financial crises are “hardy perennials.” That is true, but traditional remedies for extinguishing panics in the financial system over the past two hundred years have more or less always followed Walter Bagehot’s prescript that you “lend freely and early, to solvent firms, against good collateral, and at high rates.” This is what the bank of England did to avert the Panic of 1825. It is exactly what JP Morgan did to avert the Rich Man’s Panic of 1907 ~ he liquidated the bad banks and recapped the good ones. This is roughly what FDR did in 1933 and what Sweden did in the 1990s. They all separated the good banks and good collateral from the bad banks and bad collateral, letting the bad banks fail, and backstopping the still solvent banks. The broader aim was always the same, to save the financial system rather than the bad banks and their shaky collateral. To do this, they let the under-collateralized banks fail, and lent freely to solvent banks against good collateral at a high rate.

The financial panic of 2008-09 stands in stark contrast to the extinguishing of previous financial panics. The most outstanding features to the financial panic of 2008-09 was that the policies set in place were to save the bad banks loaded with toxic collateral on and off its balance sheets rather than to save the financial system itself. Lawmakers effected this change in March 2009 when they eliminated the fair value accounting rule to allow insolvent banks to mark their toxic assets at full value rather than at market value. Effectively, they swept the toxic asset under the rug. They masked their toxic effect, but unresolved issues remain. These toxic assets are now being stored on the Federal Reserves and other off-balance sheets, loaded with unrealized losses. The Basel Committee and FASB are now allowing banks until 2012-2013 to put these assets back onto their balance sheets. This explosive timetable has been reset to 2012, the end of the Mayan Calendar. For those with an eschatological bent, this date with destiny might be the End Days of our financial system as we knew it.

This is a first-ever occurrence in 200 years of banking history that losses stemming from bad collateral were not realized early on. They are time bombs with delayed fuses. To partially offset this day of reckoning in 2012, the Federal Reserve adopted a Zero Interest Rate Policy (ZIRP) to help the very same insolvent banks lever up the yield curve borrowing short and lending long to earn their way out of insolvency. But rather than letting these profits restore the banks impaired balance sheets, bank executives are redistributing these profits in the form of bonuses.

Worse yet, ZIRP is a financial hardship that hurts millions of saving Americans plowing their hard earned dollars into CDs and money market funds. In this way, a zero interest rate policy serves to undermine the financial security of millions of Americans. And still, the unanswered question is whether insolvent banks can successfully recap themselves before these Bouncing-Betty’s detonate. In a race against the clock, policymakers are simply buying banks time, hoping they can avoid mutually assured destruction when their eschatological date with destiny arrives.

... ... ...

Domestic Risks and Uncertainties

1. The Bulk of the Option Arm resets trigger in 2010-2011 – “The reality is that these loans were never meant to survive the reset. Unless an alternative is created, the human pain and loss will be massive.” Institutional Risk Analyst Chris Whalen

2. The Black Holes at FNM and FRE and other GSEs continue to grow

3. Bank hoarding [cash] in 2009, with no end in sight until those option arm resets trigger and all toxic assets have been brought back onto their balance sheets by 2013

4. State and local governments defaulting on financial obligations. To meet financial obligations, austerity measures will be required, social obligations will suffer, meaning more unemployment and less teachers, firemen, and policemen. This burden will be another source of drag on the U.S. economy.

5. Credibility of the Fed and U.S. Treasury and White House Administration will be on the forefront on Investors minds in 2010 and beyond. If their credibility suffers, there will be negative ramifications in the financial markets

6. Stock Market Rescue Operations like the one that got underway in March 2009 tend to last roughly two years, and are followed by bear market resumptions. My models indicate the 2009 bear market rally may end sometime in 2H 2010 followed by a resumption of the secular bear market into 2012-2013.

7. My models also indicate the 2009 bear market rally in the Dow Jones may peak at 11,750-to 12,000, near the bull market crest in 2000. That leaves maybe 12% further upside in 2010 and implies that most of the gains from this bear market rally are already in place. As David Rosenberg pointed out throughout 2009, this is a rally for investors to ‘rent.’ What reallocations can they make as and when the rally ends?

8. Advanced Economies in America and Europe all face Pension liability nightmares with shrinking workforces to support the retiring population, recent examples are GM and YRC pension nightmares. Are taxpayers going to be obligated to fund all private and public pensions of bankrupt companies and state governments?

9. Risk Aversion, saving more versus spending more will be a drag on the economy

10. U.S. government mandate requiring 30 million uninsured Americans to buy health insurance will curb consumer spending and act as a tax on the economy. It will also curb hiring plans amongst U.S. employers further prolonging Americans sidelined from employment opportunities and exacerbating the unemployment rate issues.

11. Will the kindness of foreigners continue to fund the U.S. deficit spending? Eric Sprott and David Franklin noted in their December 2009 missive titled “Is it all just a Ponzi Scheme?” that the “household sector” bought $528 billion of the $1.88 trillion of U.S. debt that was issued to them. This sector only bought $15 billion of treasuries in 2008, where would this group find the wherewithal to buy 35 times more than then bought in the previous year. Sprott concludes that makes no sense with accelerating unemployment and foreclosures, so the household sector must be a “phantom. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.”

Global Risks and Uncertainties

12. Sovereign Risks of Default are increasing as is their fiscal credibility in countries with large debts

13. Asymmetries within the EMU could precipitate a possible breakup of the EMU. The solidification of the countries in the EMU may break-up like ice sheets in the Artic tundra as the global financial meltdown puts further stress on the EMU. Incentives to remain in the EMU, for many EU countries it might be better to leave the EMU than stick around for its constraints and austerity measures

14. The One-size fits-all monetary policy in the EMU may be derailed by this crisis

15. Germany may not want to subsidize weaker countries in the EMU if their exports to those weaker euro countries are falling off a cliff as the crisis rolls on

16. The ECB may not be able to accept sovereign collateral and assets from countries in the EMU that have a negative credit outlook and are later hit with further downgrades. That could have spillover effects into the banks-at-large, including the ones the U.S. government sought so frantically to save.

17. The PIIGS (Portugal, Ireland, Italy, Greece, and Spain) debt ratios are all expected to exceed the 3% GDP 1992 Maastricht Treaty requirement.

18. PIIGs negative 2009 GDP resulting from global export decline leaves them with little incentive to stay strapped to an expensive Euro.

19. Italy is expected to be the first country that will first kiss the EMU good riddance. Greece and Spain might not be far behind as a domino-effect takes hold.

Selected Comments

Ina Pickle:

The “household sector” buying treasuries is the 401(k) funds of the remaining employed in the middle class. They got burned in the stock market, in which they were FORCED to invest by their “betters” during the past decade when their pensions were liquidated and their only hope of saving for retirement was turned into a slot machine on Wall Street. Those people are looking at their retirement accounts, looking at the current stock market and the balanced funds that contain bonds, and are flocking to two options: money market or treasuries. Those are their only options. There are not any other funds for them to invest in!

So probably they are investing in treasuries, but it has nothing to do with faith in their country or with patriotic tendencies. These are not “war bonds.” This is supposedly a safe investment, for which they are willing to (apparently) accept negative returns. Some probably even understand that treasuries aren’t really safe, but figure that if the US government defaults on its debt, they will have much bigger fish to fry than worrying about the destruction of their nest egg. I have to agree.

The real mystery here is why the American people do not rise up and revolt. No one in my generation (born in the 1960s) expects to ever see a penny of social security money, despite paying into the fund our entire lives. The opportunity to actually diversify our forced savings in 401(k) funds is denied us: basically our “pensions” have just been used as fodder for market manipulation for the past 20 years. None of us will ever be able to retire, assuming that there is still employment for us when we’re 65.

Francois T:

traditional remedies for extinguishing panics in the financial system over the past two hundred years have more or less always followed Walter Bagehot’s prescript that you “lend freely and early, to solvent firms, against good collateral, and at high rates.” This is what the bank of England did to avert the Panic of 1825. It is exactly what JP Morgan did to avert the Rich Man’s Panic of 1907 ~ he liquidated the bad banks and recapped the good ones. This is roughly what FDR did in 1933 and what Sweden did in the 1990s. They all separated the good banks and good collateral from the bad banks and bad collateral, letting the bad banks fail, and backstopping the still solvent banks. The broader aim was always the same, to save the financial system rather than the bad banks and their shaky collateral. To do this, they let the under-collateralized banks fail, and lent freely to solvent banks against good collateral at a high rate.

The financial panic of 2008-09 stands in stark contrast to the extinguishing of previous financial panics. The most outstanding features to the financial panic of 2008-09 was that the policies set in place were to save the bad banks loaded with toxic collateral on and off its balance sheets rather than to save the financial system itself. Lawmakers effected this change in March 2009 when they eliminated the fair value accounting rule to allow insolvent banks to mark their toxic assets at full value rather than at market value.

Going against history is rarely a recipe for success. Yet, there was apparently no good collateral against which lending freely was possible, even at high rates.

This means that the decades of financial innovation were a scam, pure and simple. Yet, no investigation, no reform, and the same actors who destroyed this economy are still in place, collecting giga-bonuses with the benediction of Congress and the White House.

So, I’m asking our lawmakers and Administration: How much more pain and suffering must we endure before you wake up? Must we hit you so you guys wake up? How hard? Make no mistakes oh! powerful people out there. This is the stuff that, sooner or later, breeds revolutions.

You can only hope it’ll be a peaceful one.

Doug Terpstra:

“Those who make peaceful revolution impossible will make violent revolution inevitable.”
— John F. Kennedy
 

[Dec 29, 2009] Did Christianity Cause the Crash - The Atlantic (December 2009)

"One theme emerging themes in subprime abuse related suits is how banks teamed up with pastors to win over new customers for subprime loans... The unpleasant reality—an inadequate paycheck, a pregnant daughter, a recession—is invisible. It’s your ability to see beyond such things, your willing blindness to even the most hopeless-seeming circumstances, that makes you a certain kind of modern Christian, and a 21st-century American. There is the kind of hope that President Obama talks about, and that Clinton did before him—steady, uplifting, assured."
America’s churches always reflect shifts in the broader culture, and Casa del Padre is no exception. The message that Jesus blesses believers with riches first showed up in the postwar years, at a time when Americans began to believe that greater comfort could be accessible to everyone, not just the landed class. But it really took off during the boom years of the 1990s, and has continued to spread ever since. This stitched-together, homegrown theology, known as the prosperity gospel, is not a clearly defined denomination, but a strain of belief that runs through the Pentecostal Church and a surprising number of mainstream evangelical churches, with varying degrees of intensity. In Garay’s church, God is the “Owner of All the Silver and Gold,” and with enough faith, any believer can access the inheritance. Money is not the dull stuff of hourly wages and bank-account statements, but a magical substance that comes as a gift from above. Even in these hard times, it is discouraged, in such churches, to fall into despair about the things you cannot afford. “Instead of saying ‘I’m poor,’ say ‘I’m rich,’” Garay’s wife, Hazael, told me one day. “The word of God will manifest itself in reality.”

Many explanations have been offered for the housing bubble and subsequent crash: interest rates were too low; regulation failed; rising real-estate prices induced a sort of temporary insanity in America’s middle class. But there is one explanation that speaks to a lasting and fundamental shift in American culture—a shift in the American conception of divine Providence and its relationship to wealth.

In his book Something for Nothing, Jackson Lears describes two starkly different manifestations of the American dream, each intertwined with religious faith.

The self-made man imagines a coherent universe where earthly rewards match merits. The confidence man lives in a culture of chance, with “grace as a kind of spiritual luck, a free gift from God.” The Gilded Age launched the myth of the self-made man, as the Rockefellers and other powerful men in the pews connected their wealth to their own virtue. In these boom-and-crash years, the more reckless alter ego dominates.

In his book, Lears quotes a reverend named Jeffrey Black, who sounds remarkably like Garay: “The whole hope of a human being is that somehow, in spite of the things I’ve done wrong, there will be an episode when grace and fate shower down on me and an unearned blessing will come to me—that I’ll be the one.”

... ... ...

Among Latinos the prosperity gospel has been spreading rapidly. In a recent Pew survey, 73 percent of all religious Latinos in the United States agreed with the statement: “God will grant financial success to all believers who have enough faith.” For a generation of poor and striving Latino immigrants, the gospel seems to offer a road map to affluence and modern living. Garay’s church is comprised mostly of first-generation immigrants. More than others I’ve visited, it echoes back a highly distilled, unself-conscious version of the current thinking on what it means to live the American dream

One other thing makes Garay’s church a compelling case study. From 2001 to 2007, while he was building his church, Garay was also a loan officer at two different mortgage companies. He was hired explicitly to reach out to the city’s growing Latino community, and Latinos, as it happened, were disproportionately likely to take out the sort of risky loans that later led to so many foreclosures. To many of his parishioners, Garay was not just a spiritual adviser, but a financial one as well.

... ... ...

In June, the Supreme Court ruled that state attorneys general had the authority to sue national banks for predatory lending. Even before that ruling, at least 17 lawsuits accusing various banks of treating racial minorities unfairly were already under way. (Bank of America’s Countrywide division—one of the companies Garay worked for—had earlier agreed to pay $8.4 billion in a multistate settlement.) One theme emerging in these suits is how banks teamed up with pastors to win over new customers for subprime loans.

... ... ...

It is not all that surprising that the prosperity gospel persists despite its obvious failure to pay off. Much of popular religion these days is characterized by a vast gap between aspirations and reality. Few of Sarah Palin’s religious compatriots were shocked by her messy family life, because they’ve grown used to the paradoxes; some of the most socially conservative evangelical churches also have extremely high rates of teenage pregnancies, out-of-wedlock births, and divorce. As Garay likes to say, “What you have is nothing compared to what you will have.” The unpleasant reality—an inadequate paycheck, a pregnant daughter, a recession—is invisible. It’s your ability to see beyond such things, your willing blindness to even the most hopeless-seeming circumstances, that makes you a certain kind of modern Christian, and a 21st-century American.

There is the kind of hope that President Obama talks about, and that Clinton did before him—steady, uplifting, assured. And there is Garay’s kind of hope, which perhaps for many people better reflects the reality of their lives. Garay’s is a faith that, for all its seeming confidence, hints at desperation, at circumstances gone so far wrong that they can only be made right by a sudden, unexpected jackpot.

Once, I asked Garay how you would know for certain if God had told you to buy a house, and he answered like a roulette dealer. “Ten Christians will say that God told them to buy a house. In nine of the cases, it will go bad. The 10th one is the real Christian.” And the other nine? “For them, there’s always another house.”

[Dec 28, 2009] Brace For Impact In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else

zero hedge

...Bottom line: everyone has major problems at home, and is more focused on the supply than the demand side of the equation.

What options does this leave for the administration? Very few, and all of them are ugly. As we stated earlier on, the options for the Fed are threefold:

  1. Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes (at least those whose residential zip codes do not start with 10xxx or 068xx), creating major headaches for Obama and the democrats which are already struggling with collapsing polls.
  2. Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke's complete lack of preparation from a monetary standpoint (we are surprised the Fed's $200 million reverse repos have not made the late night comedy circuit yet) to a forced interest rate increase, would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.
  3. Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow (as we demonstrated recently, that is not the case), but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. Yet the President's Working Group is fully aware that when the time comes to hitting the "reverse" button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasuries is unknown. It will likely be correlated to the size of the equity market drop.

If the Fed decides on option three, we fully believe a 30% drop (or greater) in equities is very probable as the new supply/demand regime in fixed income becomes apparent. We hope mainstream media takes the ideas presented here and processes them for broader consumption as indeed the Fed is caught in a very fragile dilemma, and the sooner its hand is pushed, the less disastrous the final outcome for investors. Then again, as Eric Sprott has been pointing out for quite some time, it could very well be that the US economy has become merely one huge Ponzi, and as such, its expansion or reduction on the margin is uncontrollable. We very well may have passed into the stage where blind growth is the only alternative to a complete collapse. We hope that is not the case.

Merry Christmas and Happy Holidays to all readers.

Anonymous

I am not sure why you describe a falling stock market as an "engineered" crash? Actually, the opposite is true. The only thing the Fed needs to do to cause a share price crash is slow down the printing of funny-money. The equity markets needed a huge amount of engineering to be pumped up to current bloated levels. They will need no engineering at all to crash to their natural values.

Anonymous

From a community banker perspective, I find the prospects for 2010 to be rather dim. The moment the Fed stops pushing down mortgage rates, through its drug-like crazed MBS buying spree, property values are going to drop like a rock and take down every weak and marginal financial institution down with it. Collateral values have been propped up by the mortgage rates that have hovered for most of the year at below 5%.

Rates and asset values do not reflect the inherent risk associated with the environment right now. They are distorted due to government meddling.

I don't whether to buy a rifle and a bunch of shells at Wal-Mart, or buy as much silver and gold as I can get my hands on.
 

msorense:

The real debt to GDP is around 840%:

http://www.forbes.com/2009/12/18/government-budget-deficit-personal-finance-financial-advisor-network-treasury-debt.html

Rusty_Shackleford

Riddle me this Z-men (and ladies):

When calulating an individual person's financial risk and viability, we look at his debt to income level (DTI), but when talking about a country we always look at debt to GDP.

However, is this valid?

Every dollar said government borrows and spends makes the GDP go up.

This is akin to looking at an individual person and counting everything he has purchased with his credit cards as "income".

(Also, the GDP is not the Government's income.  It is ours.

As soon as the government starts creating something of value and selling it at a profit, it can count it as it's income.)

Anonymous

Excellent writing. Thank you

I fully agree. I have worked for hedge funds in the US and now in emerging markets. Timmy, the pet is a complete nut and Benny, the chief thief knows very well what he is doing but alas the last thing on his mind is the welfare of American common man. He is more interested in piling it on via debt issuance.

The sad thing is where is the money going??

Fresbee
Investing contrarian
 

Shameful:

I like where you are going with that but consider this angle, that we are their property. Why can the government enslave us via the draft, because we are their property. Why can the government take our property and earnings without our permission, because we are their property.

Why can the government pursue our income and property across the globe, be cause we are their property. Slavery still exists in the US. They got rid of private slavery and kept only public slavery.

Every American is a slave to the Federal Government. They are free to take our fortunes and indeed our lives at their pleasure. The only thing holding them back is the armed segment of the population, after all it's harder to rob an armed man.

skippy:

Shameful, with all due respect, the arms you speak of give a false sense of security.

Firstly the thief must be with in range DC/WS can be a long way, away and does your ammo have the ability to penetrate their armor.

Secondly, in a war between facts and the *truth* the frame is cognitive not material, have you ever tried putting a hole in a thought with a bullet. Your enemy's are many, can your clip dispatch them all before the need to reload arrives?

Lastly, if any one actually uses violence *especially with ballistics* you will only further their grip of power over you and yours as it will be used to enact stronger reaction on their part. My thought is to de-legitimize their power by not participating in the voting process, take the mandate away or as voices of the people they must have sufficient backing to lay claim to such and with out the backing will be naked for all to see.

Mad Max:

How did that work for Chinese students in 1989? Hungarian uprising? Prague spring? Palestinians today?

Nonviolent resistance works, sometimes, when the oppressor isn't all that evil and isn't all that interested. Gandhi succeeded because the British Empire was spent. MLK because the US culture was changing and he was in the right place and time.

Now how do I emigrate to Norway?

Shameful:
You mistake that I would have any intentions of fighting any kind of armed conflict.  I have zero interest in that.  My statement is simply that by the fact that a person is armed that makes a looter think twice before robbing him.  While you are correct that the Overlords are Quite safe in Mordor on the Potomac (DC) however the Orcs (IRS, EPA, etc) are less likely to unleash their full depravity when there is a chance a slave might take a shot at them.  Ultimately the gov would of course win a crushing victory over any armed resistance, no doubt.  All it would take would be to shut of water/power/food in a city for a week and the masses will gladly accept the shackles once more. Much less the use of the wonderful tech toys they have developed to murder and suppress populations.  Full agreement that armed resistance is futile, I merely think that by being armed we mitigate some of the depravity, or at least slow it down.  Think Fleet in Being doctrine.

As to not voting, they don't care.  They don't care about you not playing the game because if you don't so what?  The only way to "win" is to leave.  Deprive the beast of your labor, and your productivity.  No to be a fatalist, but the oligarchs won.  At least here in America, it's all over but the crying.  Well unless the sheep wake up, but they have their CNN, MSNBC, and Faux News to tell them it's all Red/Blue teams fault.

[Dec 28, 2009] Divergent Views on Treasury Yields in 2010

Looks like they are forecasting "Inverted W"  or "inverted "U" for 2010: First Up -- till probably Q2 -- then down and that Up, Up and Up ?

Here are a couple of stories with very different views ...

From Bloomberg: Morgan Stanley Sees 5.5% Note as U.S. Faces Deficits (ht Bob_in_MA)

Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.
And the LA Times has comments from PIMCO's El Erian (Update: the article is not clear when El Erian made these comments, but the article is dated Dec 27, 2009):
El-Erian says people are fooling themselves if they think all the bullish data of late means a strong recovery is in the offing. So he's buying Treasurys and selling riskier stuff.

His bet: Investors will get scared again and want U.S.-guaranteed debt so they know they'll get repaid.

Earlier Greenlaw argued that the Fed would start raising rates in the 2nd half of 2010 because of rising inflation, even with a fairly weak economy. I think it is unlikely that the Fed will raise rates in 2010 (although possible) - and I'll definitely take the under on Greenlaw's 2010 prediction of 7.5%+ rates on 30-year fixed mortgages - that seems extremely unlikely.

DCRogers:

For me, the interesting question is what does Morgan Stanley hold in its portfolio that would benefit from giving such a loud push to a report that is likely an outlier in the opinions held even within the company, and risks making them look foolish over the longer run if/when it does not come to pass.

I'm guessing they're sitting on the wrong end of a large number of interest-rate swaps they would love to be bailed out of, but that's just a guess. If this report can tweak the market even a little bit in the right direction, that might be worth a lot to them.

wawawa:

ZeroHedge has an article about this. Among other possibilities, ZH speculates that Gov. will orchestrate stock market decline to divert money to the treasury market.

brace-impact-2010-private-demand-us-fixed-income-has-increase-elevenfold-or-else

Anonymous:

The real question here is this....

It is not if China , Japan and other countries will buy US debt....but the question will be CAN THEY ?

As Julian Robertson has pointed out....if they cannot.....

Then the US Govt. may have to offer much much higher rates in light of lack of demand with respect to sheer volume needs.....ie 15% interest rates....

Who says the US can control this ????

When the US is not the one with the REAL money ????

And fabrication/monopoly money will suffice ????

Yes.....2010-2012 will be full of surprises....

Anonymous

How does 40% of $7 trillion in treasury debt maturing in 12 months = $702 billion?
does this not = 2.80 trillion?

I looked at debt maturity fiscal year 10/09-09/10 = $2.696 trillion
And calendar year = 1.457 trillion

If you add in expected deficit for fiscal year 2010 Oct 2009 - 09/2010 this is
1.5 trillion + 2.696 trillion = 4.196 trillion

Anyone know what tax receipts were in 2007 and 2008 and 2009?

I see projected interest expense to be about 509 billion for year end 2009. any estimates for 2010 year end?

Cyan Lite:
Tyler, all sarcasm aside, we did $2.16t in 2007 and $2.05t in 2008, why would it be outlandish to think that we couldn't do 2.2T in 2010?  The bid-to-cover in every single auction has been atleast 2.0x, even on the long end of the curve with massive supply.

Personally, I think we won't see the 2.5x bid-to-cover anymore in the auctions, but I don't think we'll see a failed auction any time soon.  That'll be too damaging to the market and the primary dealers know that.  They'll just bid on the auctions and then work something out with the Fed behind the scenes. 

I can't name you one person I know in real life that knows what QE is, and most likely won't know what QE 2.0 is all about.  And as I said before, new episodes of Lost begin in February, and then new season of American Idol kicks off in the fall.  And if that doesn't work, throw in another H1N1 2.0 scare and mass vaccination campaigns to scare the living bejeezus out of everybody.

[Dec 28, 2009] How not to solve a financial crisis by Edward Harrison

December 28, 2009 | nakedcapitalism.com

kevinearick

This caused a bit of an uproar over at the NYT:

GDP, Deficits, Law, & Outcomes

Deficits measure maladaptive behavior, the failure to effectively save, and invest in future viability, to maximize NPV and induce growth. Capital is in trouble because it failed to invest in the future, and the current policy of infinite monetary policy (see Freddie and Fannie) is to accelerate the short, now that the future, demographic deceleration, is here.

There is no way to measure I because capital borrowed from the future to create “earnings” as the basis for borrowing again, compounding the error, to magnify C, supplying artificial demand abroad to create global dependency, increasing self-interested G to process the transactions.

I, C, & G are all artificial, because GDP never measured economic profit; it measures economic activity, maximizing borrowing from the future to pay increasingly irrational, maladaptive costs, to bail out capital – eliminating the path to the future.

Healthcare is classic, 20% of the economy to subsidize maladaptive behavior, created by the ponzi capital pyramid between producers and consumers in the food chain, a problem that would quickly solve itself if the structural subsidy to capital were removed.

Monetary policy is being employed to create artificial scarcity, social demand, to re-enforce non-performing capital and the government serving it.

The constitution was designed to protect the majority from these self-liquidating circumstances. Shorting the constitution with family law terminated savings and investment, doubling down on debt and consumption, in a too-big-to-fail strategy, that always fails. Capital had a going-away party.

The US Supreme court, on the vote of a handful, removed the evolutionary lead of natural new family formation, discharging the middle class battery to ground, capital.

Capital breeds on the laws of property. Labor breeds on the laws of physics. They had an agreement to grow a semi-neutral middle class. Capital broke that agreement under the false assumption that its global economy was the only “game” in town. Labor is protected by its relationship with evolution, and always has access to ground, alternative capital.

The point in developing the Internet was to make the process transparent. The dismantling of the USSR was just a beta test.

The dinosaurs were a sunk cost. Everyone clutching non-performing assets may want to make a new years resolution, or continue partying. Titration is nearly complete, non-performing capital is turning to salt, and social evolution is about to accelerate again.

Now, we watch as the municipalities are pushed over the cliff, as the momentum of global implosion hits American shores, but at least the feds got a big pay raise for putting the states and municipalities at the edge of the cliff first, to buttress themselves.

Doug Terpstra:

“…new management must be installed to prevent the old management from covering up past mistakes or perpetuating errors that led to the firms demise. The same is true in government.”

This is why Obama’s steadfast refusal to investigate or prosecute, not only wire fraud and financial fraud but war crimes is so maddening; it ensures their perpetuation.

In this context, deterrence, I disagree that “motives and intent are irrelevant.” It implies letting bygones be bygones; let’s look forward not back. I feel they are critical, not only to basic trust in business and society, but also to crime and punishment, (or vengeance)—the difference between 25-to-life or lethal injection. Can’t we at least get a seven-strikes-and-no-parlole rule for banksters and politicians?

 alex:

“I disagree that ‘motives and intent are irrelevant.’ It implies letting bygones be bygones”

That’s true for prosecution, but not entirely true for politics. Failure to achieve desirable outcomes, regardless of motive or intent, is a perfectly valid reason for throwing the bums out.

The problem with focusing on intent is that in politics it’s very hard to prove and very easy to defend against. Absent a smoking gun memo, a politician’s supporters can always say “he meant well”. So what? The effect is what counts.

P.S. Not to say we don’t need more prosecution. As William K. Black has pointed out, there were over 1000 convictions in the S&L crisis. Given that the current debacle makes that look like a petty cash theft, it’s beyond belief that there aren’t plenty of crimes to prosecute. But who prosecutes their campaign contributors?

 Blurtman:

Is the US investment banking industry the new US auto industry, issuing toxic garbage as opposed to unreliable gas guzzlers? And fighting reform all the way into oblivion?

just me:

Resolving a non-bank financial crisis and a banking crisis are two entirely different things. Only banks in theory can offer transactional DDA that are payable on demand at par. Read Corrigan’s 1982 piece “Are Banks Special”. Part of the problem is that the size of the non-bank institutional MMMF sector got too large – and post the break-the-buck of the Reserve Primary fund we had the makings of a classic run here.

But banks are special: they issue financial liabilities (guarantees, backup lines, derivatives) that are different in size, scale and scope from those issued by non-bank firms. They do this because of confidence in their ability to backstop these obligations.

There is a universally acknowledged way of handling a banking crisis: guarantee the liabilities, inject capital into institutions, and remove the bad assets. The first two were done, as arguably was the third through writedowns. We are now in extra-innings as the lack of credit set off a credit downturn recession.

moneta:

Obama: 1961
Geithner: 1961
Summers: 1954
BB: 1953
Paulson: 1946
Taibbi: 1970

I would not be surprised if only 2 variables determine how much change we could actually believe in: age and wealth accumulated. IMO, we are not going to see any change coming from leaders born between 1945 and 1965, unless they are broke.

First of all, these dogs are old enough to not be able to learn new tricks plus they have every reason to believe in their powers and the status quo.

Been there:

Moneta,

You tryin’ to say boomer leaders are arrogant know-it-alls that look out strictly for their own self interest?

You may be right but I’ll bet that there were also plenty of generation X’ers who sold the Sh** that got us into this mess. The problem does not involve age. Rather, the conundrum, it seems, is that the only people who are seen to have the appropriate level of cred to tackle the problems are the ones who now are frantically trying to scrape off the bottom of their boots.

Obama, like Bush and every other modern President before him, has probably been checkmated into a course of action dictated by those who provided the cash that got him where he is. For these reasons I agree with Ed Harrison’s conlusions about what he belives is the most likely outcome for the next decade.

TC:

“Could it be any different?”

Not only could it be, it absolutely must be. Yet cause for optimism is terribly faint.

I disagree “[t]he likely outcome for the next decade is one of sub-par global growth with short business cycles punctuated by fits of recession.”  Rather more likely is a cascading, global collapse of many vital economic, social and political functions.

Response thus far to crisis occurring amidst profound imbalances (both physical and financial) built up over many decades reveals the lender of last resort behaving like a spoiled, unrepentant child (a view your dominant themes for the year 2009 more or less supports). And yet where is the smack-down of this unruly child? In bipartisan calls for restoration of Glass-Steagall as well as other [watered down] regulatory reforms being put forward long after the horse has left the barn? The spirit of Neville Chamberlain rules the Congress!

And now, with risks of sovereign default growing by leaps and bounds, I am to suppose there is serious concern for our wholly unresolved, grave vulnerability when even well-informed critics say “motives and intent don’t matter?”

Indeed, motives and intent are the only logical starting point at this time if our desire is to avoid the most likely outcome: catastrophic, chain reaction collapse of many substantive bonds existing within, and among, nation states.

Our present vulnerability to a more or less total collapse into a physical breakdown crisis DEMANDS targeting of all enemies acting in defiance to principles put forward in the simple, single sentence to the U.S. Constitution. We should be acting as though our nation were under attack (which, judging by outcomes — think taxpayer looting — it is).

wally:

It is becoming really frustrating to read something in which common sense and reason are clearly laid out – because it just serves to point out that we aren’t going there. Instead, we will adopt the opposite as policy.

The most telling is your statement: “Obama was not elected to do wildly unpopular things”.

Of course not! He was elected to do popular things, things people want. How he ever got sucked over to the philosophy that ‘the people are always wrong’ is beyond me. It’s nuts.

Jim in SC:

I’d like to follow up Moneta’s point about the baby boomers. Incidentally, I am one, 1961.

I suspect that if you were to draw up a list of the movers and shakers who brought us Health Care Reform, which is supposed to be paid for through cuts in Medicare, you’d find they are mostly boomers. I would guess they skew slightly older than the President.

The underlying motivation is to take something valuable away from their parents’ generation. ‘You didn’t give me that train set I wanted back in ‘62, Pop, so you’re not going to get that medicine you need to get out of bed everyday.’

It has never made any sense for the President and Congress to focus on Health Care Reform during such an economic crisis as the one we’ve been experiencing. That they are doing it proves that deep Oedipal strivings trump reason every time.

[Dec 28, 2009] Weekly Summary and a Look Ahead

rich:

The Financial Crisis Inquiry Commission is starting to sound like a political circus that will whitewash away any meaningful facts when it finally publishes its report, more than a year from now. It's technically part of the executive branch, which means it falls under the sway of the Obama White House and the Administration's pledge to use technology for transparency, like never before in American politics. So, where's the technology and transparency?

The FCIC still doesn't have a functioning Website, even though it has an operating budget of $8 million, plus ability to borrow without cost any executive branch employee. The FCIC has powers to gather information through judicially enforceable subpoenas and testimony taken under oath.

The FCIC is charged by statute with examining "the causes of the collapse of each major financial institution that failed (including institutions that were acquired to prevent their failure) or was likely to have failed if not for the receipt of exceptional Government assistance from the Secretary of the Treasury." There's at least a dozen such institutions, and perhaps as many as 30-40 useful witnesses from each.

Why can't the FCIC take testimony under oath, from hundreds of such witnesses, away from the glare of cameras and circus political posturing, and then post that verbatim testimony on line ASAP, so all Americans can read and interpret it?

Maybe the answer has something to do with the fact that the FCIC still doesn't even have a functioning Website, where we can learn what staffers they have hired, whom they will interview, what documents or testimony they will make available to the public in the interim, etc.?

Tell me about technology and transparency, Obama, you liar.

You're covering up your cozy ties with Wall Street as fast as you can, and the American people know it.

.dryfly:

 josap wrote:

thanks in advance

Original equipment [manufacturers]. Think Whirlpool, Ford Motor, Toro, etc. Then their supply chain will be the folks who make parts & assemblies that go into the original equipment.

When you go through check out the big box then scans the bar code... kicks back the info to the corporate data base... reconciles with inventory [both on floor & in warehouse] and might even kick out a 'release' signal to the manufacturer to ship and if not in stock build more... which then signals a release to the suppliers to do the same.

Prior to the internet it might take six months to kick that all back. Now it could be days or at most weeks [depending how they reconcile & aggregate the data at whse & factory - they want information but don't want to be a slave to noise either].

Jonathan:

Speaking of long slow declines...

Rupert Cornwell: The car park: a celebration of its place in history -
Rupert Cornwell, Commentators - The Independent

Even sadder is the tale of the former Michigan Theater. Once it was the biggest, glitziest movie house in Detroit, built in French renaissance style with columns and inlaid ceilings.

Now the half-derelict building is a parking garage, perhaps the most beautiful, and certainly the saddest in the country. This monument to decay stands on the site of the tiny workshop where back in 1896 a young engineer at the Edison Illuminating Company built his first car, whose successors would fill parking garages throughout the land.

His name was Henry Ford.

We'll see more of this kind of abomination, as tax revenues decline, and the money to support truth and beauty dries up.

Anonymous Bosch:

Tell me about technology and transparency, Obama, you liar.

You're covering up your cozy ties with Wall Street as fast as you can, and the American people know it.

"When something becomes sufficiently complex, it is indistinguishable from magic. (Who said that, or words to that effect?)

energyecon:

Anonymous Bosch wrote:

"When something becomes sufficiently complex, it is indistinguishable from magic. (Who said that, or words to that effect?)

Arthur C. Clarke

edit: though he was talking about a sufficiently advanced technology, IIRC

edit edit: viz the third law
http://en.wikipedia.org/wiki/Clarke's_three_laws

broward:

Anonymous Bosch wrote:

"When something becomes sufficiently complex,

When something becomes sufficiently complex, you can charge a lot of money to fix it.

[Dec 28, 2009] Biggest Paychecks 2005 - Forbes.com

[Dec 28, 2009] The Intelligent Investor Golden Pay for CEOs Could Be Bad for Stocks - WSJ.com

The first study, led by corporate-governance expert Lucian Bebchuk of Harvard Law School, looked at more than 2,000 companies to see what share of the total compensation earned by the top five executives went to the CEO. The researchers call this number—which averages about 35%—the "CEO pay slice."

It turns out that the bigger the CEO's slice of the pie, the lower the company's future profitability and market valuation. "These CEOs," says Prof. Bebchuk, "seem to be trying to grab more than they should."

Finance professor Raghavendra Rau of Purdue University and two colleagues looked at CEO pay and stock returns for roughly 1,500 companies per year from 1994 through 2006. They found that the 10% of firms with the highest-paid CEOs produce stock returns that lag their industry peers by more than 12 percentage points, cumulatively, over the next five years.

Companies at the top of the pay pile, Prof. Rau concluded, award their CEOs an annual average of $23 million—but leave their shareholders poorer (relative to other companies in the same industry) by an average of $2.4 billion per year. Each dollar that goes into the CEO's pocket takes $100 out of shareholders' pockets. Prof. Rau's team is still validating these findings, so regard them as provisional.

[Dec 28, 2009] www.financialarmageddon.com

To start off the roundtable, we've created a matrix highlighting prognostications for various asset classes in 2010. Not all participants took part in this section of the Q&A, but the ones that did are included in the matrix below. As shown, the consensus view is that the S&P 500 will be up in 2010, bonds will be down, oil will be up, the dollar will be up, US home prices will be up, and China's stock market will be up. The projection for gold was split.cPlease visit the individual Q&A pages (links above) to view each participant's projections along with price targets where applicable.

Below we provide various responses to each of the 25 questions. Remember that there is a Q&A page for each participant that shows all of their responses as well. The links are posted next to each participant's name above. Enjoy!

1) What has surprised you the most and least about financial markets in 2009?

Most participants thought that the sharp rally off the March lows without a meaningful correction was the most surprising thing about 2009. There were a wide range of "least surprising" answers. Below are a few responses.

Financial Armageddon: Least: The fact that equity investors don't really have a solid grasp of macroeconomics or geopolitics. Most: The willingness of policymakers and investors to repeat the same mistakes that helped bring about the worst financial crisis this century.

Footnoted: Obama's seemingly uncanny ability to call the bottom of the market (most). How some executives still don't seem to get the fact that outrageous perks, including tax gross-ups are disgusting (least).

Infectious Greed: How quickly U.S. consumers began spending again. Maybe it's true that U.S. consumers can't stay downbeat more than 18 months.

Random Roger: The size of the rally off of the March low has been the biggest surprise. After events like 2008, massive rallies are very normal, but the lack of a meaningful correction along the way has been surprising.

The Reformed Broker: The market's ability to put the blinders on and rip for 10 months has to have surprised everyone, myself included. I'm least surprised by the resumption of the commodity obsession that was abruptly put on pause in the heat of the credit crisis. It came back without missing a beat.

A Dash of Insight: My biggest surprise was the short honeymoon for the Obama Administration and the stock market reaction. For me, the least surprising thing was the general improvement in the economy and stocks throughout the year.

2) What do you believe are the most important lessons to be learned from the 08/09 financial crisis?

All of the responses to this question are worth reading, and they are listed below.

A Dash of Insight: We learned what happens when you get a complete cessation of lending in an economy that depends upon normal and sensible borrowing for regular commerce.

Crossing Wall Street: When market participants panic, governments panic as well. Not a new lesson but a good example of an old one.

Financial Armageddon: 1) The mistakes of the past have a habit of repeating themselves. 2) Bad policies beget bad outcomes. 3) While there may be free money, there's no such thing as a free lunch.

Footnoted: Greed isn't always good - sometimes it leads to serious problems. Greenspan wasn't the maestro he was made out to be. There's only so much crap that even skilled hucksters can repackage and sell.

Infectious Greed: 1) Don't watch television. I'm kidding. Mostly. 2) You can know that an epochal bubble exists, and you can know how to profit from its looming decline, but time the trade wrong and you might as well have stayed home that decade. 3) Credit rating agencies are a pro-cyclical disaster.

Investment Postcards: Banks' financial statements do not necessarily reflect the true financial picture. Geared hedge funds are responsible for extreme excesses in financial markets. Failure by central banks to enforce their monetary policy on banks as executors thereof eventually leads to financial and economic disaster.

Kirk Report: 1) Capital preservation is always more important than capital accumulation. 2) Wall Street is undergoing changes in ways that will make our markets more volatile than ever before. 3) America has significant challenges that must be addressed to restore its economic leadership over the world. If nothing is done, the standard of living for most of its population will be in decline over the next decade.

Random Roger: The details causing the crisis were different but the behavior of the market was not. Human behaviors repeat over and over, misusing leverage as one example. People have very short memories with regards to market turmoil.
The Reformed Broker: 1) Someone who went to Wharton can just as easily lose you all of your money as anyone else. 2) Someone who sits on charitable foundations regulatory boards of directors can rob you blind. 3) When rich people panic, really bad decisions are made with taxpayer money.

Vix and More: 1) Always know your exits (especially where to take losses) in advance and do not deviate from the plan. 2) In a fat tails environment, the feedback effects will trump the underlying economics for an extended period. 3) Disasters almost always happen in stages.

Wall St. Cheat Sheet: Risk management, Risk management, Risk management. If you have any money in speculative products such as financial investments, you MUST have a stop loss point that allows you to call timeout and reevaluate the situation. Trends and emotions can always go much farther than we expect, so we need to have a simple line in the sand which acts as complete protection against the unexpected. Since most of us are not psychic, the unexpected is always around the corner.

World Beta: Avoid losing money. Investors dislike losses much more than they enjoy their gains. If investors and advisors were to design portfolios with that fact in mind, they would be much more proactive about managing their risk rather than maximizing their gains.

[Dec 24, 2009] Banks Bundled Bad Debt, Bet Against It and Won - Readers' Comments - NYTimes.com

Michael McLaughlin

We should've let these banks go bankrupt. Sure it might've hurt the economy more (that's what they say anyway), but at least we wouldn't still have all these losers looting the economy for billions of dollars in bonuses. Personally, I think it would've helped the economy.

Goldman Sachs' $20 billion+ bonus pool is the equivalent of 500,000 jobs at $40,000 per year. Let's assume there's another $20,000 in benefits and overhead involved as well so we'll call it $60,000 a year to employ someone at $40,000 a year. That's still 333,333 jobs we could have created with that money. There are 15,375,000 people out of work as of November's numbers . All it'd take is the bonus pools of 46 companies like Goldman and we could get everybody back to work.

Anybody still wonder where all the jobs have gone? Banks skim billions of dollars from the economy by playing elaborate shell games, billions that would've gone to paying salaries and buying tangible goods instead. They've looted us for too long and it's time for Congress to stop listening to lobbyists and start listening to the agonizing cries of tens of millions of Americans. If they need some motivation, here it is: corporations can't vote. Bring back Glass-Steagall and put an end to these crooked bonuses or we'll put you out of work next November. And we'll remember all you Senators who aren't up for reelection next fall, too. Your turn will come, unless you do the right thing.

Tony Glover

"Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them..."

In addition to the obvious conflict of interest, isn't what Goldman did the very definition of insider-trading?

A new place in hell has been created for Goldman as they placed bets against the financial products of their own investor clients, while they, and only they, had privileged knowledge of not only the clients but also the exact complicated financial products their clients were suckered in to buy.

Let's forget, for a moment, the lack of regulation after the fact. Why on earth did lawmakers and government overseers allow such financial products to be set up by the same investment/banking firms that would also be allowed to bet against them?

Didn't any of the legislators and regulators hear the ominous bass violin being plucked in the background while they created the conditions which allowed such inanity to proliferate? It sounded something like this:

"Dummmb-Dum-dum-dum ...

...Dummmb-Dum-dum-dum-Duummmmmmmmb."

Chris Black

I'm wondering Goldman [and others] will see a backlash, against this theft by deception, from the victims - those being the working stiffs around the country, dutifully paying into various "managed" pension schemes, only to see their retirement assets drained by tricks like the one well reported in this article.

Jonathan Egol, a reasonably astute trader, using cutting edge data analysis, positioned his company to reap handsomely by duping greed-blinded fund managers, who were themselves betting other people's money.

Goldman spokesman Michal DuVally's unctious observation that the suckers "had an optimistic view of the housing market" fails to cast Goldman's activities in more favorable light.

Somebody remind me again, what is the real point of capital markets, and investment banks?

Billybob

I have heard Government Sachs explain that this was just routine hedging and nothing sinister. It was merely taking short positions to offset certain long positions for example. However, selling the underlying securities and then shorting those same securities is not taking offseting positions. This is a unidirectional bet or an "unhedged" position that the securities are going to go down in value. I was willing to give government sachs some benefit of the doubt until I heard that explanation. Anyone who understands hedging knows that the explanation was a complete lie. This was not the ordinary taking of offseting positions for a good faith hedge. It makes no sense from a VaR perspective to take such an unhedged position. If they lied about their motives (that it was mere hedging) then this is good evidence of malfeasance and possible criminal intent. If I have a POS car and I sell it to you without telling you everything I know about it that is bad enough, but if I also buy an insurance policy that pays off if you have car trouble, that takes amazingly big cajones.

[Dec 24, 2009] Arizona Governor Jan Brewer: "We face a state fiscal crisis of unparalleled dimension"

It's not yet spring, but the first robin of 2010 state fiscal crisis arrived...
Mish's Global Economic Trend Analysis
If you did not know Arizona was having immense budget problems, you do now. Here is Arizona Governor Jan Brewer on the Arizona Crisis of "Unparalleled Dimension".
Dear Fellow Arizonan,

We face a state fiscal crisis of unparalleled dimension – one that is going to sweep over every single person in this state as well as every business and every family.

That is why I held an emergency cabinet meeting yesterday morning where I outlined for our state’s elected leaders and business leaders the ills our state faces. As I told them yesterday, we ARE faced with some of the worst days in our 97-year history.

We can debate how we got here, but we CANNOT remain paralyzed in our efforts to address the situation. We must set aside partisan politics and face the problem head on.

So here’s the TRUTH:
 

[Dec 23, 2009] "Insecure Securities"

Economist's View

Hans-Werner Sinn is unhappy with the US financial system. He says "Europeans trusted a system that was untrustworthy," and that resulted in big losses for European banks:

Insecure Securities, by Hans-Werner Sinn, Commentary, Project Syndicate: ...For years, hundreds of billions of new mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) generated from them were sold to the world to compensate for the lack of savings in the United States and to finance American housing investment. Now virtually the entire market for new issues of such securities – all but 3% of the original market volume – has vanished.
To compensate for the disappearance of that market, and for the simultaneous disappearance of non-securitized bank lending to American homeowners, 95% of US mortgages today are channeled through the state institutions Fannie Mae, Freddie Mac, and Ginnie Mae. Just as there was a time when collateralized securities were safe, there was also a time when economies with so much state intervention were called socialist.
Most of these private securities were sold to oil-exporting countries and Europe, in particular Germany, Britain, the Benelux countries, Switzerland, and Ireland. China and Japan shied away from buying such paper.
As a result, European banks have suffered from massive write-offs on toxic American securities. According to the International Monetary Fund, more than 50% of the pre-crisis equity capital of Western Europe’s national banking systems, or $1.6 trillion, will have been destroyed by the end of 2010... Thus, the resource transfer from Europe to the US is similar in size to what the US has spent on the Iraq war ($750 billion) and the Afghanistan war ($300 billion) together.
Americans now claim caveat emptor : Europeans should have known how risky these securities were when they bought them. But even AAA-rated CDOs, which the US ratings agencies had called equivalent in safety to government bonds, are now only worth one-third of their nominal value. Europeans trusted a system that was untrustworthy. ...
For years, the US had a so-called “return privilege.” It earned a rate of return on its foreign assets that was nearly twice as high as the rate it paid foreigners on US assets. One hypothesis is that this reflected better choices by US investment bankers. Another is that US ratings agencies helped fool the world by giving triple-A ratings to their American clients, while aggressively downgrading foreign borrowers. This enabled US banks to profit...
Indeed, it is clear that ratings were ridiculously distorted. While a big US rating agency gave European companies, on average, only a triple-B rating in recent years, CDOs based on MBSs easily obtained triple A-ratings. ... And according to an NBER working paper by Efraim Benmelech and Jennifer Dlugosz, 70% of the CDOs received a triple-A rating even though the MBSs from which they were constructed had just a B+ rating, on average, which would have made them unmarketable. The authors therefore called the process of constructing CDOs “alchemy,” the art of turning lead into gold.
The main problem with US mortgage-based securities is that they are non-recourse. A CDO is a claim against a chain of claims that ends at US homeowners. None of the financial institutions that structure CDOs is directly liable for the repayments they promise...
Only the homeowners are liable. However, the holder of a CDO or MBS would be unable to take these homeowners to court.   And even if he succeeded, homeowners could simply return their house keys...
The problem was exacerbated by fraudulent, or at least dubious, evaluation practices. ... The US will have to reinvent its system of mortgage finance in order to escape the socialist trap into which it has fallen. A minimal reform would be to force banks to retain on their balance sheets a certain proportion of the securities that they issue. That way, they would share the pain if the securities are not serviced – and thus gain a powerful incentive to maintain tight mortgage-lending standards.
An even better solution would be to go the European way: get rid of non-recourse loans and develop a system of finance based on covered bonds, such as the German Pfandbriefe . If a Pfandbrief is not serviced, one can take the issuing bank to court. If the bank goes bankrupt, the holder of the covered bond has a direct claim against the homeowner... And if the homeowner goes bankrupt, the home can be sold to service the debt.

Since their creation in Prussia in 1769 under Frederick the Great, not a single Pfandbrief has defaulted. Unlike the financial junk pouring out of the US in recent years, covered bonds are a security that is worthy of the name.

Selected Comments

kievite
"Hans-Werner Sinn is unhappy with the US financial system."

I do not think he is unhappy and I doubt that it's just him. It's a much stronger feeling, but truth be told if you look like a duck - walk like a duck - quack like a duck...

Loss on business confidence is quite natural reaction and due to the size of the losses is not that easy to overcome.

I would expect that the level of scrutiny of each and every US TBTF banks action now will be quite different for a generation or so. GS might suffer more then others as it is a symbol of everything that is wrong with the US investment banking. 

[Dec 24, 2009] A bear shows up on CNBC

The Mess That Greenspan Made

Another classic moment on CNBC as an independent financial adviser is sandwiched between Melissa Francis, Larry Kudlow, and a JPMorganite, all of whom look aghast as Dan Deighan tells viewers that stocks will retest their March 2009 lows next year.


It probably didn't help Dan's chances of getting invited back anytime soon when he advised investors to buy gold on the dips. Then again, if CNBC is anything like Fox, they've probably seen an increasing amount of ad revenue coming from the many companies selling the metal.

[Dec 24, 2009] Risk of Double Dip Recession in 2010 Still Too High For Nariman Behraveshs

The most crippling for recovery is a false sense of recovery
Dec 23, 2009  | Yahoo! Finance

"The recovery will be slow and things will be fairly fragile," and that might be the best we can hope for in 2010, according to Nariman Behravesh chief economist at Global Insight, the world's largest economic forecasting and consulting firm.

"Any number of risk could knock us back down into recession," Behravesh tells Aaron and Henry in the accompanying clip. These risks include:

Behravesh isn't saying it's the most likely scenario; but at 20% the probability is "too high" for his liking.

On the flip side, he forecasts an equally high probability of a strong recovery.  "There's a lot of pent up demand for consumer spending for cars, for housing," he says. "And that could be released a lot sooner and lot more powerfully than anyone is talking about."

But the more likely scenario is a slow and sluggish economic recovery,  Behravesh says, predicting unemployment remains high in 2010, peaking at 10% before falling back to the 9% range by year's end.  That will provide a headwind for consumers, who will spend at a slower rate than in the past.

[Dec 23, 2009] Chris Whalen's 2010 Outlook: "A Grudging Admission of the Truth"

Dec 18, 2009
Financials suffered Thursday after Citigroup's massive secondary offering was poorly received and influential analyst Meredith Whitney cut 2010 estimates on Goldman Sachs and Morgan Stanley.

But even prior to Thursday's selloff, a lot of traders were nervously watching the poor action in the financials as a possible "tell" for the broader market. The question is whether the recent weakness is just profit taking after the big gains earlier this year or concern about the fundamentals heading into 2010.

The answer is "yes" (or "both"), according to Christopher Whalen, managing director at Institutional Risk Analytics.

In 2009, the momentum created by a "wall of paper fiat dollars" overcame the industry's still-poor fundamentals, driving the sector higher, Whalen says. "Where you see the markets changing in terms of sentiment is where fundamentals are so ugly they can't be ignored."

Whalen is sticking by a prior forecast that the fourth-quarter will be a "bloodbath" for the banks but says the real ugliness won't occur until the middle of 2010...

Click "more" to view the rest of the post and embed the video.» More

[Dec 23, 2009] The Protocol Society By DAVID BROOKS

The idea of "economic protocols" is pretty interesting but as described is probably too superficial and partially wrong...  But it is refreshing to think in terms of "economic protocols" instead of atomic economic actors.  Still the society is not a computer so his analogy "First, a nation has to have a good operating system: laws, regulations and property rights" is limited.  Success of McDonalds in places like Japan and China tells us a different story about "nations comparative advantage in executing certain protocols".
December 22, 2009 | NYT

In the 19th and 20th centuries we made stuff: corn and steel and trucks. Now, we make protocols: sets of instructions. A software program is a protocol for organizing information. A new drug is a protocol for organizing chemicals. Wal-Mart produces protocols for moving and marketing consumer goods. Even when you are buying a car, you are mostly paying for the knowledge embedded in its design, not the metal and glass.

A protocol economy has very different properties than a physical stuff economy. For example, you and I can’t use the same piece of metal at the same time. But you and I can use the same software program at the same time. Physical stuff is subject to the laws of scarcity: you can use up your timber. But it’s hard to use up a good idea. Prices for material goods tend toward equilibrium, depending on supply and demand. Equilibrium doesn’t really apply to the market for new ideas.

Over the past decades, many economists have sought to define the differences between the physical goods economy and the modern protocol economy. In 2000, Larry Summers, then the Treasury secretary, gave a speech called “The New Wealth of Nations,” laying out some principles. Leading work has been done by Douglass North of Washington University, Robert Fogel of the University of Chicago, Joel Mokyr of Northwestern and Paul Romer of Stanford.

Their research is the subject of an important new book called “From Poverty to Prosperity,” by Arnold Kling and Nick Schulz.

Kling and Schulz start off entertainingly by describing a food court. There are protocols everywhere, not only for how to make the food, but how to greet the customers, how to share common equipment like trays and tables, how to settle disputes between the stalls and enforce contracts with the management.

The success of an economy depends on its ability to invent and embrace new protocols. Kling and Schulz use North’s phrase “adaptive efficiency,” but they are really talking about how quickly a society can be infected by new ideas.

Protocols are intangible, so the traits needed to invent and absorb them are intangible, too. First, a nation has to have a good operating system: laws, regulations and property rights.

For example, if you are making steel, it costs a medium amount to make your first piece of steel and then a significant amount for each additional piece. If, on the other hand, you are making a new drug, it costs an incredible amount to invent your first pill. But then it’s nearly free to copy it millions of times. You’re only going to invest the money to make that first pill if you can have a temporary monopoly to sell the copies. So a nation has to find a way to protect intellectual property while still encouraging the flow of ideas.

Second, a nation has to have a good economic culture. “From Poverty to Prosperity” includes interviews with major economists, and it is striking how they are moving away from mathematical modeling and toward fields like sociology and anthropology.

What really matters, Edmund S. Phelps of Columbia argues, is economic culture — attitudes toward uncertainty, the willingness to exert leadership, the willingness to follow orders. A strong economy needs daring consumers (Phelps says China lacks this) and young researchers with money to play with (Romer notes that N.I.H. grants used to go to 35-year-olds but now they go to 50-year-olds).

A protocol economy tends toward inequality because some societies and subcultures have norms, attitudes and customs that increase the velocity of new recipes while other subcultures retard it. Some nations are blessed with self-reliant families, social trust and fairly enforced regulations, while others are cursed by distrust, corruption and fatalistic attitudes about the future. It is very hard to transfer the protocols of one culture onto those of another.

[Dec 22, 2009] Q3 GDP Revised Down to 2.2%

CalculatedRisk From the BEA:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.2 percent in the third quarter of 2009 ...
GDP was revised down from the advance estimated of 3.5% to the preliminary estimate of 2.8%, and now to 2.2%.

Personal consumption expenditures (PCE) were revised down to 2.8% from 2.9%.

And investment in nonresidential structures was revised down to -18.4% from -15.1% (aka falling off a cliff).

[Dec 22, 2009] Uncharted Waters by David Merkel

Bernanke looks like Greenspan on steroids. Greenspan engineered a steep yield curve in the wake of the S&L crisis to recapitalize banks on the cheap but right now we have even steeper curve. 

It does not matter how you measure it, the US Treasury yield curve is at its steepest level ever.  Away from that, the value for expected five-year inflation, five years from now is at its highest level ever, excluding the noise that we had as our markets crashed in the fourth quarter of 2008.

This concerns me.  Anytime we hit new extremes on critical financial variables, it makes me think, “What next?”  Treasury yield curve slope and inflation expectations are fundamental.  Reaching unprecedented levels is a big thing.

Could the US Government ever face the possibility that it could not meet its obligations?  I think so, and a record wide yield curve is one of the things that I would see prior to such troubles.

Last week, I had dinner with my friend Cody Willard.  His favorite idea was shorting long bonds.  I indicated that I had some leaning that way but could not go  all the way on that idea, as the Federal Reserve had the option of inflating during the Great Depression, and did not do so.  Cody said something to the effect of “but we have so much less flexibility today.”  Can’t argue with that, though I wonder whether politicians and bureaucrats favor foreign claims over domestic claims.  Would they bankrupt Americans to pay off foreign claimants?  Yes, they might do that.  It has happened before.

Cody might be on the right track, but the steepness of the yield curve may fight him.  It is very, very hard to get a yield super-steep without something breaking — inflation running rampant, etc.

The greater worry from my angle is the US pursuing Japanese solutions that have failed miserably over the past 20 years.  Japan continues to follow failed Keynesian ideas, fostering a low return on asset culture, with all of the failed projects financed by very low interest rates.  Now we do the same.  The Fed runs a low interest rate policy via Fed Funds and buying mortgage bonds.

All that does is reinforce mediocrity by enabling assets with low returns to be financed and survive.  Better that many of those should die, and the capital be released to more profitable uses.

All of this is the price for not allowing recessions to be deep — now we have to clear away bad loans bigtime.  But who has the courage to do that?  Certainly not our government.  They avoid all short-term pain, leading to long-term problems.

That’s where we are now, in uncharted economic waters.

[Dec 20, 2009] Stocks 1999-2009: Worst. Decade. Ever  By Barry Ritholtz

Mr. Buffett once noted on the Stock Market (Fortune magazine,, November 1999): “You know, someone once told me that New York has more lawyers than people. I think that’s the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems.”
December 20, 2009 | The Big Picture

95-99 ReturnsFrom tomorrow’s WSJ, comes this (amusing) article about the past decade:  Its the worst equity performance in nearly 2 centuries.

Why do I say amusing?

Because despite what many fools and asshats were claiming in the 1990s, stocks can only gain so much relative to earnings. Sure, other factors like population growth, economic expansion, productivity gains, all matter on the margins, but the bottom line is Earnings. But over the long haul, there is only so far you can run ahead of historical median rates of return.

The current horrific decade lost half a percent each year on average versus average annual returns of about 10-12% over the past century. Why? This under-performance is payback for the massive gains in the salad days of the late 1990s. As the table at right shows, the gains were far above median.

There is only so far you can deviate from the historical mathematical norm before mean reversion rears its ugly head.

Here’s the WSJ:

“Even with the rebound this year, the U.S. stock market is on the verge of posting its worst performance for any calendar decade in nearly 200 years of American stock-market history.

Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade.

In the process, the market has provided a lesson for ordinary Americans who used stocks as the primary way of saving for retirement.

Many investors were lured to stocks by the big bull market that began in the early 1980s and gained force through the 1990s. But coming out of the 1990s, the best calendar decade in history with a 17.6% average annual gain, stocks simply had gotten too expensive. Companies also pared dividends, cutting into investor returns. And in a time of absolute financial panic like 2008, stocks usually were the worst place to be.

With just two weeks to go in 2009, the declines since the end of 1999 make the last 10 years the worst calendar decade for stocks going all the way back to the 1820s, when reliable stock-market records began, according to data compiled by Yale University finance professor William Goetzmann.

It edges out the 0.2% decline stocks suffered during the Depression years of the 1930s, which up until now held the title of worst decade. And it is worse than other decades with financial panics, such as in 1907 and 1893.”

Repeat after me: There is no free lunch. A decade of out-performance will be p[aid back one way or another.

[Dec 20, 2009] The Public Purpose of Banking

While Lloyd Blankfein claims bankers are worth Billions, even as they destroy Trillions, it's worth taking a look at what the public purpose of banking is. Chicago economists, sit back down, the public purpose of banking is not to enrich their shareholders any more than the public purpose of pharmaceutical companies is. Capitalism works by enriching owners as they compete to provide some value to customers. So, what is the value that banks deliver to their customers?

First, what is a bank? My definition is simple and goes to the heart of their public purpose: a bank is an entity that has a reserve account at the Fed. That is it. If you have a reserve account at the Fed, it means you can lend unconstrained by your reserve balance. Briefly, this is how it works:

1. You make a loan. This debits your reserve account, and you credit a receivable account.
2. The loan gets deposited, which credits that reserve account, and credits a liability. Note how the loan created the deposit, not the other way around.
3. If the loan and the deposit are made at the same institution, that institution has no net change to its reserve levels. If the loan and deposit were made at different institutions, then the institution short reserves borrows what it needs from the institution long reserves overnight. That's it.

If you or I make a loan, we cannot use the reserve credit that the corresponding deposit creates to top up our own reserve levels. Thus this clear, operational difference between banks and non-banks.

Ultimately, the Govt creates all reserves, so why not just have the Govt make loans directly? Because we do not want the Government to make credit decisions, they are too likely to dole out money to politically connected constituencies, while starving worthwhile, but unconnected borrowers. You can see this today, as banks and unions get Billions, while shop keepers, dry cleaners, manufacturers, and restauranteurs shutter their businesses and go on the dole. An institution that makes loans it knows will not be paid back is not making loans at all, it is making gifts, and the operational bankruptcy of the FHA is a great example of this in action. Many adjectives come to mind: corrupt, wasteful, abominable, unfair, fraudulent, etc. This is the opposite of Responsible Governance. Barry, we really expected more.

So, to keep responsible lending, we put private capital infront of public capital and ask that private capital take the first loss on loans it makes which turn out to be bad. Ultimately, taxpayer money is there as backup, but it should not be directing investment. We call this institutional arrangement a "bank".

This simple sensible construct is utterly lost on policy makers and the commentariat alike. For banking to do the job it is meant to do (ie. make loans that will be paid back), a bank should be required to keep all loans it makes on its books until maturity. It should be forbidden to participate in any secondary markets, in any way. It should not run a prop trading desk. It should not sell insurance. It should not have a fee-for-service business. It should simply conduct its own credit analysis, make loans, and service them. And in return for providing this public purpose, a bank shall have a reserve account at the Fed.

[Dec 19, 2009] Steve Meyers: Market Outlook and Analysis for 2010

Very bearish analysis...
2009-12-17

[Dec 19, 2009] The recession is over but the depression has just begun By Edward Harrison

As Kevin Phillips noted "In the United States, political correctness, religious fundamentalism, and other inhibitions sometimes dumb down national debate"  but the country now face pretty difficult choices...  It became one giant Enron. As money that is made from value addition in the form of manufacturing fades in significance to the volume of the money that is made from shuffling money around: Wall Street's locked USA the situation from which there is no easy exit. Whether you shift private debt to public to increase confidence or not it's a huge debt. It can only be compared to the debt bubble of 1933. The liquidation of Bear Sterns and Lehman is only a start of consolidation of finances and we need to find something that replace it in the national economy. For now the only obvious choice is government.  From this point of view March rally was just a pause in the unfolding of event and while quite welcome does not change the structural imbalances that we created.  It would be nice is some technological breakthrough happened which would lift the country out of this hole.
December 18, 2009 | The Big Picture

The double dip or the economic boom?

So what’s next?  A lot of the economic cycle is self-reinforcing (the change in inventories is one example). So it is not completely out of the question that we see a multi-year economic boom.  Higher asset prices, lower inventories, fewer writedowns all lead to higher lending capacity, higher cyclical output, more employment opportunities and greater business and consumer confidence. If employment turns up appreciably before these cyclical agents lose steam, you have the makings of a multi-year recovery. This is how every economic cycle develops. This one is no different in this regard.

Now, I have turned slightly more dour of late and see a double dip as more likely in the medium-term. Longer-term, things depend on government because we are in a balance sheet recession. Ray Dalio and David Rosenberg make this case well in the previous quotes I supplied, but it was a post about Richard Koo from Prieur du Plessis which originally got me to write this post. His post, “Koo: Government fulfilling necessary function” reads as follows:

According to Koo, American consumers are suffering from a balance sheet problem and will not increase consumption until their personal finances are back in order. The banks are not lending mainly because nobody wants to borrow and, furthermore, the banks want to build their own balance sheets (raise cash) and get rid of toxic garbage…

Again, when asked what would happen if the government cuts back on its fiscal stimulus, Koo replies: “Until the private sector is finished repairing its balance sheets, if the government tries to cut its spending, we’re going to fall into the same trap Franklin Roosevelt fell into in 1937 (a crushing bear market) and Prime Minister Hashimoto fell into in 1997, exactly 70 years later.

“The economy will collapse again and the second collapse is usually far worse than the first. And the reason is that, after the first collapse, people tend to blame themselves. They say, ‘I shouldn’t have played the bubble. I shouldn’t have borrowed money to invest – to speculate on these things.’

I wrote last November that if government stops the support, recession is going to happen.

The U.S. economy cannot possibly work itself out of the greatest financial crisis in some 70-odd years in a mere 4 years and then expect to raise taxes on the middle class without a major recessionary relapse.

So, when you hear policy makers talking about reducing the deficit as soon as possible, what you should think is 1938 and continued depression.

Right now, if you listen to what President Obama is likely to do, you know that the government prop for the economy is going to be taken away. Get ready because the second dip will occur. It will be nasty: unemployment will be higher and stocks will go lower than in 2009. I The question now is one of timing: when will the government stop propping up the economy? The more robust the recovery, the quicker the prop ends and the sooner we get a second leg down.

So to recap:

  1. A depression was borne out of high levels of private sector debt, the unsustainability of which became apparent after a financial crisis.
  2. The effects of this depression have been lessened by economic stimulus and government support.
  3. Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more stock market increases and eventually to asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.
  4. In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized
  5. Because large scale government deficit spending is politically unpalatable and unsustainable over the long-term, expect a second economic dip within three to four years at the latest.

Why is government spending key?

The government plays a crucial role here because of the huge private sector indebtedness.  In the U.S. and the U.K., the public sector is not nearly as indebted. So while, the private sector rebuilds its savings and reduces debt, the public sector can pick up the slack. Marshall Auerback says it best in a recent post:

We’ve said it before and we’ll say it again. As a matter of national accounting, the domestic private sector cannot increase savings unless and until foreign or government sectors increase deficits. Call this the tyranny of double entry bookkeeping: the government’s deficit equals by identity the non-government’s surplus.

So, if the US private sector is to rebuild its balance sheet by spending less than its income, the government will have to spend more than its tax revenue. The only other possibility is that the rest of the world stops saving on a massive scale — letting the US run a current account surplus. But that is highly implausible and socially undesirable, since it means we export our economic output, rather than consume it domestically. And if the government deficit does not grow fast enough to meet the saving needs of the private domestic sector, national income will decline, which, given the size of the private sector’s debt problem, will generate a huge debt deflation.

This is the foundation of modern monetary theory. Would that the IMF and the G20 understood these basic facts.

If the private sector is a net saver, the public sector must run a deficit. The only other way to prevent the government from running a deficit when the private sector is net saving is to run huge current account surpluses by exporting your way out of recession – what Germany and Japan tried in the 1990s and in this decade.

However, I must admit to having a preternatural disaffection for large deficits and big government which is what Koo and Minsky advise respectively.  It is this knee-jerk aversion to what is viewed as fiscal profligacy which makes it likely that the government prop will be taken away inducing another downturn.

So, what does this mean for the American and global economy?

  1. The private sector (particularly households) is overly indebted. The level of debt households now carry cannot be supported by income at the present levels of consumption. The natural tendency, therefore, is toward more saving and less spending in the private sector (although asset price appreciation can attenuate this through the Wealth Effect).  That necessarily means the public sector must run a deficit or the import-export sector must run a surplus.
  2. Most countries are in a state of economic weakness. That means consumption demand is constrained globally. There is no chance that the U.S. can export its way out of recession without a collapse in the value of the U.S. dollar. That leaves the government as the sole way to pick up the slack.
  3. Since state and local governments are constrained by falling tax revenue (see WSJ article) and the inability to print money, only the Federal Government can run large deficits.
  4. Deficit spending on this scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year). Therefore, at the first sign of economic strength, the Federal Government will raise taxes and/or cut spending. The result will be a deep recession with higher unemployment and lower stock prices.
  5. Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with.  While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver.  However, when the prop of government spending is taken away, the global economy will relapse into recession.
  6. I believe this dynamic will induce a Scylla and Charybdis of inflationary and deflationary forces, forcing central bankers to add and withdraw liquidity in a manic way. The likely volatility in government spending and taxation gives you the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation.
  7. Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.
  8. From an investing standpoint, consider this a secular bear market for stocks then.  Play the rallies, but be cognizant that the secular trend for the time being is down. The Japanese example which we are now tracking is a best case scenario.

That’s my thesis. What’s your view?

the bohemian Says:

but . . . then we have this from BR-

“Barry Ritholtz Is Still Bullish on Stocks, But Not for the Long-Term”

http://finance.yahoo.com/tech-ticker/barry-ritholtz-is-still-bullish-on-stocks-but-not-for-the-long-term-395059.html

here’s the statement I find most interesting-

“While his 2010 S&P target would equate to around Dow 13,000, “we could very easily be at 10,000 [again] in two-three-four years from now [but] the way we get it is a lot of volatility – a lot of up and down,” Ritholtz says. “The goal from now until let’s call it 2015 is to preserve capital — see if you can make a little money here or there – but be ready for the next 15-to-20 year bull market.”

interesting indeed- delusional . . .maybe

bsneat:

Mr. Harrison’s scenario is quite realistic. One of the best at laying out the future, IMO.

Mr. Harrison states:

“From the very beginning, the excess liquidity created by the U.S. Federal Reserve created an excess supply of money, which repeatedly found its way through hot money flows to a mis-allocation of investment capital and an asset bubble somewhere in the global economy.”

I will continue to argue that the low interest rate policy of the Federal Reserve in the early 2000s was the correct course of action for that period of time and it did not the cause of the excess money supply and liquidity that sloshed around the financial system. Rather it was the decisions that allowed banks to pursue unlimited leverage, both on and off balance sheet, that created this excess supply of money, and to the extent the Federal Reserve supported and advocated for this, yes, they did in fact create an excess supply of money.

But it was the deregulation not the low interest rates that was the culprit.

Go back and replay 2001 – 2007 with banks maintaining leverage ratios of 12 – 1. Think through how banker’s capital allocation decisions would have been affected if the amount of funds that the banks had available to loan was scarce (12 to 1) rather than unlimited (40 to 1 + SIVs & CDOs). Under this set of circumstances the low interest rates would have help to finance projects with long term ROI characteristics rather than short-term consumption and the encouragement of fraudulent lending practices by all parties to the loan transactions simply to generate more assets.

The future would have been much different and in a positive way. Just food for thought.

Donlast:

This commentary is couched totally in terms of aggregates. It may be interesting to play this aggregate game and toy with financial assets, interest rates et al, but as with all the macroeconomic game playing, its capacity to show us what will happen at micro ground level in the economy, the real economy, the shifts in wants, business and household responses to price signals, people’s response to job prospects, business and household reponses to tax implications of government policies, the real and actual allocation of scarce resources, for this its contribution is absolutely zilch.

Yet this is what we really wish to know: the real shape of the US economy two, five and ten years down the road.

Macroeconomics is truly Panglossian: it always assumes the best of all possible worlds when governments spend and raise debt “to close output gaps and boost aggregate demand”. Would that Keynes had never invented the philosophy and aggregate terms because all it has done is lend power to politicians and the government bureaucracy to waste money, misallocate resources, pursue pet projects, expand its reach and authority, and generally ensure sub-optimal growth and productivity.

So interesting as Edward Harrison’s essay might be I don’t believe it. He can only describe the past because that’s all the aggregates can really do – describe what has happened. Their predictive value is very strictly limited because what may happen in the micro-economy, and above all, its interaction with the international micro-economy, will almost certainly throw those aggregates totally off balance. And that’s leaving out any poltical mayhem that might result from what the government is doing – or failing to do.

willid3:

The 1970s was a difficult period in which the U.K. and the U.S. saw jobs vanish in key industrial sectors. To stop the rot and effectively mask the lack of income growth by average workers, a new engine of growth had to be found. Enter the financial sector.

this is what i think triggered the biggest factor for the depression. and that collapse of incomes has continued almost unaffected since (with a minor up tick from 1995 – 1999) after which we fell back again. and the only thing that drove the economy was credit.

reminds me of a TV commercial with a man on lawn mower, who was saying he was up to to eye balls in credit. seems that was who some finance company wanted to loan to.

Moss:

Too bad too many people do not understand or will not accept or continue to ignore the fact that this particular crisis is borne from too much PRIVATE debt and therefore can’t accept the necessary remedy unless they wish to see a complete collapse.

fusionbaby:

These are new and different times. Much experimentation has taken place. The basic rules and axioms of economics have almost been made meaningless (government, big business and the private sector have caused this through immorality and short-sightedness). Prediction and forecasts are almost impossible (inflation? hyper-inflation? deflation? double dip recession? stagflation? greater depression? secular series of lower case “w’s”?) because of all the experimentation, alteration and the continuing variables of government interference (with the potential of changing every 4 year term). All we can be certain of is surprise, unintended circumstances, damage from well-meaning but uneducated forces, damage from opportunists.

LeeX:

It sure looks likes an actual depression where I live, with no relief on the horizon. Great article!

pif:

An outstanding post, congratulations!

I think you have managed to add a new perception into this whole crisis, next to Mish’s deflationary views and government waste and cronyism and Barry’s pragmatic approach to trading and no-bullshit attitude.

Totally agree that the recovery is fake, that it was finally enabled by the ban of mark-to-market, and that the only tool of government now and the last 25+ years has been asset inflation. I was still surprised how easily people became willing to pretend that the banks are solvent and assets are cheap – I thought they would have at last learned better after all the bubbles. So they cranked up their tool once more, but the real economy is being barely influenced by it, that is why fiscal stimulus is the only thing keeping tepid “growth” alive.

Still, I am not sure that savings by one sector must necessarily be lent ot another, as there may be no worthy projects for financing. I am also not sure that there is some accounting rule that works b/w the public and private and foreign sectors (similar to the current and capital accounts for the foreign sector)

And finally, are you really sure that Obama & co wll abandon the stimulus? Would they do it because of false economic beliefs or are they pressured by China and other creditors?

wally :

Public debt/private debt are ultimately the same thing. Deficit spending by government to allow private debt to be eliminated is merely a shift of the debt from current obligation to future tax obligation – which falls ultimately on individuals. The debt is not destroyed.

Confidence for repayment is increased somewhat, depending on the culture and politics of the country, but when the total gets to a point where it obviously cannot be repaid and still allow individuals in that country to live reasonable lives, there must be default or default-by-inflation. There is a tipping point beyond which there is no recovery.

superman2:

unfortunately the us is in bad shape and as much as people believe it is getting better, they are wrong. The total debt To GDP has gone up. Ultimately that is going to have to be paid back in taxes so the high end will get hurt unless they all leave. Debt break all great nations and people, this is a fact

call me ahab:

“Deficit spending by government to allow private debt to be eliminated is merely a shift of the debt from current obligation to future tax obligation – which falls ultimately on individuals. The debt is not destroyed. ”

I like that wally- good point

Scarecrow:

In answer to Edward’s question, I believe that after the mid term elections the government will stop supporting the economy, then announce a large spending and giveaway package about 9 months before the 2012 presidential election, since it is really about TPTB remaining in power. This could also possibly give them the ability to regain more power over the banks. Just my best guess though. Seems logical. Maybe they sacrifice Timmy too when political pressure heats up a little for helping the banks. That will be funny.

johnborchers:

Problems with even short term recovery:

1) Jobs moving overseas.
2) US income not increasing.
3) Even though the Fed has lowered the rate, credit card interest rates have not lowered and mortgage rates have not lowered much.

I think theres very short time left in this stock market rally.

FrancoisT:

The U.S. economy cannot possibly work itself out of the greatest financial crisis in some 70-odd years in a mere 4 years and then expect to raise taxes on the middle class without a major recessionary relapse.

So, when you hear policy makers talking about reducing the deficit as soon as possible, what you should think is 1938 and continued depression.

So, why are the deficit hawks winning the ideological debate at the expense of the rest of the economy? haven’t they learned NOTHING??

Doc at the Radar Station:

Great *descriptive* analysis of what our problems are. Great work. But, what’s your *prescription* other than just maintaining the government prop indefinitely? Wouldn’t it be better, to wipe out the debt as fast as possible and just do a wholesale financial cleanup? I’m thinking of big nationalization of the banking system, wiping out the big banks-get rid of the bad assets as quickly as possible. Why prolong the process?

Detroit Dan:

Interesting divergence of opinion here. I’ve been impressed by the arguments of Marshall Auerback and the Modern Monetary Theorists that more deficit spending is needed. The wallys of the world say that “Public debt/private debt are ultimately the same thing”, but that doesn’t seem to be true. The government can create money at will to pay debts denominated in fiat currency. (Didn’t the US government just do this to the tune of several hundred billion dollars? So, in fact, taxpayers will not have to pay these debts!) In fact, the government can spend more than it takes in without resorting to debt at all. As far as I can tell, these are facts, not opinions.

Anyone care to respond?

What if the U.S. just doubled its deficit without issuing any new debt? Wouldn’t that allow the private sector to get out debt?

What if much of the rest of the world followed suit? A race to the bottom? Or a quick correction to stressed private sector balance sheets globally?

What is the worst case if this happened? What is the most likely case?

Serious questions. Thanks…

lalaland:

I hope the Ron Paul and such supporters out there realize that the one institution (since it will obviously be resolved by institutions and not corporations or individuals) that can avert this chain reaction is The Fed. If Bernanke disagrees with the political assessment that fiscal easing has to end he can continue regardless of what congress or Obama thinks, and a Fed intervention at step 4 would be a lot better than continuing down the list.

Not saying it will happen or anything like that, but if there is a silver bullet to prevent that scenario from going down, that/he would be it.

Also, can someone answer this for me?

If housing bottoms and the economy heats back up interest rates will eventually have to rise, whether modestly or severely (doesn’t matter here). With rising interest rates the longer a seller leaves his house on the market the more expensive it gets, leading to eventual price cuts. Doesn’t housing have to find it’s price to interest rate equilibrium (not just price with steadily low interest rates) before it bottoms? Anyway, I’m a rank amateur at this so don’t bite my head off please if it’s elementary and obvious to the rest of you…

CTB:

Excellent analysis.

One of the issues it doesn’t touch on, though, is China’s position as the world’s manufacturing center and it’s peg to the dollar. I imagine that through the USD inflation/deflation roller coaster ride, China will face immense domestic pressure and possibly civil unrest. I can imagine a painful transition as China transitions itself to a consumer-led economy as a recovery in the rest of the world stalls. Hopefully this readjustment provides some relief with employment as the USD weakens relative to the Renmimbi.

Secondly, the US trade surplus also goes hand in hand with our oil imports. I expect urbanization trends to continue with higher energy prices due to a weaker dollar. I expect natural gas prices to rise relative to oil. Food prices will be way up, especially beef. Airlines are screwed.

Gaucho:

Great post.

I have a question though. How long can the govt pick up the slack of the private sector? At the end of the day the govt is only 20% of the economy. How much borrowing capacity does the govt have before it gets in trouble itself? and is it enough to “save” the private sector?

MayorQuimby:

Everyone and their mother can see this. Guess TPTB just don’t want THEIR good times to end. Who woulda thought…

bsneath:

My instincts say the underlying economy is far weaker than most econometric models are showing. Once the temporary stimulus measures subside, the real economy will continue to contract and the dollar will fall as tax revenues decline, deficits rise (even more) and global confidence falls.

The next stage of the decline will be a “fire sale” on assets to sustain the economy for a while longer. Foreign purchases of property and companies (stock or acquisitions) at rock bottom prices as Americans do everything in their power to maintain living standards on reduced incomes. This will accelerate our transformation from a capital rich wealthy to a capital poor, second tier economy.

I think this will play out more quickly than many are expecting.

jcgoldenstein :

Banks owning real estate is known to be a disastrous situation so they’ll prefer to wait a couple years to allow some of their borrowers to get back on their feet. Nevertheless there is: $1.8 trillion loans coming due in next three years. There will be a very rare and tremendous buying opportunity for foreign investors and blue chip REITs whether it’s distressed with big or small d. There will be a mass liquidation and this time there’s cash…As Kevin Phillips noted "In the United States, political correctness, religious fundamentalism, and other inhibitions sometimes dumb down national debate."  but the country now face pretty dire choices...  As money that is made from value addition in the form of manufacturing fades in significance to the volume of the money that is made from shuffling money around future became really grim. Wall Street's greed, criminality and stupidity locked USA the situation from which there is no exit. The actual debt bubble can only be compared to the huge debt bubble of 1933, just before FDR devalued the US dollar with 40 %.

bsneath:

Detroit Dan Says: I hope all is well for you in Detroit. I feel for you guys.

With respect to deficit spending, first I think we must continue this practice because the consequence of not doing so at this moment in time would be catastrophic. Why mainstream Republicans do not understand this is beyond me.

That being said, there are negative consequences but these are difficult to match up because they may be separated by many years and disguised by political actions, such as currency manipulations or changes in bank regulations as well as by business cycles, technology/productivity advances and changes in the global economic landscape.

Nevertheless, economies eventually revert to equilibrium. This equilibrium favors those economies that save and invest over economies that borrow and spend. This is no different than the behavior of individuals which in fact is what an economy essentially is – the collective actions of its individuals.

China is aware of this and has patiently undertaken the former approach knowing that in the long term they will prevail. The United States has taken the latter approach and now we are suffering the consequences.

It is amazing that our government can continue to borrow and finance our spending habits without the dollar collapsing completely. It must be the relative position of the USA to other nations who also are in bad shape.

My biggest concern is with how we are spending the money being borrowed. Nothing is wrong with paying for more cops on the beat or more federal, state and local government workers to keep their jobs, except that these activities are not self-sustaining. This type of deficit spending assumes that the economic contraction is only temporary and once the economy recovers the tax revenues will come back and the stimulus can be taken away.

However this is not a typical “business cycle” recession but rather a major and permanent contraction in demand. Therefore our deficit spending needs to be geared towards investments that will create self sustaining economic growth, by encouraging rapidly growing emerging technologies and by making our economy more competitive and productive in the global marketplace. These concepts do not seem to even appear on the radar screen in Washington. The Krugmans, Pelosis and Obamas don’t get it and the Boehners, Palins and Shelbys continue to expouse Hooverian economic policies of “tough love” at a time when a patient is still on life support in the intensive care ward.

I am still waiting for a rational approach to emerge on the national scene. Perhaps it will come next year. Desperation is the mother of invention. When times get tough perhaps enough folks will discard their dogmatic theories and pursue more rational policies (or they will self destruct). Let us hope it is the former.

TomOfTheNorth:

If Harrison is correct and we ARE in a Depression (and I think we are….at least I am. I mean the whole Roubini / Spam thing made PERFECT sense to me. But remind me NEVER to eat the Hors d’oeuvres at one of his shindigs! I’ll be all like “Hey Nouriel, this pate shit tastes kinda weird…WTF??”), then you need to get yourself over to:

Outside The (Cardboard) Box: Your Practical, Yet Faux, Guide For Surviving The Modern Economic Depression

http://outsidethe-cardboard-box.tumblr.com

Detroit Dan:

Thanks bsneath. It helps to know that people are concerned about our situation here in Detroit.

Gaucho had a question– “How long can the govt pick up the slack of the private sector? At the end of the day the govt is only 20% of the economy. How much borrowing capacity does the govt have before it gets in trouble itself? and is it enough to “save” the private sector?”

The government doesn’t have to borrow to finance the deficit. The government is unlike the private sector in that respect. See Memo to Congress: Don’t Increase the Government’s Debt Limit!, by Randall Wray.

johnborchers:

Oh I forgot to add that I don’t see the article mentioning over capacity in the system which was a major problem during the depression. For all production capacity that was added in Asia over the last 5 years there is now a big over capacity that is sinking prices in order to get demand.

In the US I see overcapacity in:

  1. Restaurants
  2. Medical rehabilitation centers
  3. Auto part stores
  4. Clothing stores
  5. Banking retail outlets

Detroit Dan:

Nevertheless, economies eventually revert to equilibrium. This equilibrium favors those economies that save and invest over economies that borrow and spend. This is no different than the behavior of individuals which in fact is what an economy essentially is – the collective actions of its individuals. China is aware of this and has patiently undertaken the former approach knowing that in the long term they will prevail. The United States has taken the latter approach and now we are suffering the consequences.

I’m not sure about this equilibrium concept. Clearly, we are not in equilibrium now, with China having a huge trade surplus with regard to the rest of the world. It seems that part of the way this will correct is that the Chinese currency will appreciate with respect to the dollar. Dramatic increases in the U.S. deficit would thus hasten the re-balancing that needs to take place…

steve from virginia :

Very interesting. The plus of this article is that it provides a template for improvements in my own blog. New Year’s resolution; write better articles. Simply write better. Simply write …

Otherwise, there is much to disagree with in this piece. Part of this reflects my own finance learning curve. However, it is hard to discuss a systemic breakdown of the economy without mentioning energy. The economic problems of the 1970’s and early 80’s were an outgrowth of over- dependence on fossil fuel rates of production that could not match ever upward ramping demand.

This is where we are now, demand is subdued by distress/collapse in the OECD while it expands exponentially in China. Somehow this meant to suggest China will succeed in place of America because it pursues the US’s squanderous energy strategy.

The US pursues the squanderous debt strategy of replacing debt with … even more debt. And you wonder why economists have ‘public relations’ problems.

This leaves money and ‘productive’ activities as relatively unimportant as all are dependencies of petroleum production. Mr. Market sez that the peak of energy availability was in 1998; $12 a barrel oil. We hold @ $75 a barrel now and Saudi Arabia is now making US monetary policy:

The real, as opposed to nominal price (of oil) is a powerful incentive to keep production under check. This leaves aside the issue of production constraints. The depletion landscape has changed since 1998. Many countries are producing as much as possible, this has little effect on price. Saudia has gained control of OPEC decision making. They have spare capacity, the rest of OPEC doesn’t. Saudia can let the others pump their fields empty. Doing so cannot effect prices significantly.

OPEC’s oil has much greater money value than does the defaulting finance toys that OPEC has imported to entertain itself. OPEC is a monopoly. There are insufficient non-OPEC reserves to push onto the oil markets and effect prices in a meaningful way.

GaveKal recognizes the Niewe Hard Dollar relative to oil, but gets their takeaway is puzzling. The idea that low nominal energy prices, “would de facto justify the Fed’s decision to keep interest rates low for a long time ” suggests that low oil prices are a result of economic disorder sufficient to destroy oil demand. Maybe this is so. There certainly isn’t anything economically bullish about declining oil prices any more than high oil prices. Declining prices suggest the next leg of credit deleveraging has begun.

Rising oil prices alongside other commodities would reflect the success of Ben Bernanke’s ‘Zero Dollar’ strategy. Instead, the Fed has lost the power to control its own destiny; its strategy to bluff dollar inflation has failed. Wall Street finance is flooding the world with dollar denominated credit; Bernanke suggests that this is all real money. (Saudi oil minister) Ali al- Naimi has simply called the Fed’s bluff. After all, he has oil, Bernanke has nothing.

In this view through the kaleidoscope the denouement has already begun; the effects of a oil-backed US dollar are starting to be felt as short-dollar trades are being unwound. Ali al- Naimi has created a time machine, welcome to 1931.

The US could solve its debt problems tomorrow and its global economy would still fall apart.

Pete from CA:

Great article. One comment on this:

“There is no chance that the U.S. can export its way out of recession without a collapse in the value of the U.S. dollar.”

We already export a lot. We may be able to fix the current account deficit by importing less. I wasn’t able to find a quick summary of how much of our imports are discretionary so I don’t know how realistic this is. But on an anecdotal level everyone seems to think that we buy a lot of crap from China…

@Detroit Dan

I hope you realize that when you say that the government doesn’t have to borrow to finance the deficit you are basically advocating the printing of money. At this rate we could completely eliminate the national debt (or why stop there… *all* debt!) by simply crediting bank accounts with boatloads of money. It’s just electrons in a computer anyway, doesn’t cost a thing! Except that afterward the a loaf of bread would cost 200 bucks…

Pete from CA:

“Ali al- Naimi has simply called the Fed’s bluff. After all, he has oil, Bernanke has nothing.”

The US is not a kingdom and Bernanke is not the king. Let’s compare countries to countries, shall we? Are you implying that the US doesn’t have anything the Saudis want? How is their agriculture going? Technology? Military?

Detroit Dan:

Pete from CA– The government does print money and credit bank accounts to pay for expenditures. The currency is a creation of the government. At any rate, there’s a long way to go before it generates inflation. Why worry about inflation when we it is not a problem now and we have 12-25 million jobless workers?

Inflation will be a concern as the economy approaches full employment of resources, including labor resources. We’re not anywhere close to that point…

[Dec 19, 2009] Harvard’s Feldstein Says U.S. Economy Still Mired in Recession By Vincent Del Giudice and Thomas R. Keene

Dec. 17, 2009 | Bloomberg.com

The U.S. economy remains mired in a recession, prospects for next year are weak and home prices may resume declines, Harvard University economics professor Martin Feldstein said.

“The recession isn’t over,” Feldstein said today in an interview on Bloomberg Radio in New York. “It will be a while before we have enough information to know if the recession ended.”

...The economy has lost more than 7.2 million jobs since the recession began in December 2007. The total number of workers collecting unemployment checks as well as those taking extended government benefits totals about 10 million, according to Labor Department statistics released today.

...Restrained consumer spending suggests “2010 is going to be a very weak year,” said Feldstein, 70, who was chairman of the White House Council of Economic Advisers during the Reagan administration.

“Thrift in the long run is a very good thing, but increasing thrift as you come out of a recession is going to be a drag,” he said.

...Regarding the residential property market, where the recession initially emerged, Feldstein said the Obama administration’s effort to revive the housing market is a failure and home prices will continue to decline.

“It was just not well enough designed,” Feldstein said. “They ended up failing.” That suggests the housing slump will “continue to push down house prices,” he said.

“We saw a little pause in home-price declines in the summer but I think that was because of the first-time home buyers program,” Feldstein said. “We’re not going to get that boost.”

[Dec 17, 2009] Feldstein- House Prices to Fall Further

If house prices fall further construction jobs, banking and real estate jobs  will be affected.  AAs for how much they can fell find the median income in your area. Multiply by 3. There's your target median price.

the Obama administration’s effort to revive the housing market is a failure and home prices will continue to decline.

“It was just not well enough designed,” Feldstein said. “They ended up failing.” That suggests the housing slump will “continue to push down house prices,” he said.

“We saw a little pause in home-price declines in the summer but I think that was because of the first-time home buyers program,” Feldstein said. “We’re not going to get that boost.”

Selected comments

Angry Saver:

Here's a little more dirt on Marty. Feldstein was a big supporter of George W. Bush's attempt to privatize social security. Feldstein called the privatization idea "reform".

The man is a stooge for Wall St. fraud. Same as Rubin, Summers, Paulson and the rest of the financial "innovators".

Good grief. This guy should be fired and never allowed to practice in economics or finance again.

crazyv:

 NOTaREALmerican wrote:

If there's a very rough return to "reality" then housing prices will go to 2.5 - 3.5x people salaries (which is the "historical" range)

we had an extensive discussion on that 2.5- 3.5 times income ratio and decided that those of us who quote it are showing our age! While I have hard time emotionally letting go of that ratio (while advising my children) the operative ration is mortgage payment as percentage of your income. Assuming a mortgage payment of around 6.5% (interest(5%) and principal) and payments not to exceed 31% of income then the appropriate multiple is 4.8. Based on that metric and median family income of around $50,000 that would suggest a median home price of $240,000.

Of course if mortgage rates go up that number will decline.e.g at a 7% rate the multiple becomes 3.85
 

EvilHenryPaulson:

Sebastian

What bubble could be big enough to roll the recent one into it? Latin America, Asia, Tech, Real Estate, Commodities, etc are all just vehicles for credit bubbles. If a new one does take off, how long could it last and how far could it spread?

The only sustainable way out of this is a rebalancing of labor income and capital assets

Rob Dawg:

EvilHenryPaulson wrote:

What bubble could be big enough to roll the recent one into it?

Ans: GovDebt.
 

crazyv:

Cinco-X wrote:

Actually, it was not well enough "conceived". There is a difference.

actually it assumes that any set of policy prescriptions could have kept them up. That he (Feldstein) assumes it can be done pretty much sums up how economic policy is being viewed these days. We have gone from the idea that government can run the economy to one that assumes that government can maintain asset prices irrespective of their economic worth.

Sebastian:

Feldstein said: “It was just not well enough designed,” Feldstein said. “They ended up failing.” That suggests the housing slump will “continue to push down house prices,” he said.

“We saw a little pause in home-price declines in the summer but I think that was because of the first-time home buyers program,” Feldstein said. “We’re not going to get that boost.”

I'm really hate the sniping of guys like this.

We had a recession that lasted 1 1/2 years. Unemployment is up around 10%, and probably won't start dropping persistently until sometime next year at the earliest. What "better design" would have helped housing in an environment like that?

Angry Saver:

Feldstein is another over-rated eCONomist. He had a big hand in creating this mess as one of Reagan's chief debt pushers. Deficit hawk my @ss.

Here's some little known dirt on Marty. Feldstein was on the Board of Directors of AIG FP. You know, the part of AIG that played a huge part in the near collapse of the global financial system.

Feldstein is another eCONomist dingbat that believes that senseless credit creation is wealth creation. The man is a sham.

threetorches:

Nova, I agree ... but the point I was making was that in large parts of the country the projected price drops are largely theoretical, as ordinary people go on living in their ordinary homes and paying their ordinary mortgage payment. A 20% drop out in that Midwest Worker Home is a total drop of only $10,000. Not worth stopping your $350 mortgage payment. The guy living there can make $350/month without becoming a male prostitute or holding up liquor stores, even if his job is only part-time or is generally not much fun.

If the majority of homes in the Midwest go to "negative value," then it is Mad Max time! You would need to see unemployment up over 50% for this to happen, with roving bands of meth-freaks kicking in doors. We got lots of problems headed our way, but the Midwest is not going to turn into no-man's-land over a $350/month payment.

The bubble states are going to go through a painful readjustment, but the "floor" for housing are the Midwest prices. Yes, a handful of elite can continue to overpay for waterfront, but most people are going to have to give up the notion that things costing 10 or 12 times more in California or Florida is "normal." A little price premium, maybe, but things got very out of whack.

NOTaREALmerican:

mp wrote:

The economy cannot return to equilibrium without intervention.

Intervention always comes from outside.

Juvenal Delinquent:

Mishkin is another ex-expert that refuses to go away quietly...

adornosghost:

mp wrote:

The economy cannot return to equilibrium without intervention.

Actually, because of resource depletion, superstition based economic systems, and survival strategies that are liabilities, we need to straight this out on the other side of the wall--- equilibrium is no longer an option.

steelhead:

 I do like Mr Daly's thoughts on banking:

"Could a SSE support the enormous superstructure of finance built around future growth expectations? Probably not, since interest rates and growth rates would be low. Investment would be mainly for replacement and qualitative improvement. There would likely be a healthy shrinkage of the enormous pyramid of debt that is precariously balanced atop the real economy, threatening to crash. Additionally the SSE could benefit from a move away from our fractional reserve banking system toward 100% reserve requirements.

One hundred percent reserves would put our money supply back under the control of the government rather than the private banking sector. Money would be a true public utility, rather than the by-product of commercial lending and borrowing in pursuit of growth.

Under the existing fractional reserve system the money supply expands during a boom, and contracts during a slump, reinforcing the cyclical tendency of the economy.

The profit (seigniorage) from creating (at negligible cost) and being the first to spend new money and receive its full exchange value, would accrue to the public rather than the private sector. The reserve requirement, something the Central Bank manipulates anyway, could be raised from current very low levels gradually to 100%.

Commercial banks would make their income by financial intermediation (lending savers’ money for them) as well as by service charges on checking accounts, rather than by lending at interest money they create out of nothing. Lending only money that has actually been saved by someone reestablishes the classical balance between abstinence and investment. This extra discipline in lending and borrowing likely would prevent such debacles as the current “sub-prime mortgage” crisis.

100% reserves would both stabilize the economy and slow down the Ponzi-like credit leveraging."

Bond Girl:

Economy.com is predicting state revenues will not get back to FY 2008 levels until mid FY 2012 to 2013 (they will lag economic recovery). Think about that, when you think about how much the debt burden is increasing.

http://www.nga.org/Files/pdf/0911FISCALCHART05.PDF

Rob Dawg:

Sebastian wrote:

Why would you be looking at the 1990s as a basis when the last time we had similar social, political and financial upheaval was the 30s?

I cannot speak for others but there's really nothing left of the 1930s that could possibly be applicable in today's problems.

There's nothing to learn.

[Dec 17, 2009] Market Doomed 401k Plans Sail Calmly By Max Rottersman

December 16, 2009 | Yahoo! Finance

Robert Prechter, David Rosenberg and Charles Ortel have excellent and compelling reasons why the market will take an Icarus fall.  The bull market is on wings of wax; surely to melt from blistering layoffs and rising taxes.  This beauty pageant won't last (innapropriate as it is, put on while people are losing their jobs and homes).  Comforting as a market rally is, we're still guilty for buying too many SUVs and speculative housing.

Tens of millions of Americans remain unperterbed.  Mutual fund redemptions are, once again, tone-deaf.  They tell the same story they told in  1987, 1991 and 2000 and 9/11.  Despite all the gloom and doom, the public isn't quitting the stock market.  A friend of mine, who bought a bunch of survival food in the summer of 2007, has eaten through most of it.  He has no desire to go through a year's worth of powdered milk again.  If a bread-line depression reappears he'd rather stand on line like everyone else.

In the fall of 2008 things looked bleak for equity funds (NYSEArca: SPY - News) everywhere.  About 1% of all equity funds were cashed out in October.  At that rate $900 billion could have abandoned equity funds maybe even reaching a trillion!  But it didn't happen.  Equity funds may be in a secular redemptive market, as more baby boomers retire, but there's little proof that the market turmoil of last year has accelerated the process.

You can see for yourself at www.fundanalyze.com.  There is a Fund Flows section that shows sales and redemptions for most major funds.

It can be said investors are shifting money from equities to bonds at the rate of $10 billion a month.  Against $5 trillion in equity funds these numbers are small and so far inconsistent.  The tide could turn any day; no one would be surprised.

What if the market does crash tomorrow?  What does it mean if it comes back next month, next year, or in two years?  For most people the only time they think about the market is when they open their 401k account and when they close it.  In between, which is every day they walk the Earth, they don't care.

To borrow an old joke, two investors read Prechter and decide the market is indeed coming to an end.  One decides to go on a two year cruise around the world, the other, in financial ruins, will short 100 hundred dollars.  The market crashes.  Through leverage and impeccable timing, the second investor makes $1,000,000 dollars.  Then the market rises again.  The round-the-world traveler comes back and asks if his friend can go to lunch.  'I can't afford it,' his friend wails, 'I lost a million in the market!'

The fact is, most wealthy people stay wealthy and most poor people stay poor, through all market cycles. (I'm not making this up!  I'm pretty sure this theory was once widely accepted.)

We're told by the media that there is a divide, a crack between populations of people.  It is always growing.  It is always threatening to amass anarchy.  I'm talking about the have-nots.  They have plans those have-nots have!  They have plans to have, those have-nots have.

But the market remains aloof to the have-nots. The have-nots just don't buy or sell stocks.  True, they have an economic impact on business.  They can bankrupt a retailer, like Circuit City.  And when their population grows they strain government services.  But they don't buy stock.  They didn't before they lost their job and they certainly don't buy any after they lose it.

What the market likes to do is play games with the have-nots.  It makes some of them think they are haves.  But like everything it does, the market is fickle.

Every few years, the market creates millions of Americans who look like they have money (but don't).  To borrow from Warhol, everyone gets their 15 minutes of having.

In the population of people with real savings, real net worth, there are those with thousands and those with billions.  But even if both have their wealth cut in half, life changes little.  Why?  Because they don't live on their savings they live on their income.  And funny, everyone who says they would live on their savings (or at least share them with others) never does as soon as they have them.

Maybe a billionaire can't get used to five thousand bucks, but do many ever have to?  He just has to live with half-a-billion.  Anyone used to ten thousand can get used to five thousand.   They're no more inclinded to sell a bunch of stock when the market goes down, to buy freeze-dried survival food, then to sell half their stock when it doubles to buy exotic race cars, though there is always a small minority in each camp that do both.

Social disconnects are not new.  W.H. Auden wrote a poem about a 1558 painting by Bruegel.  From 'The Fall of Icarus', Auden wrote.

In Breughel's Icarus, for instance: how everything turns away

Quite leisurely from the disaster; the ploughman may

Have heard the splash, the forsaken cry,

But for him it was not an important failure; the sun shone

As it had to on the white legs disappearing into the green

Water; and the expensive delicate ship that must have seen

Something amazing, a boy falling out of the sky,

had somewhere to get to and sailed calmly on.

So what if the Dow goes down to 5,000 next month?  Will all the billionaire yachts disappear from the ocean?  Will any?

Personally, I believe the market will crash.  But I don't know when.  (And as soon as it does, I believe it will rise).  Fortunately, most people want to live their lives on their terms, not the markets.  At least that's what the fund data says.

Max Rottersman is a specialist in industry data and systems development for the mutual fund industry. He's also founder of  FundAnalyze. His opinions don't necessarily represent the views of ETFguide.com or Yahoo Finance.

[Dec 17, 2009] Comments on FOMC Statement, TIME Cover, and More

NOTaREALmerican:

Rob Dawg wrote:

I expect the socioecopolitical landscape of SoCal c. 2015 to be barely recognizable from where we are now.

I donno, more of the various cities down there will have bigger ignored/decaying donut-holes surrounded by protected soap-bubble-burbs; but that's not new really. If you are planning on big changes in 5 years that would effect the entire US. Too many people are there for "big changes" to take place peacefully.

Based on the Sacramento peasants that I work with, I don't notice any real anxiety. Just resignation, which is slowing turning to optimism induced normalcy. Sac-metro should be in roughly the same shape as SoCal (but much much smaller, of course).

I still think if you keep the peasants fed and entertained (sports and reality shows) nothing will happen.

SNAFU:

NOTaREALmerican:

I still think if you keep the peasants fed and entertained (sports and reality shows) nothing will happen.

That of course assumes shelter and employment. More difficult than just food and cable.

NOTaREALmerican:

SNAFU wrote:

That of course assumes shelter and employment. More difficult than just food and cable.

Shelter isn't a problem, just tell them to stay where they are. And, perpetual UE benefits for all (but with lots of noise and suspensions so people like me don't get any ideas).

1 currency now -yogi:

Dec. 16 (Bloomberg) -- Goldman Sachs Group Inc. should be probed for its role in the subprime mortgage crisis, according to letters sent to 10 state attorneys general by a labor union that represents 150,000 people in the U.S. and Canada.

Workers United sent the letters this week urging officials to follow the example of Massachusetts Attorney General Martha Coakley. In May, Goldman Sachs agreed to a $60 million settlement to end an investigation by Coakley’s office into how the New York-based bank packaged securities containing home loans made to Massachusetts residents.

In an analysis of $23.2 billion Goldman Sachs mortgage bonds offered between August 2005 and February 2007, Workers United determined that residents of the 10 states had 61 percent of the mortgages contained in Goldman Sachs’s securities, the union said.

“It is clear from its response in Massachusetts that Goldman is prepared to respond to pressure from Attorneys General like yourself, which can translate to millions of dollars for hundreds of troubled homeowners,” Workers United President Bruce Raynor wrote in a letter to New York Attorney General Andrew Cuomo, a copy of which was obtained by Bloomberg News.

Goldman Sachs Mortgages Should Be Probed, Union Says (Update1) - Bloomberg.com

NOTaREALmerican:

1 currency now -yogi wrote:

sent to 10 state attorneys general by a labor union that represents 150,000 people in the U.S. and Canada.

Well, it's a good thing for Merica that we're planning on getting the state attorneys out of the bank regulating business. The hard working bankers of Merica have more important things to do than respond to frivolous nonsense like this.

 

[Dec 17, 2009] “Wake Up, Gentlemen”

Is he expecting to wake up George W. Obama ?

105 comments

The guiding myth underpinning the reconstruction of our dangerous banking system is: Financial innovation as-we-know-it is valuable and must be preserved.  Anyone opposed to this approach is a populist, with or without a pitchfork.

Single-handedly, Paul Volcker has exploded this myth.  Responding to a Wall Street insiders‘ Future of Finance “report“, he was quoted in the WSJ yesterday as saying: “Wake up gentlemen.  I can only say that your response is inadequate.”

Volcker has three  main points, with which we whole-heartedly agree:

  1. “[Financial engineering] moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.”
  2. “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy”
and most important:

     3. “I am probably going to win in the end”.

Volcker wants tough constraints on banks and their activities, separating the payments system – which must be protected and therefore tightly regulated – from other “extraneous” functions, which includes trading and managing money.

This is entirely reasonable – although we can surely argue about details, including whether a very large “regulated” bank would be able to escape the limits placed on its behavior and whether a very large “trading” bank could (without running the payments system) still cause massive damage.

But how can Mr. Volcker possibly prevail?  Even President Obama was reduced, yesterday, to asking the banks nicely to lend more to small business – against which Jamie Dimon will presumably respond that such firms either (a) are not creditworthy (so give us a subsidy if you want such loans) or (b) don’t want to borrow (so give them a subsidy).  (Some of the bankers, it seems, didn’t even try hard to attend – they just called it in.)

The reason for Volcker’s confidence in his victory is simple - he is moving the consensus.  It’s not radicals against reasonable bankers.  It’s the dean of American banking, with a bigger and better reputation than any other economic policymaker alive – and with a lot of people at his back – saying, very simply: Enough.

He says it plainly, he increasingly says it publicly, and he now says it often.  He waited, on the sidelines, for his moment.  And this is it.

Paul Volcker wants to stop the financial system before it blows up again.  And when he persuades you – and people like you – he will win.  You can help – tell everyone you know to read what Paul Volcker is saying and to pass it on.

By Simon Johnson

[Dec 16, 2009] Bernanke Named Time’s ‘Person of the Year’ The Big Picture

Michael Panzner:

In light of today’s announcement, some might find the following Financial Times story aptly sums up the “contribution” Fed Chairman Ben Bernanke has made to the world:

Distressed debt – defined as a bond trading at less than 50 cents on the dollar
- is rapidly disappearing from US financial markets as yield-hungry investors
push up the prices for even the most beaten-down securities.

Bonds trading at less than 50 cents on the dollar now account for only 1.1 per
cent of the high-yield market, or $8.9bn in securities, down from 27.5 per
cent, or $202bn in bonds, a year ago, according to JPMorgan data.

The intense demand for once-distressed bonds is stirring the debate about
whether investors are acting wisely or piling into junk bonds because of a lack
of opportunities elsewhere in the fixed-income markets.

Source:
Distressed Debt on the Wane in US Markets
Henny Sender
Financial Times, Dec. 16, 2009
http://www.ft.com/cms/s/0/a013765c-e9af-11de-9f1f-00144feab49a.html

seneca:

Note that the 1938 Time’s then “Man of the Year” was, you’ll pardon the expression, Adolf Hitler. Time’s “Person of the Year” isn’t an honorific. It’s the person who most influenced events that year, for good or ill. Bernake certainly fills the bill, although Bernie Madoff I’m sure gave him a run for the money, so to speak.

“Obama’s Newfound Populism- All Hat, No Cattle” By Marshall Auerback

President Obama is taking a sharp, populist tone with Wall Street and scolding the ways of Washington. Once again, he is looking to the Senate to follow the House and pass a top legislative priority: sweeping financial regulatory reform. It might feel satisfying to hear the President criticize “reckless”, “fat cat” bankers, but the financial reform legislation passed by the House last Friday (and lauded by the President) provides little incentive to change their behavior. In reality, populism — with nothing of substance behind it — is just cynical posturing designed to mask genuine failure. To use an expression favored by his predecessor, this president is once again showing himself to be all hat, no cattle.

Appealing to the peanut gallery at this stage is an insult to the voters’ intelligence. The most telling comment on the latest reforms came from the stock market: Bank stocks ended the day higher last Friday (when the House bill was passed to great fanfare), with the KBW Banks index slightly outperforming the benchmark Dow Jones industrial average.

At its most basic level, a bank is an entity that has a reserve account at the Fed, which makes loans and takes deposits. That is its primary public purpose, and we should not be allowing activities which undermine this central function, especially seeing as it is the government which guarantees the public’s deposits via the FDIC. (As an aside, even though the government creates all reserves and guarantees deposits, we do not want it to be directing lending activity because, as “Winterspeak” notes, “we do not want the Government to make credit decisions, they are too likely to dole out money to politically connected constituencies, while starving worthwhile, but unconnected borrowers.”

However good the political optics of resorting to demonization of Wall Street, the legislation itself does nothing to recognize that the behavior criticized is a direct consequence of incentives built into the current institutional structure. It completely misses the point because it does nothing to ban activities which were at the heart of the crisis and which will likely be perpetuated as a consequence of the new legislation. All the new legislation does is institutionalize tax payer bailouts and, in so doing, continues the process of privatizing profits and socializing losses. Insolvent institutions have a habit of “betting the bank” through control fraud (Bill Black’s term for CEOs using the company as a fraud vehicle) and the new legislation will not prevent this.

... ... ...

The economist Hyman Minsky argued that the Great Depression represented a failure of the small-government, laissez-faire economic model, while the New Deal promoted a Big Government/Big Bank highly successful model for capitalism. The current crisis just as convincingly represents a failure of the Big Government/Crony Capitalist model that promotes deregulation, reduced oversight, privatization, and consolidation of market power. Yet the very people who have shredded the New Deal reforms and replaced them with self-supervision of markets are the champions of today’s financial “reform”.

As appealing as the story of Paul on the road to Damascus might be, there is certainly no evidence of any Damascene conversion here amongst the policy makers of the Obama Administration. It’s business as usual, along with the championing of monetary and fiscal policy that is biased against maintenance of full employment and adequate growth to generate rising living standards for most Americans.

We must return to a more sensible model. We need enhanced supervision of financial institutions with a financial structure that promotes stability by aligning the banks’ activities with public purpose, rather than abetting speculation and then bailing the financial sector out after the fact. President Roosevelt proved that we could reform the financial system, rescue homeowners, and deal with the unemployed even as we mobilized and then fought World War II. By contrast, this is an Administration that defines reform as muddled compromise within a profoundly broken polity.

But What do I Know?:

This is good stuff and right on. Obama is starting to remind me of the “first black mayor” politician (Kurt Schmoke, Wilson Goode, David Dinkins, etc.) who appeals to minorities and progressive whites as a force for change but is really in office to maintain the status quo and the entrenched political corruption (I’m not saying that those politicians were personally corrupt, just that they didn’t do anything to change it).

The “first black mayor” will make some superficial gestures at reform and begin some highly publicized and well-meaning social programs (”Baltimore, the city that reads”) but essentially he will deflect criticism from the left by posing as their champion (and have the added ability to play the race card against white intellectuals.)

After a few years the FBM moves off to some comfortable corporate and non-profit boards to serve as a token minority and live out his comfortable existence, having done nothing to fix any structural problems or improve the lives of the people who voted for him (but even more for change).

Obama didn’t create the problems, but he certainly isn’t doing anything to fix them. . .

Please don’t take this as racist–it’s just that for the con to work it needs a minority face. I suppose the same dynamic prevailed with ethnics in the nineteenth-century city (Irish in Boston and NYC, perhaps).

[Dec 15, 2009] Institutional Economics ‘Light Reading It’s Not’ - Forbes

The Centre for Public Integrity and the Washington Post investigate Ginnie Mae:

The trouble signs surrounding Lend America had been building for years. A top executive was convicted of mortgage fraud but still helped run the company. Home loans made by its headquarters were defaulting at an extremely high rate. Federal prosecutors alleged in a civil suit that the company falsified loan documents and committed fraud.

Yet despite these red flags, a little-known federal agency continued giving its blessing to Lend America, allowing it to do business in the name of the U.S. government. The Government National Mortgage Association, known as Ginnie Mae, authorized the firm to bundle its mortgages into securities and sell them to investors around the world—all backed by U.S. taxpayer money.

[Dec 15, 2009] Economist's View Obama Says Banks Should Lend More

Euton:

Obama is confused. Banks are still lending to viable businesses and consumers. The question should be why are there currently so few viable businesses and consumers?

I haven't heard anyone address this issue yet, but we will need to do so eventually.

julio:

I could have sworn "viable" meant "has a pulse". But I haven't checked in a couple of years.

DavidL:

Does Obama think that more rhetoric will change the businnsss climate? Obama has Obamacare and Cap and Tax hanging over the economy and professes to wonder why banks are notlending.

gordon:

Pres. Obama (from the post): “Now that they’re back on their feet we expect an extraordinary commitment from them to help rebuild our economy.” ...

From Washington's Blog (discussing the way the US Govt. resolved the Peso crisis):

"* It took 13 years to manage the crisis (at another point in the talk, Koo [Richard C. Koo - former economist at the Federal Reserve Bank of New York and doctoral fellow with the Fed's Board of Governors, and now chief economist for Nomura] says 15 years).
"The way that Volcker approached the problem was that he allowed U.S. banks to keep their lending rates relatively high, while the central bank brought short-term rates down. The spread between the two (the "fat spread") became revenue for the banks, and the banks used the high fat spread to gradually write off problem loans and to repair their balance sheets.

"* Volcker's covert rescue of the American banks using secrecy and a high fat spread didn't cost U.S. taxpayers a cent

"* Koo points out that you can't use the fat spread approach where there are no borrowers"

http://www.washingtonsblog.com/2009/10/fed-economist-american-banks-went.html

So, are we seeing Pres. Obama trying to set up a "fat spread" situation again? Is Paul Volcker recycling a ploy he once used successfully before? Most important, what rates are the banks (who can borrow really cheap) going to charge? Should we look at credit card rates for an indication?

anne:

There has been a liquidity trap that began forming by March 2008 and was fully formed in September and persists. A liquidity trap is formed as short term Treasury interest rates near zero, and in such a condition what we could expect ordinarily about economic activity is not what may happen. Banks have all sorts of excess reserves and besides there is a large spread between short and long term interest rates. There is every reason for banks to borrow short and lend long, and as much as possible that is what is being done. The bond market has been terrific for banks or for any investors. The problem is however that borrowing for investment purposes has been quite constrained and there is no reason to anticipate a quick change.

anne:

http://krugman.blogs.nytimes.com/2009/12/14/a-new-paradox/

December 14, 2009

A New Paradox
By Paul Krugman

Gauti Eggertsson is in the process of presenting a new paper on fiscal policy; the paper is here. * In his presentation — though not in the paper — he offers great phrase: the “paradox of toil.”

According to his paper, when you’re in the liquidity trap, ** certain kinds of tax cuts have perverse effects. Cutting taxes on capital income, for example, encourages more saving — which is a bad thing, because we’re suffering from the paradox of thrift. In fact, reduced taxes on capital income actually end up reducing investment.

So what’s the paradox of toil? If you cut taxes on labor income, this expands labor supply — which puts downward pressure on wages and leads to expectations of deflation, which increases the real interest rate, which leads to lower output and employment.

All of this only applies in a situation of zero interest rates, which wouldn’t be interesting except that that’s the situation we’re in.

The general point is that we’re really through the looking glass, in a world in which lots of things have perverse effects — and basing your policy ideas on intuition from “normal” times can lead you very much astray.

Right at the beginning, Gauti made the point that empirical results from periods in which interest rates are not zero tell you little about this situation — which is why most of what Robert Barro and others, including Greg Mankiw, have been saying is besides the point.

* http://www.newyorkfed.org/research/staff_reports/sr402.pdf

** Near zero short term treasury interest rates

anne:

http://krugman.blogs.nytimes.com/2009/12/14/samuelson-friedman-and-monetary-policy/

December 14, 2009

Samuelson, Friedman, and Monetary Policy
By Paul Krugman

Paul Samuelson was a great economic theorist. But he was also an acute observer of the real world, to such an extent that many of the things he said in his 1948 textbook ring truer than what many, perhaps most economists believed on the eve of the current crisis.

This is especially true with regard to monetary policy. By the 1980s, I think it’s fair to say that the vast majority of economists had been convinced by Milton Friedman’s assertion that aggressive monetary policy could have prevented the Great Depression. Some of us started to have doubts after contemplating Japan’s troubles in the 1990s; but as late as 2002 Ben Bernanke declared, * on behalf of the Federal Reserve, "You’re right. We did it. But thanks to you, we won’t do it again."

But here’s Paul Samuelson, from pages 353-4 of his 1948 textbook:

"Today few economists regard Federal Reserve monetary policy as a panacea for controlling the business cycle. Purely monetary factors are considered to be as much symptoms as causes, albeit symptoms with aggravating effects that should not be completely neglected.

"By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel. For in the middle of a deep depression just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans. If the Reserve authorities buy government bonds in the open market and thereby swell bank reserves, the banks will not put these funds to work but will simply hold reserves. Result: no 5 for 1, 'no nothing,' simply a substitution on the bank’s balance sheet of idle cash for old government bonds. If banks and the public are quite indifferent between gilt-edged bonds — whose yields are already very low — and idle cash, then the Reserve authorities may not even succeed in bidding up the price of old government bonds; or what is the same thing, in bidding down the interest rate.

"Even if the authorities should succeed in forcing down short-term interest rates, they may find it impossible to convince investors that long-term rates will stay low. If by superhuman efforts, they do get interest rates down on high-grade gilt-edged government and private securities, the interest rates charged on more risky new investments financed by mortgage or commercial loans or stock-market flotations may remain sticky. In other words, an expansionary monetary policy may not lower effective interest rates very much but may simply spend itself in making everybody more liquid....

"In terms of the quantity theory of money, we may say that the velocity of circulation of money does not remain constant. 'You can lead a horse to water, but you can’t make him drink.' You can force money on the system in exchange for government bonds, its close money substitute; but you can’t make the money circulate against new goods and new jobs. You can get some interest rates down, but not all to the same degree. You can tempt businessmen with cheap rates of borrowing, but you can’t make them borrow and spend on new investment goods."

A few slight archaisms aside, he could have been describing our current dilemma.

* http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm

Reply Dec 14, 2009 at 05:40 PM

Alex Tolley said in reply to anne...
Wouldn't all this have had relevancy when we were talking about whether to rescue banks or set up a national bank?

Reply Dec 14, 2009 at 06:15 PM

anne

http://krugman.blogs.nytimes.com/2009/12/14/followup-on-samuelson-and-monetary-policy/

December 14, 2009

Followup On Samuelson and Monetary Policy
By Paul Krugman

Earlier, I quoted Paul Samuelson on the ineffectiveness of monetary policy in deep slumps, * how monetary expansion just piles up in bank reserves. Here’s a picture of where we are now:

[Excess reserves of depository institutions, 1990-2009]

Yes, it’s a bit more complicated thanks to the Fed’s decision to pay interest on reserves. Still, you get the point.

* http://krugman.blogs.nytimes.com/2009/12/14/samuelson-friedman-and-monetary-policy/

bakho

Obama should set up his OWN bank and then when he tells them to jump they can ask how high. Pick an area where investment is needed and get into the direct loan business. Direct student loans, direct SBA loans, Direct FannieFreddie loans. WTF needs the banksters?

Too much of the policy is designed to help the banks recover their losses and too little is going to get our economy moving.

save_the_rustbelt 

Banker circular logic:

1. We cannot lend to small businesses because the recession makes these loans high risk.

2. We will not come out of the recession until small businesses get enough credit to stop being high risk.

So....

Let's trade derivatives instead of lending!

bakho said in reply to save_the_rustbelt...

That is exactly the problem with trying to address a recession with monetary policy. This recession destroyed the credit and collateral of many people and businesses. Until there is collateral to borrow against, loans are too risky.

The solution is for government to step in with JOBS to help repair the balance sheets and work so that businesses can repair their balance sheets. My cousins do construction work and their business is sound, but they can get hit with other businesses going under and not paying out. This is why the collateral requirements have gone up.

coffee-bagger said...

Forget it.

It was either radical populism and reactionary populism. Obama has ensured that reactionary populism will be the next one. You can wash of the rest of his single term.

There will be hope for this country when the people will throw out the neo-liberals from the democratic party.

It is just unfortunate that such a thing will happen only after rule by a tea-bagger government.

[Dec 15, 2009] Yes, Obama is Getting Serious About Banks. He is Now Calling Them Bad Names!

naked capitalism

BDBlue:

Via Ian Welsh, Peter Morici puts the $140 billion in banker bonuses in perspective:

How much is $140 billion?

The U.S. economy grew at a $89 billion annualized rate in the third quarter. That was the first growth since the second quarter of 2008 and came to $22 billion in actual growth in the third quarter.

The bankers, after causing the greatest economic calamity since the Great Depression, are rewarded with six times the growth accomplished so far in the much heralded “economic recovery.”

Meanwhile, seven million families face foreclosure and 25 million Americans can’t find full time work.

If Obama thinks he can hide that kind of injustice – or his role in it – with a PR campaign, he’s delusional. But then I’m beginning to think our entire ruling class is delusional.

bobh:

I saw these numbers before the election, but I hoped–and believed– that these donors were just sophisticated, limousine liberal bankers, frightened by McCain/Palin and eight years of damage to the economy from fighting trillion dollar unwinnable wars. If you hung out with these guys, you would probably find that many of them would agree with a lot of the points made here. The side of them raking in the huge salaries and bonuses is their cynical side. They know that huge piles of money are sitting there, just waiting to be skimmed by smart people, and it would be naive not to help themselves and get that summer place in the Hamptons, especially after all that work of getting the MBA in finance and wearing those expensive suits and working twelve hour days for years when they only made a few hundred grand. This was pretty broad-based giving from these firms, I suspect, and it is hard to imagine in what way quid pro quo promises were made. I think Obama caved to these guys for more complicated psychological reasons than campaign contributions.

BDBlue:

The real tell on Obama was how many of his initial backers were hedge fund guys. Wall Street was how Obama, a first-term Senator, was able to be competitive for the Democratic nomination. Their support for Obama above all others was clear early on.

Simply put, without Wall Street, Obama would not be President. He was more dependent on them than any other candidate. It looks like they’re getting their money’s worth. Unfortunately.

Doug Terpstra:

There may be no quid for the pro there, but the optics are terrible, and you would think that, with GS as his #2 investor, he might have had more than a passing comment about greed now and then, or waited a year to grace us with an eloquent reprimand on 60-Minutes. The rhetoric sans action is wearing awfully thin.

Nothing to see here. Let’s not look back; war is messy, torture is messy; fraud is messy; mistakes were made. Move along please.

bobh:

I don’t think Obama “sold out” for past or future campaign contributions from Wall Street. If he did, it was a bad move. He is losing the professors from Berkeley, who will get new Priuses in 2012 instead of giving their $2k to Obama. Most of them gave last time on credit cards in response to the daily emails from David Plouffe that went on and on about change but made no promises. Obama didn’t have to give speeches at their banquets or have department chairs call them up to make the ask. Despite all the money he got from bankers in 2007-8, Obama was in a perfect position last January to try to get out in front of a populist reaction to the crisis he inherited by wiping out failed-bank bondholders and getting the economy and financial system under control with serious reforms. If he had taken this route, a lot of his Wall Street contributors would probably have been okay with it, even if it starved their golden goose. These are smart, complicated people. Most of them have to know that what they were doing is bogus, but they can’t help doing it if nobody stops them. If Obama had shut it down, they would have gone to Tahiti for a while, or written their novel, or opened a gallery or sushi bar in Vermont with their girlfriend. I think Obama did what he did because he was frightened and overwhelmed by his new job and turned to the most powerful and confident people he knew for advice.

Doug Terpstra:

Fear is a useful servant but a cruel master. You may be right about Obama’s fear, but if so, he hides it masterfully.

However commendable, I think you are too forgiving. He surely knows the prodigious power he now commands, yet he has capitulated completely on too many fronts at once—contradicting both the letter and spirit of everything he campaigned on so convincingly. Consider his stellar record to date on: NAFTA-SHAFTA, Iraq, Gitmo, habeus corpus, war crimes and torture investigations/prosectutions, extraordinary rendition, telecom immunity, ongoing secret surveillance, healthcare, gay rights, Employee Free Choice Act, arctic drilling, Iran sanctions, Israeli settlements and Palestinian statehood, climate change legislation…

Also, consider Matt Taibbi’s “Sellout” article and the conspicuous absence of financial fraud indictments, unlike the S&L aftermath and I think the picture of capture is crystalline. Maybe Obama suffers from Hearst’s Stockholm Syndrome, but I think he’s too smart for that and not so easily cowed. Though none of us are beyond redemption, I have no benefits of doubt left for Obama. I have come to see him as the great deceiver.

bobh:

Doug,

Half of the time I agree with you and see Obama as a fraud from the beginning, but what an amazing feat to have consciously pulled off such a massive deception. The other half of the time, I see him as an overachieving A-student who got Peter-principled into deeper water than he could handle. The question is: when he sold us out did he sell himself out as well. I don’t know, but it is a sad story. He got all the way to the presidency and could have done some good. Maybe we get another chance in 2016, if things go badly enough during Romney’s first term.

Tao Jonesing:

David Rosenberg has a different take on this same WSJ article and the 60 Minutes interview, one that defines the same types of concerns that Jesse has in more concrete terms. If you don’t read his articles at Gluskin Scheff, you should take a look at what he has to say today. Here are some interesting paragraphs from that article:

———————————-
As a long-time reader of our research and valued friend told us over the weekend, “he [Obama] finally threw the banks under the bus”. While not suggesting the adjectives are undeserved, I am afraid that the U.S. President has invited all consumer borrowers, creditworthy or not, to abdicate their financial responsibility. We now have borrowers as victims.” Ain’t it the truth. And the consequences will be profound. Our friend reminded us that in regard to our theme of “frugality”, the current reality is that “frugal” represents just the first wave in a fundamental change in behaviour towards complete self-interest and risks morphing into something a little more troubling, such as abdication of individual responsibility.

Meanwhile, the adjective used to describe the banks and their actions, were, in a word, scary (and if you want more on ‘scary’, read the WSJ assessment on Obama’s appearance on the television show 60 Minutes yesterday — talk about being completely out of control and inciting divisiveness — see Obama’s Slams ‘Fat Cat’ Bankers). This backlash against the banks, whose behaviour was condoned by the government when the credit and housing bubble was in full swing, is surreal.
—————————————

While I agree with Dave that the banks’ reckless behavior that led to the crisis was condoned by the government, I don’t find the “backlash” surreal at all because it is not in response to the banks’ past “inflate the bubble” but their current “let them eat cake” behavior, which is getting some people riled up.

Like others here, I think what the President and the media are currently doing is not a real backlash but a kabuki dance to relieve pressure that is building up. Like Dave and Jesse, I don’t think that’s going to work out quite the way administration, the banks and the media hoped. There are too many forces causing the pressure to build that trying to address one only validates the others.

Anon

“Our friend reminded us that in regard to our theme of “frugality”, the current reality is that “frugal” represents just the first wave in a fundamental change in behaviour towards complete self-interest and risks morphing into something a little more troubling, such as abdication of individual responsibility.”

No. All we’re seeing is people beginning to wake up to the reality of homo economimus and behaving a little more mercenary. Like a hedge fund, private equity group, or…a bank!

Hugh:

This is just kabuki for the rubes. It is not directed at us. Just as Bush had his 23 percenters who thought to the end that he had done and could do no wrong, Obama is playing to a similar fact-free constituency in the center and on the left. These are the people who will excuse Obama because it was George Bush’s fault, Obama hasn’t been in office long enough, some problems are really complicated, they mistake the speeches for reality, the Republicans are being obstructionist, he is playing 11-dimensional chess, he is doing the best he can but he doesn’t have the votes, he is still better than John McCain, and, of course, we like being negative.

Tao Jonesing:

Yes, Obama is still better than McSame. I guess that makes him McSamer?

McSame and McSamer. Sounds like a comedy but feels like a tragedy.

dfb:

I’d like to point out 1994 and the “Contract with America.” If you’ll remember, Clinton was not in Wall Street’s favor in 1994 and the Democrats lost control of Congress. He then repented and won the 96 election.

Obama is in a similar position as Clinton at about the same time in office. Don’t think that the Clintonites (there are many in the WH) are not warning Obama about that history lesson, too.

Obama has little real choice but to call Wall Street names while simultaneously colluding with it to not see much reform happen. Sad, too.

I would like to see more class actions and movement by states to disavow some of the crazy derivatives products that have so many in trouble. In many cases, there is good reason to pull out the ol’ trump card and use state tort law to nullify contracts, force modification, excuse performance, or defend against enforcement. In many instances, the asynchronous nature of the information held by the sides negotiating as well as the misleading nature of many of the contracts and disclosures would lend themselves to a court finding a lack of mutual assent, that no contract was formed, or that enough information is available to excuse performance because of fraud.

bruer:

I thought he was parroting Elizabeth Warren because people like her.

My impression, Obama does not have a mind of his own in how to bring strong leadership to them, and set down deterrent, without calling them into the White House for pastries and tea.

This guy re-appointed Bernanke to please the bank lobby contingent.

Ask Obama to explain the importance of 5 U.S.C. § 552 to democracy and he will start talking about military grade secrecy for the Fed, is good for democracy.

S Haust:

Obama is a liar! In fact he is the worst, most manipulative, most insidious political liar I have seen in decades. We have to go all the way back to Henry Kissinger and Richard Nixon to find any kind of realistic comparison and even then we don’t get the kind of bait-and-switch that this lousy SOB has managed to pull off.

 

[Dec 15, 2009] America is angry, but Wall Street's bankers are still living the high life Business  by Andrew Clark

Trading is zero sum game. If so, Wall Street bonuses is where 401K savings landed.
Dec 13, 2009 | The Observer

Many Americans reacted with amazement to Britain's 50% windfall tax on City bonuses. There is little chance of such a measure in the US, even though Wall Street bonus payments are expected to shoot up by around 40% to $26bn (£16bn) this year. Factoring in salaries, pension contributions and other forms of pay, overall remuneration in New York's financial sector, according to an analysis by the Wall Street Journal, could top $140bn, beating the record $130bn payout in 2007. The average employee's take-home package could reach $143,400.

Just as in Britain, the wider American public is not impressed. Unemployment has topped 10%, small businesses are biting the dust in ever-increasing numbers, and with the housing market in the doldrums homeowners are set to see $500bn of property wealth evaporate this year – if they're lucky enough to avoid repossession.

Reaction in Washington, however, has been curiously muted. After blasting Wall Street bonuses as "the height of irresponsibility" in a bad-tempered outburst back in January, Barack Obama quickly backed down from a threat to cap payouts at $500,000. The White House has only initiated modest measures – the introduction of "say on pay" votes by shareholders on top-level boardroom remuneration, and the appointment of a "pay czar" whose remit to scrutinise pay contracts only extends to companies in receipt of government bailout funds.

"If you ask what the political viewpoint is outside Washington, people are livid… at levels of pay," says Martin Baily, a senior fellow at the Brookings Institution and a former economic adviser to President Clinton. "There's been a kind of in-your-face attitude by some of the financial institutions which hasn't helped. But whether that's enough to stimulate a reaction on Capitol Hill – I suspect not."

Traditionally, the US has tended to be more tolerant of inequality than European nations. In a society explicitly built on a dream of rags-to-riches aspiration, there is less willingness to condemn rewards at the top. But the speed of the return to blooming health at elite Wall Street banks has appalled many people.

The top target for populist opprobrium is Goldman Sachs, which, uniquely, insists on distributing as much as 40% of its revenue to employees, a sum set to exceed $20bn this year, amounting to more than $700,000 per staff member. A $500m charitable donation by the bank has failed to cut the mustard and Goldman's chief executive, Lloyd Blankfein, has embarked on an erratic charm offensive, remarking (jokily, according to a spokesman) that his staff were doing "God's work", then apologising in public for Goldman's involvement in "things that were clearly wrong".

A leading US union, the Service Employees International Union, wrote to Blankfein last week, highlighting that Goldman is the biggest shareholder in Burger King, with a 10.3% stake. The SEIU pointed out that the fast-food chain's staff are paid a median wage of $6.33 per hour, often getting no healthcare insurance – a stark contrast to the well-feathered nests of Goldman's own employees. In a modest concession, Goldman last week said its top 30 executives would get their bonuses in shares over a five-year period, rather than cash. But this is unlikely to mollify anger over the sums.

Goldman is not alone. JP Morgan bankers are set to get around $482,000 this year, while Morgan Stanley's staff can expect an average of $252,000 according to estimates by David Trone, an analyst at Fox-Pitt Kelton. Eminent names in the economic world are among those critical of the quick return to splashy payouts. At a conference in Britain last week, former Federal Reserve chairman Paul Volcker asked why no bank chief had admitted that such sums were excessive: "Wake up, gentlemen. Your response, I can only say, has been inadequate."

Banks have toned down, or cancelled, Christmas parties this year. At Goldman, a voicemail left for staff by Blankfein reportedly prohibited mass celebrations numbering more than a dozen staff. Yet in many cases senior executives shrug at the bonus controversy, arguing that they have no other way to keep a competitive edge. Asked the extent to which traders were motivated by take-home pay, a source at one leading investment bank replied: "Pretty much one hundred per cent."

 

[Dec 12, 2009] Breakfast_with_Dave_120809

The dynamic growth in Asia is not merely some flashy cyclical deal; it is more permanent than that

This is the quote from Ben Bernanke at his famous "What If" speech he delivered over how a central bank can fight deflation … using exchange rate policy as a tool. This is why the current countertrend rally in the greenback and the giveback in commodity and gold prices are noise around the trendline. There is nothing wrong with using corrections in the resource complex to add to long-term positions at a better price because this is a secular bull market. The dynamic growth in Asia is not merely some flashy cyclical deal — it is more permanent than that. But the reflation initiatives the U.S. is going to have to take to make the full transition to the next sustainable economic expansion are going to very likely involve the competitive boost from a weaker currency … and Helicopter Ben outlined the strategy seven years ago:

"Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932, to -5.1 percent in 1933, to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation."

Let’s look at the facts:

  1. At 1,090, the S&P 500 is no higher today than it was on October 14. That was about two months ago.
  2. The financials are down nearly 10% from the October highs.
  3. Small caps peaked in mid-October.
  4. Food/beverage/tobacco, utilities and health care equity groups have been outperforming in the past month.
  5. Three-month bill yield are 0.04%. (This is not Japan? Really?)

THE COUNTERTREND DOLLAR RALLY

We warned that this was the catalyst for a reversal of all the risk trades:

  1. Oil down to an eight-week low
  2. Gold experiencing its worst three-day performance in 14 months
  3. Copper is in its deepest slump in nearly three months

The commodity complex will come back, of course, but for the time being will be in a corrective phase. This is not an end to the secular bull market but the speculative

The commodity complex will come back, of course, but for the time being will be in a corrective phase

THE U.S. CONSUMER STILL AWOL

The Redbook revealed that chain store sales in the first week of December were running at +1.2% YoY. Not only is that uninspiring considering the depressed base from a year ago when it was the Wil E Coyote economy, but below the target of +2.1%. According to the Redbook, "retailers described the week as a lull". Not a good sign for this time of year. The weekly Gallup survey found that average spending per shopper is down 21% from a year ago. That is a shocker.

Amazingly, despite stimulus that would have made Leon Trotsky blush, 58% of Americans believe the economy is "getting worse" while a mere 38% think it is getting better. The IBD/TIPP economic optimism index dropped to 46.8 in December from 47.9 in November — a five-month low. And the index measuring "federal policies" sank to 40.2 from 42.0 and 46.6 in September — maybe, just maybe, the majority of Americans don’t think it’s a wise use of taxpayer funds to bribe consumers into the auto dealerships and home showrooms.

The jobs market remains the key and we continue to see conflicting evidence over the outlook. The just-released JOLTS survey showed that job openings fell back by 80k in October and new hires plunged 95k. According to Gallup, 24% of employees say their bosses are adding to payrolls. The annual survey from the ISM found that just 32% of manufacturers intend to boost their staff requirements in 2010 and a mere 15% of non-manufacturers intend to do so (27% plan to cut!). Even the Business Roundtable survey, which reflects the collective views of large blue-chip companies, showed a tepid 19% intending to boost employment. The headline sentiment index soared to 71.5 in Q4 from 44.9 in Q3 and 18.5 in Q2 — highest since the third quarter of 2008.

[Dec 12, 2009] Q3 2009- Mortgage Equity Extraction Strongly Negative

The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined in Q3, and this was partially because of debt cancellation per foreclosure sales, and some from modifications, like Wells Fargo's principal reduction program, and partially due to homeowners paying down their mortgages as opposed to borrowing more. Note: most homeowners pay down their principal a little each month unless they have an IO or Neg AM loan, so with no new borrowing, equity extraction would always be negative.

Equity extraction was very important in increasing consumer spending during the housing bubble (some disagree with this, but I think they are wrong). Atif Mian and Amir Sufi of the University of Chicago Booth School of Business wrote a piece earlier this year: Guest Contribution: Housing Bubble Fueled Consumer Spending

Findings in our research suggest ... the rise in house prices from 2002 to 2006 was a main driver of economic growth during this time period, and the subsequent collapse of house prices is likely a main contributor to the historic consumption decline over the past year.
Don't expect the Home ATM to be reopened any time soon - so any significant increase in consumer spending will come from income growth, not borrowing.

[Dec 12, 2009] Volcker- "Not time for business as usual"

patientrenter (profile) wrote (in reply to...) on Fri, 12/11/2009 - 9:30 pm

sdtfs wrote:

Although in scale smaller, the crisis in the 60's, 70's, and 80's were every bit as worrisome and people were devastated.

That's right, sdtfs. I lived through the difficult times from the 1960's on, and was responsible for managing money from 1974 on, so I really felt them all from that point forward.

What's happening now is different, and severe, but I wouldn't call it uniquely difficult overall. And, just as we have Summers, er, Fat Larry, and Tim and Ben, so they had people like Arthur Burns and Donald Regan. Volcker was head and shoulders above the rest, not just physically.

noob goldberg:

patientrenter wrote:

noob: You don't need to run a marathon to tell a few good minions to turn 180 degrees, and keep repeating and checking on it once a week.

I want someone with a bit of backbone to step up to the plate as much as you, patientrenter, but Volker's decades of experience is probably telling him to play second fiddle here. It takes more energy than you think to run the gauntlet of committees, bureaucracy, and public opinion. Just look how much Timmy and Ben have aged in the past year or so, even, and they started out relatively young and healthy. Appearing before politicians, bureaucrats, and the public is not a task delegated to a minion, no matter how competent they may be. It requires the presence, usually, of the big dog.

I think he could serve as a valuable source of reputation and political capital, but his days of being point man are past, and I think he recognizes that.

energyecon:

poic,

from your Pettis link:

Just growth in Chinese consumption alone does not help if it grows in line with GDP, and less so if it grows slower than GDP. In that case the imbalances will get worse, and while the impact on the trade account can be temporarily disguised if investment continues to surge, ultimately it just postpones the needed adjustment (and increases the cost if the investment surge is misallocated).

patientrenter:

sdtfs wrote:

Their contention is that it doesn't matter who the Chairman is, the policy remains the same.

I am pretty cynical about the system and all that, but I lived through the 1970's and all the dumbshits who refused to deal with the problems of the day, letting things get worse and worse. Then Volcker showed up and things actually happened - radical things - that fixed the problems. He had the barons of Congress after him, and the Treasury Secretary. Yet he stood up to them all. We can be very cynical, but sometimes a person can make a difference.

noob goldberg:

patientrenter wrote:

You know the political process better than I do, noob, so you're probably right. But I cannot help thinking that Volcker's complete independence (he doesn't need the govt salary and he certainly doesn't need to prove his credentials) means he could, if he chose, appoint very capable people to handle the daily noises. If seven committees a week demand to question him in person, he is independent enough to tell them to get stuffed.

I think we're talking about different scenarios. I was anticipating him using his reputation to push significant change through the current political structure, which tends (from what I know) to be a relatively lengthy and laborious process. I don't think he has the energy to run from meeting to meeting from 7AM to 8PM five or six days a week.

But, if as you've suggested, he's given carte blanche to fix it answering only to the president, for example, I think he'd be more than capable for the job with a wise selection of minions. The single time I've met the man he still seemed like he had the mental acuity and physical strength to do that kind of job.

crabsofsteel:

Volcker has credibility. The markets trust him because they know he has already saved the dollar once before. As things stand now, all we know is that a lot of private debt has been converted to public debt, but we don't know what it is and how bad the losses will get. If Obama wants to save his presidency, he would be wise to start taking the big guy a lot more seriously. What Volcker has to do is simple; he would work on getting all the bad debt out of the system as opposed to the Geithner policy of pretending it's all money good.

noob goldberg :

PastTense wrote:

That means you think there is a viable solution to the current mess. What is it?

I don't see any painless solution, if that's what you're getting at. Furthermore, the situation is going to resolve itself one way or another, irrespective of who is in charge. We're not talking an asteroid slamming into the earth, we're talking about global economic adjustments.

colganc is certainly right; one person can't 'save' the economy. It's not really the point, here. One person, with a strong enough reputation and some fairly tight controlling action, can provide the impression that some control has been exerted on the problem, which would minimize volatility and provide time for the economy to heal. Volker is just a name put forward because of his reputation and proximity to the current administration, but there could certainly be others--probably some more qualified. If enough within the economy are placated by this approach, the economy itself can begin the process of self-healing.

Quite truthfully, I'm not at all convinced that anyone, Volker or otherwise, could right the ship without triggering significant social unrest and upheaval and generally changing the world as we know it. But that doesn't mean we necessarily wash our hands of the whole thing

I gotta get some sleep.

EDIT: But if you're asking what I think whoever takes the reins from Timmy should do, the answer is put forward a feasible plan to break apart TBTF. That moral hazard is a cancer that will undermine any further economic growth.

[Dec 12, 2009] An Economy On Thin Ice By Paul A. Volcker

April 10, 2005 | washingtonpost.com

The U.S. expansion appears on track. Europe and Japan may lack exuberance, but their economies are at least on the plus side. China and India -- with close to 40 percent of the world's population -- have sustained growth at rates that not so long ago would have seemed, if not impossible, highly improbable.

Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.

We sit here absorbed in a debate about how to maintain Social Security -- and, more important, Medicare -- when the baby boomers retire. But right now, those same boomers are spending like there's no tomorrow. If we can believe the numbers, personal savings in the United States have practically disappeared.

To be sure, businesses have begun to rebuild their financial reserves. But in the space of a few years, the federal deficit has come to offset that source of national savings.

We are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security. As a nation we are consuming and investing about 6 percent more than we are producing.

What holds it all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing. There is no sense of strain. As a nation we don't consciously borrow or beg. We aren't even offering attractive interest rates, nor do we have to offer our creditors protection against the risk of a declining dollar.

Most of the time, it has been private capital that has freely flowed into our markets from abroad -- where better to invest in an uncertain world, the refrain has gone, than the United States?

More recently, we've become more dependent on foreign central banks, particularly in China and Japan and elsewhere in East Asia.

It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.

And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency.

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

It's not that it is so difficult intellectually to set out a scenario for a "soft landing" and sustained growth. There is a wide area of agreement among establishment economists about a textbook pretty picture: China and other continental Asian economies should permit and encourage a substantial exchange rate appreciation against the dollar. Japan and Europe should work promptly and aggressively toward domestic stimulus and deal more effectively and speedily with structural obstacles to growth. And the United States, by some combination of measures, should forcibly increase its rate of internal saving, thereby reducing its import demand.

But can we, with any degree of confidence today, look forward to any one of these policies being put in place any time soon, much less a combination of all?

The answer is no. So I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates. We had a taste of that in the stagflation of the 1970s -- a volatile and depressed dollar, inflationary pressures, a sudden increase in interest rates and a couple of big recessions.

The clear lesson I draw is that there is a high premium on doing what we can to minimize the risks and to ensure that there is time for orderly adjustment. I'm not suggesting anything unorthodox or arcane. What is required is a willingness to act now -- and next year, and the following year, and to act even when, on the surface, everything seems so placid and favorable.

What I am talking about really boils down to the oldest lesson of economic policy: a strong sense of monetary and fiscal discipline. This is not a time for ideological intransigence and partisan posturing on the budget at the expense of the deficit rising still higher. Surely we would all be better off if other countries did their part. But their failures must not deflect us from what we can do, in our own self-interest.

A wise observer of the economic scene once commented that "what can be left to later, usually is -- and then, alas, it's too late." I don't want to let that stand as the epitaph of what has been an unparalleled period of success for the American economy and of enormous potential for the world at large.

The writer was chairman of the Federal Reserve from 1979 to 1987. This article is adapted from a speech in February at an economic summit sponsored by the Stanford Institute for Economic Policy Research.

[Dec 12, 2009 Volcker Says ‘Basic Structure’ of Economy to Impede U.S. Growth - Bloomberg.com

"imbalances in the structure of the U.S. economy pose a bigger challenge than the financial crisis and will impede economic growth for some time. " Economy will be constrained by “job losses, sluggish income growth, lower housing wealth and tight credit.”
Dec 11, 2009 | Bloomberg

 Former Federal Reserve Chairman Paul Volcker said imbalances in the structure of the U.S. economy pose a bigger challenge than the financial crisis and will impede economic growth for some time.

“We have another economic problem which is mixed up in this of too much consumption, too much spending relative to our capacity to invest and to export,” Volcker, an adviser to President Barack Obama, said today in Berlin. “It’s involved with the financial crisis but in a way it’s more difficult than the financial crisis because it reflects the basic structure of the economy.”

The Fed, European Central Bank and Bank of England have provided record liquidity to support a recovery from the worst financial crisis since the 1930s and have signaled there is no rush to raise interest rates. Fed Chairman Ben S. Bernanke said this week the U.S. economy faces “formidable headwinds,” while the ECB last week left interest rates at a record low.

“It’s likely that economic growth is going to be pretty sluggish for a while,” Volcker said in a Bloomberg Television interview.

The Obama administration has endorsed a plan by the Group of 20 to rebalance the world economy so that it’s less reliant on U.S. demand.

Fed policy makers said Nov. 4 that the economy “has continued to pick up” while constrained by “job losses, sluggish income growth, lower housing wealth and tight credit.” They kept the benchmark interest rate in a range of zero to 0.25 percent and said rates will stay low for an “extended period.” Policy makers meet again next week.

[Dec 12, 2009] Debt and Interest Rates Some Empirical Evidence and Implications

November 23, 2009 | Econbrowser

Today's NYT article suggests apocalypse (very) soon:

...the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

Do we really need to worry so much in the short term?

Selected Comments

Cedric Regula

Reasons not to worry:

1) Tbills are a tax write off at the moment.
2) Banks can take their ZIRP deposits and buy treasuries.
3) Forward PE on US stock market is 21.
4) Forward PEs on BRICs % EMs above 20.
5) Foreign CBs still want to peg to the dollar.
6) Commercial real estate, residential real estate problems not over. Some rumors that private equity firms may have leverage problems.
7) Gold and silver is expensive.
8) Commodity prices are expensive.
9) Rental prices dropping, insuring a nice read on the CPI next year.
10) Only problem is now and then we get some decent econ data, but Bernanke will be sufficiently intimidated by next years elections to hold off on rate increases till after November, no matter what the economy is doing by then.

Don't worry....be happy!

[Dec 12, 2009] Economist's View Paul Krugman Bernanke’s Unfinished Mission

bakho:

There are some policies that come in between monetary and fiscal policy, It matters HOW money is loaned, who and how much rent is collected.

Ways to stimulate the economy by taking more money out of the hands of the wealthy bankers and into the hands of those who spend every dime.

1. Take the banksters out of the student loan business. Set up a program to loan direct to students at lower interest rates and government quits paying the subsidy to the loan sharks.

2. More money for direct SBA loans. The banksters are not lending anyway, so let the government make the higher risk loans necessary to float small business in the short run. These loans can be unwound at a future date by selling bonds.

3. Mortgage cram downs. Put more money into FreddieFannie for houses purchased at non-bubble prices. Replace mortgages at unaffordable interest rates with lower rates of interest. Pay for part of the program by making some or all of the interest non-tax deductible.

4. If the Feds cannot "give" money to the states, create a fund to purchase state bonds to be paid back from future state revenue. Have the Federal government cover a greater percentage of Medicaid and unemployment compensation.

5. Set up an office to loan money to high tech startups. The loans could be paid back in the future once the startups make money. This is the same way college student loans are supposed to work.

Just dumping a lot more cash onto an already dysfunctional system is a bad idea and will not do anything for employment. Unless and until the unemployment rate drops substantially, the economy will continue to be at risk.

kharris said in reply to bakho...

bakho,

Not to disagree, but just to think through the likely consequences and objections...

If banks aren't lending, then directing government lending programs around them would improve the chances of getting credit where we want to do, without hurting current bank operations. However, to the extent that the outlook for bank profitability affects current equity values and bank balance sheets, the health of banks is hurt to the extent that directing federal lending operations outside the banking system hurts banks' prospects.

Much of the government's short-term effort has been aimed at preventing further trouble for banks and then getting them on a path to health. A policy which is likely to hurt banks current stance has little chance of adoption. What that means is that, in the face of an obvious need to subordinate finance to the rest of the economy in the medium and long term, we are instead dealing only with the scary prospect that harming banks in the short term could also harm the economy. The logic of this choice can become really costly in very short order. The notion that we should make the most of a crisis has been spouted from the beginning, but it is a notion that is well on its way to being ignored in practice. We ought to be imposing a very large cost on the finance sector for all the assistance it has received. Instead, it looks like we are on our way to window dress regulation, and little more.

PCLE:

Isn't it time for the government to act as employer of last resort ? There have been some proposals for a job guarantee scheme for example by Minsky and Randall Wray. We need something along the lines of the works schemes of the Great Depression. Minsky felt it was immoral to pay people to do nothing...far better to get them working again. Money is not an issue here. The US is a sovereign issuer of its own currency and can never run out of funds. There is certainly not a problem of inflation in an economy with such a massive surplus of labor.

julio said in reply to Lafayette...

Lafayette,

The wikipedia article also says this:

"Some European countries have abandoned this kind of tax in the recent years: Austria, Denmark, Germany (1997), Sweden (2007), and Spain (2008). On January 2006, wealth tax was abolished in Finland, Iceland and Luxembourg."

Do you know why?

As for a referendum on for a wealth tax, the closest I've seen is California voting just the opposite with Prop. 13.

You may be right that by now, having seen the effects, people would vote differently; but no one thinks there is enough support for a repeal of 13.

It may be a case of Mencken's dictum, "No one ever went broke underestimating the intelligence of the American public", especially when it comes to politics.

anne:


http://krugman.blogs.nytimes.com/2008/11/28/was-the-great-depression-a-monetary-phenomenon/

November 28, 2008

Was the Great Depression a Monetary Phenomenon?
By Paul Krugman

[Depression chart] Sins of omission?

Has anyone else noticed that the current crisis sheds light on one of the great controversies of economic history?

A central theme of Keynes's "General Theory" was the impotence of monetary policy in depression-type conditions. But Milton Friedman and Anna Schwartz, in their magisterial monetary history of the United States, * claimed that the Fed could have prevented the Great Depression — a claim that in later, popular writings, including those of Friedman himself, was transmuted into the claim that the Fed caused the Depression.

Now, what the Fed really controlled was the monetary base — currency plus bank reserves. As the figure shows, the base actually rose during the great slump, which is why it's hard to make the case that the Fed caused the Depression. But arguably the Depression could have been prevented if the Fed had done more — if it had expanded the monetary base faster and done more to rescue banks in trouble.

So here we are, facing a new crisis reminiscent of the 1930s. And this time the Fed has been spectacularly aggressive about expanding the monetary base:

[Contemporary chart] Ben goes for broke.

And guess what — it doesn't seem to be working.

I think the thesis of the "Monetary History" has just taken a hit.

* 1963

A Monetary History of the United States, 1867-1960
By Milton Friedman and Anna J. Schwartz

Mark A. Sadowski said in reply to anne...

The Fed's hands were largely tied by Eichengreen's "golden fetters" during the Great Depression. It's not really a surprise that the economy started to recover almost to the day that FDR started to debase the dollar. I'd have to go research this but I believe that even Friedman acknowledged this at some point.

The huge current expansion of the monetary base is very deceptive for the following reason: the Fed has been paying interest on reserves since October 6th 2008. This is a deflationary policy that for some mystery no one seems to be talking about.

Monetary policy has not been exhausted. The Fed is just strangely passive.

paine said in reply to Mark A. Sadowski...

"This is a deflationary policy that for some mystery no one seems to be talking about"

it indeed would be if the free reserves would otherwise be loaned out. i doubt even much would at the margin

i see tis as just more money to rebalance the bank books

Mark A. Sadowski said in reply to paine...

"i see tis as just more money to rebalance the bank books"

I agree but whereas the fed apparently thinks what is good for Citi is good for America I actually happen to think that what is good for America is good for America. But what do I know.

kharris said in reply to anne...

The Friedman/Schwartz view that stabilizing growth in monetary aggregates will stabilize growth in economic activity relies on stable monetary velocity. Friedman, after seeing velocity destabilize over a significant period, recognized that his view was not workable. If Friedman can see that, when others in his position (Mundell?) might just defend their early work till the end, perhaps Friedman's followers need to get a clue.

Euton said...

We need to start with the understanding that things are they way they are for a reason. Bernanke/Geithner(Summers) are just relief pitchers for the starting team of Greenspan/Rubin. These Wall Street tools have had their way for a couple of decades now. We now see the results of their "brilliance".

I'm not impressed, but I can understand why economists are.

RW said...

Indirectly Krugman limns what I have considered a core problem since Nixon and Burns: A poisoned political environment that prevents rational fiscal decisions forces monetary technocrats to compensate and eventually overreach.

Analyzed on that level, Greenspan's low interest-rate policy was an entirely rational response to funding the programs of a series of government regimes* who refused to support their policies with taxes.

If you have to borrow then keep costs low; this has the added benefit of distracting elites with bright, shiny bubbles.

*That many members of these regimes continue to act and talk as if increased public debt were 'a bad thing' rather than an inevitable outcome of their own philosophy, such as it is, suggests at least one of the toxins involved in poisoning national politics may have had hallucinogenic properties.

Reno Dino said...

They are forcing the young into the military. Part of the plan needed to drive the war machine.

psychohistorian said...

The economic cabal in power has no intention of creating more jobs in the US. They are aiming us for a shock doctrine moment when they will kill all entitlements to keep our war machine going.

Lafayette said in reply to psychohistorian...

If voters ever get wind of what's going on, "they" will stand this tidy little world of plutocrats on its end.

Regrettably, by dumbing down Americans with meaningless platitudes, that National Epiphany will not occur in my lifetime.

Terry said...

The fact that the Fed has not yet BEGUN to address employment per Krugman above is sufficient condemnation of Ben Bernanke that he should not be reconfirmed by the US Senate.

I'm ready to bring back Paul Volcker in a heartbeat, if he'd have the job.

kharris said in reply to Terry...

Monetary policy is asymmetrical because of the zero bound. Volcker knew that he could kill inflation with higher rates, because there was no upper bound. I don't know that he would be more effective than Bernanke, facing the same limit on the effectiveness of policy. Bernanke's inclination to leave monetary accommodation in place for a long time is just about the best we can hope for from any central banker in this situation. That is more or less Krugman's point. Fed officials would be fools to admit it, but they are out of ammo.

[Dec 11, 2009] A windfall tax in the US by Krishna Guha

December 11, 2009 | FT.com Money Supply

Britain is doing it, France is doing it. Should the US impose a windfall tax on bankers’ bonuses too? Let me set out what I understand to be the case for the prosecution. I invite readers to comment on whether you think it stacks up or not.

1. People on Main Street are furious about Wall Street bonuses.

2. This anger is justified because the bonuses are based in large part on windfall profits. These profits derive from taxpayer-backed interventions that stabilised the financial system, paving the way for a  recovery in financial markets and collapse of risk spreads.

3. All banks benefited from this bailout - not just the ones that took or still have Tarp funds. Even the strong gained hugely from Fed liquidity and government actions to ensure none of their weaker counterparties failed (including but by no means limited to the AIG case).

4. In an ideal world, these interventions would have been structured up front in a way that ensured the value created did not leak out to banks and bankers. But they were not.

5. This is understandable given the pressures on decision makers mid-crisis. However, this means we have to consider the cost/benefits of acting retrospectively.

6. If policymakers do not act to address justified public anger, there will be long term costs.

7. People have lost faith in economic institutions such as the Fed and Treasury because they believe these institutions are working in the interest of Wall Street rather than the general public.

8. This is likely to lead to bad policies, including reforms that undermine the powers and independence of the Fed, high rates of tax on high incomes earned in normal competitive markets and the wrong type of financial regulatory reform.

9. It is also the worst possible starting point for a serious debate about fiscal consolidation, which at its heart is a debate about national burden-sharing.

10. The best way to lance the boil is to recoup the value created by taxpayer-backed interventions through a windfall tax.

11. Having imposed a windfall tax the Treasury and the Fed would be in a better position to resist bad policies, e.g. punitively high rates of tax on high earners on an ongoing basis.

12. A well-designed windfall tax with measures to limit avoidance might raise roughly $30bn. (Math follows: with $140bn in planned bonuses and one third successfully diverted to avoid the tax, a UK style 50 per cent surcharge on bonuses net of 35 per cent income tax would yield $30bn.)

13. This sum is small relative to the deficit but it is not trivial. For instance, it could finance a one-time $5,000 per job hiring tax credit for up to 6m jobs. Suppose nine out of ten of these jobs would have been created anyway. That is still 600,000 extra jobs.

14. Any resulting increase in banks cost of capital due to a political risk premium is likely to be small because: a) the tax relates to a truly one-time event; b) it falls on employees not shareholders; and c) past windfall taxes e.g. on the UK privatised utilities did not result in large increases in the cost of capital.

Well… what do you think?

Selected Comments

10024:

Isn't it much simpler than 1-14? (1) In large part, the bonuses are driven (claimedly) by the banks' need to retain employees who generate large trading profits. (2) Since every trading gain equals a counter-party's loss, overall they produce no economic benefit. (3) Moreover, the bonuses incentivize pernicious side-effects. (4) They also distort societal values. A trader is many times more valuable to society than a teacher? (5) Whatever action can be taken, promptly, should therefore be taken by Washington to match the British and French actions.

SNY

While the windfall tax is an unfortunate way of doing it, something needs to be done. The problem is that the utility of banking, which TARP and fed policy was meant to save, is inextricably linked with the "casino" of banking. The bank recapitalization as engineered by the fed pumping cash at 0% was meant to bolster the utility of banking. Borrow at 0% from the fed and lend it at something higher, maybe even buy US treasuries and improve the capital situation of the institution. But free money became the bankroll for the casino and generated large profits. Very little of that profit had anything to do with the skill of the traders involved. If the banks were to honestly separate the "alpha" of value-added by an individual trader from the "beta" of the banking activity itself making money and paid bonuses based on alpha and not beta then there would be precious little to pay since there was no alpha generated this year. But that is not what is being done and the public is understandably incensed.

Charles Seifried

Very good idea....I don't know if this will change the way the public feels about Banks. What happened was the biggest crime foisted upon the American people ever. I think that the trust has been lost. Most of middle America see the big corporations and bankers working together to suck them dry. Then, they move their headquarters out of the US....like Haliburton to Dubai. The young adults are in the midst of this and hopefully they won't forget. They need to be the next guardians.

Tax the Banks, their bonuses, their houses. Tax them back to the stone age.

Krishna Guha:

Great, thought-provoking comments. Keep them coming! Meanwhile, a few thoughts in response...

@Constantine @ Anshuman the argument is that even a reasonable ROI on Tarp capital injections represents only a few cents on the dollar in terms of the true value of the wider insurance the authorities provided for the system as a whole at the taxpayers risk.

@JDA @Pascual I hope you are wrong about the admin and Congress working for the rich. I'm not sure this is true, but it is the belief advocates of a windfall tax say the tax would correct.

@Econoclast I like you wish bankers had themselves acted to forestall public rage by showing real restraint on bonuses this year. But there are serious collective action problems.

@10024 @Anonymous @SK @SNY Windfall profits are concentrated in trading (though eg those involved in capital raising also benefited from interventions that reopened markets). The big bonuses are also concentrated in trading, so you could exempt eg the first $200,000 from a bonus surcharge and shield the less rich from some of the pain.

But bankers are not sole traders: everyone exploits the brand and balance sheet of the firm and benefited from interventions that insured it against failure. So if there is a windfall tax it strikes me that non-traders should not be exempt from it.

As to the value created by trading - I think there is some, but it is not as large as the bonuses associated with it suggest, and there is @SNY a lot of beta masquerading as alpha.

@Anshuman there is a good case for extending the scope of any windfall tax beyond banks to financial institutions more broadly.

@M @Richard subsidised farmers should lose their subsidies or be subject to ongoing higher taxation. The case for a windfall tax is that bankers benefited from a one-time subsidy and so should be hit with a one-time tax - not an ongoing surcharge.

@Anonymous Why only bankers (or @Anshuman financiers more broadly)? Because the windfall gains from specific taxpayer-backed interventions accrued overwhelmingly to this group.

The strongest argument against a windfall tax in my view is the claim that Congress would not stop with a one-time levy but would keep coming back for more.

Still, it is not obvious to me that it is easier to resist a soak-the-rich strategy from a position that denies any recovery of windfall gains. Taxing the windfall but not punitively taxing future success might be a more defensible position.

[Dec 11, 2009] Obama's Big Sellout

Rolling Stone

There's no other way to say it: Barack Obama, a once-in-a-generation political talent whose graceful conquest of America's racial dragons en route to the White House inspired the entire world, has for some reason allowed his presidency to be hijacked by sniveling, low-rent shitheads. Instead of reining in Wall Street, Obama has allowed himself to be seduced by it, leaving even his erstwhile campaign adviser, ex-Fed chief Paul Volcker, concerned about a "moral hazard" creeping over his administration.

"The obvious danger is that with the passage of time, risk-taking will be encouraged and efforts at prudential restraint will be resisted," Volcker told Congress in September, expressing concerns about all the regulatory loopholes in Frank's bill. "Ultimately, the possibility of further crises — even greater crises — will increase."

What's most troubling is that we don't know if Obama has changed, or if the influence of Wall Street is simply a fundamental and ineradicable element of our electoral system. What we do know is that Barack Obama pulled a bait-and-switch on us. If it were any other politician, we wouldn't be surprised. Maybe it's our fault, for thinking he was different.

[Dec 10, 2009] Effort to Reform Finance Instead Turning into a Coup by Banksters

naked capitalism

attempter:

House leaders are trying to settle a dispute between liberal and moderate Democrats that threatens to sideline, at least temporarily, a bill to overhaul regulation of the financial system.

Here we go again with this vile media framing, where right-wing and/or obviously corrupt Democrats are called “moderates” or “centrists”, while the people, and any Dem who wants to vote for what the people want, are called “liberal”.

In this case the malevolence of this framing is even more severe than in the case of health “reform”.

Let’s be absolutely clear: the corporatist MSM is not only grotesquely inadequate to the needs of democracy, it is by now actively, aggressively treasonous.

The same is true of most in Congress and among presidential candidates.

This government is utterly broken, corrupt beyond redemption. Potemkin reform is worthless in itself, and anyway never exists in simply neutral do-nothing form. On the contrary, it’s always a disaster capitalist hijacking, where the nominal “reform” vehicle is used as an aggressively anti-reform weapon.

So again this is just like health reform but far worse. Here too, it’s better to just do nothing so long as these criminals are in power.

As Yves points out, this would at least have the virtue of rendering the utter criminality of this government absolutely clear to a wider audience.

Reply
Banksters Continue to Expand Control Over Government : The Heroes of America says:
December 10, 2009 at 8:45 am
[...] Effort to Reform Finance Instead Turning Into Coup by Banksters Published by Yves Smith of NakedCapitalism.com. [...]

Siggy:


This whole financial reform theater strikes me as being a missdirection from the fact that a large part of what has occurred, and is continuing, is the fact that we have been subject to a stunning abrogation of regulatory authority.

I’m not so sure that we need sweeping reforms, well the resurection of Glass-steagell would be worthy, as much as we need to have the existing laws enforced.

Fraud that goes unprosecuted fosters fraud. The financial services lobby is doing a masterful job of papering over the fairly obvious fraud that has occurred and moved the focus of legislation to venues that have little bearing on the failure of the regulatory agencies to do their job.

Prosecuting insider trading is helpful. The real problem, however, is that which obtains from the trade in derivatives. There was a time when if you wittingly made a trade that you could not honor, you went to jail. You can howl all you want about excess leverage and stupidity, but the simple criterion is can and will you honor the contract.

A consumer protection agency is more palaver for the public. While true it might help to protect the consumer, it will also make the consumer more prone to profligacy. At some point the consumer has to be responsible for his actions in equal measure as to the enterprise that seeks to exploit him.

A failed financial reform bill might be a better outcome if the ultimate result is legislation that addresses a resurection of Glass-Steagell.

[Dec 10, 2009] Calls For Protectionist Retaliation Against China Rise

Yves here. Did you catch that, sports fans? The US will not be able to deleverage (absent explicit default) unless we move to a trade surplus. As long as we run a current account deficit, we need to run a capital account surplus. That means (if the deficit and therefore corresponding surplus are more than trivial) rising levels of debt, and high odds of speculative asset bubbles.

Ina Pickle:

I quit studying economics because I couldn’t believe, in the religious way required, in the absolute necessity of free trade and in the rationality of market participants. I couldn’t see the point of the beautiful edifice with sponge for initial assumptions at its foundations. I dislike the unrelenting drive to treat humanity as an externality.

What amazes me most is that some economist is openly saying “these are structural problems requiring an intervention of a protectionist nature.” While it’s based in their argument on others distorting the perfection of free trade, to which we must respond, it’s mighty close to heresy in the neoliberal paradigm.

DownSouth:

Ina Pickle,

No truly democratic nation has ever freely accepted neoliberalism. Neoliberalism is always enforced at the point of a gun. That’s why neoliberalism, along with its economic prescriptions (including, but certainly not limited to, free-trade and free-capital-flow absolutism), always comes joined at the hip with its muscular twin, neoconservatism, and its military might.

Almost 20 years ago, the Mexican writer Carlos Fuentes wrote that “Our perception of the United States is that of a democracy inside and an empire outside: Dr. Jekyll and Mr. Hyde.”

As Fuentes goes on to point out, Americans never had much reason to be concerned about Mr. Hyde. As long as neoliberalism was inflicted upon someone else, it was a doctrine easy to embrace.

But somewhere along the way, America’s plutocrats decided they could completely kill off the goodly Dr. Henry Jekyll, letting Mr. Edward Hyde have his way with not only those outside America, but those inside as well. And of course most Americans, now that they’re getting a first-hand taste of neoliberalism, are finding they don’t like it. Neoliberalism is, after all, a doctrine that establishes a small, privileged elite, and everybody else suffers.

So I perceive this to be a test of American democracy. Will American oligarchs be able to permanently kill off Dr. Jekyll, as was the case in Stevenson’s novella? Or will the American people be able to stage a recovery, to recreate the exact formula of the potion that turns the evil Mr. Hyde back into the goodly Dr. Jekyll?

Costard:

Nor has there ever been a “true” democracy, or a neoliberal regime as you describe it. And every policy adopted by every binding government is, as you put it, “enforced at the point of a gun”.

And a cynic would argue that democracies do not generally prefer free trade, because people do not generally prefer competition, and will vote themselves money and business if given the chance, resulting in precisely the kind of special-interest oligarchy that you mention.

But I’ll bite. Netherlands in the 18th century. Modern Taiwan and Singapore. Post-ww2 Japan. Relatively democratic, peaceable nations with open trade. Not perfect examples by any stretch, but then it’s wise to remember that history, which rarely follows theory, is always a poor means for theoretical validation.

DownSouth:

Costard,

You assert that “people do not generally prefer competition, and will vote themselves money and business if given the chance, resulting in precisely the kind of special-interest oligarchy that you mention.”

This is a gross generalization of human nature which leads to an extremely simplistic, and erroneous, worldview, and if applied to public policy brings social disaster.

In any given population there are indeed a certain percentage of people who behave as you say. They are called “free-riders.”

If a society fails to punish and keep free-riding to a minimum, then the society does indeed become dysfunctional. But a properly functioning society has all sorts of cultural and legal mechanisms in place to identify and punish free-riders.

Neoliberal ideology, with its free-market and anti-regulatory absolutism, undermines the cultural and legal mechanisms that punish free-riders. It is a recipe for economic and social chaos.

mechanic:

IMO, the economics profession has completely missed the true lessons the 20’s, 30’s, and 40’s in America and at least five centuries of European history before that. Mercantilism leads to war.

The great depression was more about the collapse of the world economy as a result of the trade imbalance, with America playing the current role of Germany, China and Japan. America’s export juggernaut collapsed with the collapse of the trade deficit countries leading to world wide deflation, depression, and war.

America faces deflation. The jobs have been hollowed out by foolish, or non-existent, trade policies with predictable results. Just like the path from here is predictable.

Without policies, in place, to limit predatory import penetration, severe deflation, continuing job loss, and growing poverty in the US is assured. Why wait until war becomes the only solution ?

“What would happen if the deficit countries did slash spending relative to incomes while their trading partners were determined to sustain their own excess of output over incomes and export the difference? Answer: a depression. What would happen if deficit countries sustained domestic demand with massive and open-ended fiscal deficits? Answer:”

exactly what is happening, now.

Doc:

Apologies if I have posted this here before, but Michael Pettis fleshes this out (along with Martin Wolf) quite elegantly.

http://mpettis.com/2009/04/is-governor-zhou-a-closet-bernanke-ite/

“In either case US consumption must grow faster than US GDP, and the choice for the Fed is whether to target a “normal” growth in consumption, and permit rising unemployment, or a “normal” growth in GDP, and so permit rising indebtedness. The Fed must use US unemployment, in other words, as a tool to prevent Asian trade policies from leading to excess US indebtedness.”

Another damaging consequence of the trade imbalance given this statement (if my deduction is correct using their logic), is that if the Fed brings interest rates to zero and the trade imbalances *persist*, then real interest rates are *increasing* as long as the imbalance persists.

i on the ball patriot:

Ah yes, the protectionism stage …

Wealthy ruling elite scamerican gang leaders unleash their media propaganda shills on rape victim’s gang leaders … this is a particularly funny line from FT ‘s Alber — what a butt sucking piece of crap bone head he is …

“Americans have been patient – too patient – in accepting the loss of several million US manufacturing jobs because of China’s determined pursuit of mindless mercantilist policies…”

Ha! Ha!

Who created the conditions for, and strongly encouraged and facilitated, “China’s determined pursuit of mindless mercantilist policies”, that sent all of those jobs to China in the first place? Yes, you know who …

The intentional gigantic global bubble with the amazing geopolitical twist continues … the marks remain clueless as they are propagandized with divisive anger … “let’s deport all of those nasty Chinese people” … get those wetbacks out of here and all will be nirvana …

Deception is the strongest political force on the planet.

Ronald:

Little is left of American owned and operated manufacturing except for small business as the rest is part of the international corporate financial sphere. International money flows and corporate profit seeking are what drives so called trade issues. Protectionism is always held up by the financial press as the end of the world as we have known it but in reality its probably the only way out of the current global economic crisis and a return to local control over our economic lives.

charcad :

Had the US consumer chosen to buy something useful and produce some tangible gain from it

I think this is the point. That is not “consumption”, or at least it wasn’t in Yves’ Dark Ages (Yves and I are pretty much age contemporaries based on her bio).

“Buy something useful” used to be deemed “capital investment”. It was not “consumption”. A simple example would be buying (or building) machine shop tools to make dies and plastic die injection machinery to produce wanted by other people. And this definition was held in common by nearly all economic ideologies at one time. Communists, socialists, Nazis, American robber baron capitalists, British Imperialists and libertarians were united on this point. Also the buggiest balanced budget gold bugs to the most free-spending there’s-no-tommorow Keynesians.

I think it’s also true that real investment opportunities in the USA have been disappearing on the buy side for several decades. Mrs. Fields’ Cookies and Starbucks were only relatively attractive as stocks, never absolutely. Even investment managers of limited intelligence realized that it was impossible to monopolize and economically scale cookie baking and coffee brewing to the point where major returns were possible.

Back when Pension Fund Leo was here I used to routinely torture him with a single question: “Where are safe 8% returns available to the average fund manager?” And without which return his fund is heading for slow and certain actuarial failure.

It was this dearth of real investment opportunities that set the stage for faux investments like sub-prime mortgages packaged in a way that they’d perform like AAA bonds.

charcad:

Had the US consumer chosen to buy something useful and produce some tangible gain from it

I think this is the point. That is not “consumption”, or at least it wasn’t in Yves’ Dark Ages (Yves and I are pretty much age contemporaries based on her bio).

“Buy something useful” used to be deemed “capital investment”. It was not “consumption”. A simple example would be buying (or building) machine shop tools to make dies and plastic die injection machinery to produce wanted by other people. And this definition was held in common by nearly all economic ideologies at one time. Communists, socialists, Nazis, American robber baron capitalists, British Imperialists and libertarians were united on this point. Also the buggiest balanced budget gold bugs to the most free-spending there’s-no-tommorow Keynesians.

I think it’s also true that real investment opportunities in the USA have been disappearing on the buy side for several decades. Mrs. Fields’ Cookies and Starbucks were only relatively attractive as stocks, never absolutely. Even investment managers of limited intelligence realized that it was impossible to monopolize and economically scale cookie baking and coffee brewing to the point where major returns were possible.

Back when Pension Fund Leo was here I used to routinely torture him with a single question: “Where are safe 8% returns available to the average fund manager?” And without which return his fund is heading for slow and certain actuarial failure.

It was this dearth of real investment opportunities that set the stage for faux investments like sub-prime mortgages packaged in a way that they’d perform like AAA bonds.

attempter:

I think he’s doing pretty much what he wants to do. He is ideologically a corporatist, and even leaving ideology aside has a very conservative status quo preference.

But that doesn’t mean he doesn’t also lack balls. This twerp doesn’t even demand the dignity of being able to pretend he’s his own man. He hasn’t even tried to pretend he’s in some kind of hard fight to bring the transformative “change” he promised.

Even if I had lied about who I was and had been bought and paid for I’d still demand some “victories”. Clinton at least sometimes looked like he was in real fights.

AC:

Yve, I don’t understand why you and some economists keep blaming China for American’s deficit. No one as far as I know has a gun pointed at any Americans to spend beyond their means. US spends at least hundreds of billions of dollars in Afghanistan and Iraq and counting. Hundreds of billions more on the about 720 oversea military bases overseas. Who knows how many trillions $ on the military? If China were to do similar things as the US, there wouldn’t be any surplus(and probabaly a deficit) left for China. To argue that reminbi is undervalued because the US spends beyond its means (or conversely, reminbi is overvalued because the US spends within its means) is illogical. In science, this way of reasoning could not get a pass). I could see(in comment section to Martin’s article) that quite a few economists hold cantrary view to Martin’s and yours.

charcad:

Yve, I don’t understand why you and some economists keep blaming China for American’s deficit.

I think you misunderstood Yves’ post and article. I took her post and the underlying F-T article to blame “the Administration” for fostering the present state of affairs.

This however is code-talk for the current elites. Does anyone suppose the Walton family, for instance, sees any need for change? Does anyone at high levels at Walmart HQ see a need for change? Goldman Sachs?

Yves Smith:

AC,

With all due respect, did you read the post? China has, since 1994, manipulated the level of its currency, first with a fixed peg, more recently with a “dirty float” which simply means it lets its price move a teeny bit on a day to day basis but still controls the overall level. China has, deliberately, for well over a decade, set the value of its currency low to give it an advantage in trade. The Chinese accumulated TRILLIONS of dollars buying US paper to keep the value of the RMB low! Had it allowed the RMB to rise, the US would NOT have overconsumed and China would not own tons of US Treasuries and be complaining about it.

You want to airbrush out the elephant in the room, the sustained currency manipulation.

And many readers are simply incorrect when they speak about labor costs as a % of total costs in manufactured goods. When you factor in raw material cost, transportation (often to and from, for example, in the case of furniture, since the raw material comes from the US), inventory costs (you need more buffers if you are dealing with a remote supplier), capital costs, and high reject rates (and I am told they are still VERY high from China), labor is often NOT the driving cost in manufacturing. I have had multiple US executives tell me there was not a very strong case for their company to outsource to China (the economics were not compelling, and typically fell short of what was expected), but Wall Street wanted it.

AC:

“Had it allowed the RMB to rise, the US would NOT have overconsumed and China would not own tons of US Treasuries and be complaining about it.”

Yve, I don’t see any logic here. Why couldn’y Americans Not overconsumed? Are Americans not free to do so?

alex:

“And many readers are simply incorrect when they speak about labor costs as a % of total costs in manufactured goods.”

Thank you!

It drives me nuts when armchair philosophers (and worse, professional economists) talk as though China’s labor rates give them an unbeatable advantage (and ignore all the other factors you mention). These people clearly know nothing about manufacturing, and assume that direct labor costs are a major component of manufacturing costs for all goods.

Ok folks, assembling toasters is probably not something the US can compete in. But what about making computer chips or other electronic components. How about the specialized glass needed for LCD screens (largely made by Corning, but of course they decided to put the plants in Japan). Cell phones? Generally untouched by human hands (which is why they can be profitably made in places like Germany). How about capital goods like industrial robots, which are made in small volumes (compared to consumer goods) and sophisticated enough that offshoring the factory is a nightmare. What about airliner wings (now made in Japan thanks to the outsourcing policy that even Boeing now admits was a mistake).

Don’t believe high wage countries can successfully and profitably manufacture certain products? Then please explain Germany.

BTW, a similar argument goes for IT and engineering outsourcing. The mad mania to offshore it has not proven as profitable as predicted. But stock “analysts” insisted every company had to have an offshoring policy.

charcad:

When you factor in raw material cost

China has little advantage in this and is often at a disadvantage. Consider the cost of scrap steel purchased in the USA, or anywhere outside China and then imported. Or iron ore.

transportation (often to and from, for example, in the case of furniture, since the raw material comes from the US)

More like Southeast Asia and South America. The US exports little hardwood anymore. ATTENTION Friends of the Earth! Save the rainforests! Support CO2 sinks! Oppose Chinese furniture!

Still, container transportation costs are very little relative to product sales prices. Especially if your name is Wal-Mart, Sears, Home Depot or JC Penney.

high reject rates (and I am told they are still VERY high from China)

This is variable but far more common. Black & Decker for instance has offshored its consumer power tool production plants to China while retaining its engineering R&D in Maryland. And of course keeping relative control of its branding and marketing channels. Name brand companies get better results than importers dealing in generic bottom of the barrel Made In China items.

“Harbor Freight” consumer tools come to mind here. Or 3 person offices “importing” 1,000,000 rolling death trap Chinese tires by drop shipping them in container size lots to local distributors. And of course completely incapable of conducting a recall campaign when the inevitable corner cutting appears.

I have had multiple US executives tell me there was not a very strong case for their company to outsource to China (the economics were not compelling, and typically fell short of what was expected), but Wall Street wanted it.

Is there more specificity here? Surely this must have been particular people in the investment community called “Wall Street” who were saying this? And not talking pavement and street signs? Is it possible to trace these ideas to specific analysts, managers and houses? We know Henry Paulson has long promoted offshoring domestic production to China. Has Goldman Sachs collectively been following a corporate line to promote off-shoring on all occaisions?

You raise a salient point here. Long before The Crisis became manifest Paul Craig Roberts was highlighting and red flagging this “difference”. Companies were offshoring their former domestic production for domestic US markets, rather than offshoring production for offshore markets. This point is frequently missed even now, and even in this thread.

john c. halas:

You should be a bit careful in your economic thinking here. If you take any specialized slice of advanced industrial production then, indeed, labor costs are only a margin.

The contrast would be between extremely low-wage labor-intensive production and highly capital-intensive production, which, given the gap in labor skills, is virtually incommensurable.

But if you consider the sum total of the vertically integrated production supply chain, then, indeed, labor is the lion’s share of the “cost”.

alex:

john c. halasz: “But if you consider the sum total of the vertically integrated production supply chain, then, indeed, labor is the lion’s share of the ‘cost’.”

Please cite evidence.

And are you talking toasters, cell phones, or silicon boules? Manufacturing is about as far as you can get from homogeneous. Furthermore, it’s entirely reasonable that in many cases components would be made in a country like the US and assembled into final products in countries like China.

john c. halasz:

It’s conceptual. Every item in the production supply chain from raw materials extraction to parts to final assembly to capital goods has a labor-cost attached, and when you sum them up in aggregate, they are the largest cost that capitalists/investors face in aggregate. I don’t have any immediate link, but I have read studies that show strong correlation between labor input costs and output prices in aggregate. That they were not written by mainstream economists does not render them any less empirical for all that. (Especially if you ignore the trick of redefining skilled labor as “human capital”).

The point here is the difference between particular micro-level decisions and systemic macro level interests. Lowering labor costs systemically and in aggregate boosts the rate-of-profit and the value of capital. Unfortunately, it also lowers levels of aggregate demand and reduces the incentive to innovate in improved productivity of capital stocks. It’s also conducive to generating instances of “Baumol’s cost disease”, whereby productivity gains in one sector, due to a lack of opportunity for expanded investment, end up accruing to lower productivity sectors.

All of this goes back to Ricardo with the inverse proportion of profits and wages and the theory of economic (originally agricultural) rents. Mainstream “free market” economists largely ignore or underplay the role of rent-seeking in the corporate, oligopolistic economy. But it’s a key driver of corporate behavior, even as it amounts to a private “tax” on the real economy, which drives it away from some supposed social welfare optimum, (though one should be careful to distinguish the quasi-rents that derive from high fixed-cost, large-scale capital-intensive production, which have some degree of functional “justification” from the sheer rents extracted from the financial manipulation of extant productive assets).

Hence, the above goes toward explaining why there is pressure from Wall St. to off-shore production and cut wage costs, even if on a micro-level, such decisions don’t make cost-effective sense. Because on an aggregate systemic level, the accumulation of such micro-decisions favor the extraction of rents through cutting costs, lowering inflationary pressures, (which boosts capital gains), and inflating asset prices by boosting and capturing short-run profits, as opposed to the competitive risks of real long-run productivity enhancing investment. The interlocking of MNC “platforming” and Wall. St. financial interests should never be underestimated.

Yves Smith:

John,

You are just wrong here. Your statement is far from true across a whole swathe of capital intensive industries. Look at the entire manufacturing base of Germany, for starters. Chip fabs. Coated paper. Alex above provide further examples:

It drives me nuts when armchair philosophers (and worse, professional economists) talk as though China’s labor rates give them an unbeatable advantage (and ignore all the other factors you mention). These people clearly know nothing about manufacturing, and assume that direct labor costs are a major component of manufacturing costs for all goods.

Ok folks, assembling toasters is probably not something the US can compete in. But what about making computer chips or other electronic components. How about the specialized glass needed for LCD screens (largely made by Corning, but of course they decided to put the plants in Japan). Cell phones? Generally untouched by human hands (which is why they can be profitably made in places like Germany). How about capital goods like industrial robots, which are made in small volumes (compared to consumer goods) and sophisticated enough that offshoring the factory is a nightmare. What about airliner wings (now made in Japan thanks to the outsourcing policy that even Boeing now admits was a mistake).

Moreover, the ADDITIONAL coordination costs (which ARE a labor item too) of extended supply chains are a substantial offset even when labor IS the main cost. You completely ignore this issue.

To wit: IBM decided to shift its computer software writing to China. The cost of writing the code would be only 20% of writing it in the US. But how much did they expect to save? Only 15-20%. In other words, the 80% savings was offset by 55-60% of OTHER COSTS, in this case, extra layers of project management. This was a front page WSJ story. BTW, clearly based on a leak of internal documents.

Now if China’s currency were 20% more expensive, the labor savings would not be 80%, it would be 72%. The total savings would be only 7-12%. It was looking marginal to begin with, and it looks even more marginal if the RMB was priced realistically. And this is for a product where virtually ALL the costs are labor. Against these savings you have increased rigidity and risk.

And that assumes things all work out as planned. If you read the periodic surveys of outsourcing and offshoring projects, the dissatisfaction rates continue to be very high, typically well over 50%.. These are surveys of the very biggest companies, the ones with the most experience and bargaining leverage.

I have had executives (non-manufucturing, BTW, so they had no axe to grind) tell me, with considerable cost data to support their views, that there was NO reason for the US to have ceded as much of the shoe industry and furniture manufacturing as we did. We could easily have retained high end, short run products that relied on moderately high to high quality with flexible manufacturing approaches. But Ethan Allen in particular had been LBO’d and the CEO wanted the “outsourcing” story because he thought it would get a better multiple when he went public. We lost most of our domestic shoe industry when Interco when bankrupt (it had been LBO’d and was seen as a viable business that had had too much debt piled on by the financiers, but in the depths on the 1990-1991 downturn, which was very nasty, a key restructuring deal fell apart and the company wound up being liquidated). And before you assert that US shoe manufacturers could not possibly compete with China, consider this comment from reader Walter:

And a result, the whole mid-tier shoe market is gone. You either buy crap that falls apart on you in no time at all, or you pay $500+ for a pair of shoes.

I used to buy a new pair of Dexter shoes ever 18 months. When they moved to China the life-span dropped to 3 months (this is not just one pair; I tried several before giving up). As they did not drop the price, this was a 6x increase in total cost of ownership. They lost a lot of loyal customers in that move.

Yves Smith:

AC,

The experience of Japan proves the point. The yen went from 115-120/$ to over 90. Its trade surplus has collapsed and it is now running a trade deficit. As the dollar has fallen, so has our trade deficit with Germany, which has dropped by 50% in the first half of 2009 versus 2008.

emca :

Not totally buying what your saying.

Back to the analogy of of an addict and his supplier, while the dealer is definite committing a crime by supplying the addict with his fix (moreover is morally corrupt in doing so) and should be punished, this however does not relieve the addict of responsibility in the affair. I won’t argue that China (with Wall Street always seeking ‘the edge’) is guiltless, but that the problem goes beyond China’s manipulation of currency.

When Freightliner says that it can be more competitive in North America by moving its manufacturing facilities to Mexico, thereby saving $2,000 per unit, I’m not arguing that’s not true. I think the company is, as most if not all U.S. companies, is considering the bottom line, which is the best way to reduce costs and deliver a product to market. Reduction in labor cost is unfortunately, when others fail, a time proven way toward competitive advantage. In the age of robots, automation, et al. labor is still a substantial aspect of production costs, even when balanced against non-localized manufacturing. (I would also add that costs of goods made in other countries, such as Vietnam, Indonesia, India etc. are also very low).

More importantly, the U.S. doesn’t need to consume all it consumes. A minor portion of world population cannot continued to swallow such a disproportional chunk of its resources; it happened after WWII based largely on monopoly of production wrought by war and other ‘timely’ phenomena, and in a large part most recently, on the unreasonable (if profitable) expansion of credit.

I won’t go into anecdotal evidence of abandoned (new) homes whose backyard is graced with abandoned imported stuff, evidentially too cheap to even bother with moving. The age of consumption, is woefully in contradiction with philosophic ideas on a goal of personal happiness and fulfillment through material acquisition (which nevertheless enjoys such rampant lip service) ; if the acceptance of less (a form of material ‘hardship’) is the solution to problem then we are in dire straits with that consideration alone, even if we punish the dealer.

i on the ball patriot:

“And many readers are simply incorrect when they speak about labor costs as a % of total costs in manufactured goods. When you factor in raw material cost, transportation (often to and from, for example, in the case of furniture, since the raw material comes from the US), inventory costs (you need more buffers if you are dealing with a remote supplier), capital costs, and high reject rates (and I am told they are still VERY high from China), labor is often NOT the driving cost in manufacturing. I have had multiple US executives tell me there was not a very strong case for their company to outsource to China (the economics were not compelling, and typically fell short of what was expected), but Wall Street wanted it.”

You neglect to factor in the EXTREME benefit the wealthy elite corporate scamerican gangs derive (and other western nation gang leaders) from playing a cheap labor force in China against an expensive domestic labor force in this global credit bubble/counterfeit derivative financial coup with the geopolitical twist.

They are now very successfully playing the bankruptcy game here in scamerica to cripple unions and labor and diss on their pension obligations. Social security benefits have been frozen and health care and medicaid are also under pressure from this contrived disparity. Social security will be incrementally eaten away to nothing. And a few million homeless scattered around on every street corner in every city in scamerica provides a great incentive for those who do have jobs to work longer for less.

Not the fault of the Chinese people, rather it is the the sell out Chinese gang leaders working in concert with scamerican gang leaders who bear sole responsibility here. The Chinese gangs have been prudent with their currency peg, and we all know that the deceptive among us always want the prudent to step in and pay for their excesses.

Deception is the strongest political force on the planet.

jdmckay:

you run a great blog Yves, do a great service.

But…

The Chinese accumulated TRILLIONS of dollars buying US paper to keep the value of the RMB low!

huh? The Chinese saved… period. They parked their money in USD… period. So Japan, Russia et al… what was there evil motive for buy Treasuries etc.?

Had it allowed the RMB to rise, the US would NOT have overconsumed

Oh c’mon… it’s the culture here. So, you’re saying the “Chinese made us do it?” You don’t think W’ was grateful for the Chinese financing Iraq/deficit?

and China would not own tons of US Treasuries and be complaining about it.


Crap Yves, sorry… just crap. China did not sell wothless mortgage bonds as AAA, defraud our institutional investors, turn the world against us in Iraq & related ME adventure, undercut our educational system/commitment…

And many readers are simply incorrect when they speak about labor costs as a % of total costs in manufactured goods. When you factor in raw material cost, transportation (often to and from, for example, in the case of furniture, since the raw material comes from the US), inventory costs (you need more buffers if you are dealing with a remote supplier), capital costs, and high reject rates (and I am told they are still VERY high from China), labor is often NOT the driving cost in manufacturing. I have had multiple US executives tell me there was not a very strong case for their company to outsource to China (the economics were not compelling, and typically fell short of what was expected), but Wall Street wanted it.

How many US executives, in what industries?

I’ll break it down for you if you like, but you’re dead wrong on this… toes up idea. I’m familiar w/the whole process, first hand, on multiple fronts.

And you mention only labor costs (far more influential than you say), but make no mention of taxes/environmental (clean) costs, work rules (OSHA type safety)…

This was all about cheap labor… period. Why do you think Alber’s suggesting moving our manufacturing (ha ha ha) to Indonesia? Because of their political stability?

Sheesh… you’ll lose me completely w/a few more statements like that.


Yves Smith:

With all due respect, you very much need to do your homework on China’s currency policies to the US and trade accounting. China set a fixed peg in 1994 and has only modestly revalued its currency, starting in 2005. It still remains, by any calculation, substantially undervalued.

You have the equation backwards. The savings result from the cheap peg. The currency accumulation results from the cheap peg. In all honesty, you clearly do not know this terrain at all.

Costard:

Problem is, what is an export subsidy for China is an import subsidy for us. Even if we could put an end to this without starting a trade war – unlikely – the effects would still amount to a tax increase on the most widely-used consumer products. Or to put it another way, the inflation we managed to escape (in everything but asset classes) by exporting our sovereign debt would hit us like a hammer.

A better time to act would have been before we needed to finance trillions in new debt, and before US consumers were struggling just to maintain. I don’t like protectionism, but this situation has the potential to kill both nations. China by becoming (even more) dependent upon a false equilibrium, and the US by allowing us to deficit spend with what will eventually be very inflationary consequences.

The situation is already critical, IMO, and at this point the solution will be extraordinarily painful regardless of whether it happens tomorrow or in ten years’ time.

charcad:

The situation is already critical, IMO, and at this point the solution will be extraordinarily painful regardless of whether it happens tomorrow or in ten years’ time..

This is not right.

It will become progressively more difficult and eventually impossible.

Genuine capital (most importantly trained people) takes far longer to accumulate and organize than monetary metal or paper “capital”, or the recent innovation of streams of electrons and phosphor dots representing money.

rickstersherpa:

AC what are you talking about? What “logic” are using? Yves, Martin Wolf, and Peter Morici are using this thing called arithmetic. Current account deficits and and surpluses are simply accounting arithmetic. If one is +100, then someone else has to -100. The only way China can maintain its peg of the Yuan/Reminbi to the dollar when it is running a huge current account surplus is by buying U.S. credit instruments and therby creating a Current Capital Deficit toward the United States. And that surplus credit has to go someplace. But it won’t go into U.S. business investment since there appears to be no profit in that when China is exporting to the U.S. at 30% subsidty. So it went into commercial and residential real estate.

That has worked out well has it not. The surplus exported to the U.S. then pays for us to “spend beyond our means” as you call it. Although, if you actually look into it, as Elisabeth Warren has, most of that spending “beyond on means” as on health care costs and housing prices, caused by folks spending a preminium to get near good schools for their kids.

And of course, a lot of the Government deficit of the last 8 years was for wars and tax cuts for very rich people. And as example, Tiger Woods has used his surplus income as it appears he has enriched most of the party girls of Las Vegas.

But when folks like you AC start talking about “spending beyond our means” I know that it is Medicare and Social Security you have in your sights. The working classes need to be motivated by the prospect of destitution to keep their noses to the grindstone at $10.00 an hour.

When I saw this post, I knew that David Malpiss, Kudlow, and guys at Real Clear Economics must have blown a circuit at this dissent from the True Religion of Free Trade. Kudlow and them want U.S. interest rates to raised to “strengthen the dollar,” and they look at the resulting Current Capital Surplus not as a mere Arithmetic balance to the Current Account Deficit, but as “evidence” of the World’s belief in America. And they would not mind the resulting 15% unemployment, especially if the political consequences would put the Cheney-Palin Republicans back in power.

Vinny G:

But if the renminbi is allowed to rise, so will the prices of Chinese products in the US, leading to inflation, and an immediate decrease in our standard of living.

We have to thank cheap Chinese products for being able to maintain a reasonably high standard of living these past 30 years, despite things like outsourcing, downsizing, and salary stagnation.

Vinny

bosunj:

Oh freaking please! More of the ‘Its China’s fault’ crap! Duhmerican’ts never accept responsibility for their screwed up ideas and the results of them.

Pot. Kettle. Black about currency manipulation. Duhmerica manipulated the worlds currency when it decided the USD to be the ‘reserve currency’. The rest of the world has had to live under the Duhmerican’t thumb since.

Grow the eff up Duhmerica!

s:

Do import tariffs cause prices to rise?

The incorrect simple answer is yes as the additional cost is passed on to the consumer.

IMO, the more accurate answer, however, is that since the American consumer is tapped out, the cost of tariffs will be borne by the manufacturer and those in the supply chain with smaller profit margins. If margins turn negative and impact the viability of these companies, then capacity will be dumped. This might ultimately cause higher prices, but with a more balanced economic equilibrium.

In addition, the US gets some free money to pay toward a burgeoning deficit and may even find some manufacturing jobs at home to build the tax base.

I’d love to hear the counterargument.

CG:

Yves – Martin Wolf actually posted an article in November similar to Aliber’s, indicating that we’re getting near the point that the US should impose tariffs to get China moving

Emphasis on the last 3 paragraphs:
http://www.ft.com/cms/s/0/7e8bfed6-d3b2-11de-8caf-00144feabdc0.html

jjj:

Why is this discussion only about the US? Japan and the EU are also impacted by China’s peg to the dollar and are big enough players on the world scene to do something about it.

alex:

Which is why the US, if it ever decided to press the currency manipulation complaint, would find plenty of allies.

Historically the US has been the one most hurt. But the dollar has fallen so far against the Euro and other currencies that they’re now getting hurt by it.

john c. halasz:

Does anyone know what China’s current inflation rate is? Because high Chinese inflation with a fixed peg vs. minimal U.S. inflation is already a de facto RMB appreciation. Conversely, high Chinese inflation would be an incentive for them to raise their crawling peg.

But it’s in general a mistake or fallacy to blame the whole situation on China’s $ peg, as if China were in the driver’s seat all along and not rather trying to make the best out of their own difficult situation. Much of the basic decision making leading to this impasse has been clearly made-in-the-U.S.A. And China’s aims are only partly covered by the concept “mercantilist”. More fundamentally, the peg is part of a development strategy, in which maintaining capital controls and domestic control over the financial economy and fiscal/monetary policies, and acquiring technology and world-standard production know-how are deemed well worth the price of underselling their exports and taking an eventual large capital loss on their accumulated FX reserves.

But the flip side of the China peg is that it has been enormously profitable for U.S. MNCs and the wealthy investor class. (In fact, the immense profitability and appreciation of U.S. owned foreign assets vs. U.S. assets has been the principle reason why the immense CA deficits have seemed sustainable up to now: as of 2008 the official measure of the U.S. external debt, the NIIP, stood at $2.6 trillion, which means that if you add up all the CA deficits since 1990, some $2.9 trillion is “missing”). The fact that it comes at the expense of the broad U.S. working class and the latitude of U.S. government discretionary policy and social welfare/insurance with mounting wealth and income inequality is not a bug, but a feature.

A PPP tariff against China would, in fact, be the solution. (My version would start at 10% and add on 5% every six month for 3 years until a 40% level was reached, which is the current estimate for RMB undervaluation vs US$. What’s important is that the change occur gradually to permit time for mutual adjustments). That it would cause a bout of one time U.S. import inflation and amount to a quasi-permanent lowering of U.S. relative standards-of-living is not a counter-argument, since the looting of the U.S. household sector by the Wall St. induced housing bubble has already made that de facto the case anyway, as was readily foreseeable. It’s just a matter of exactly how that realization occurs. Which is, of course, why a PPP tariff will not be imposed. It is far more preferable to the Wall St./MNC elites to pursue adjustment through unemployment stagnation and the corresponding squeeze on households, labor, and government budgets than to lose hold of their rent streams.

It should be remembered that China did appreciate the RMB by some 20% already and only stopped in the midst of the uncertainties of the GFC. Imposing such a tariff would result in a burst of xenophobic outrage in China and a WTO dispute, but likely, were such a tariff authorized, it would not have to be imposed, since it would force China to the bargaining table and cause them to re-appreciate on their own terms.

Claire:

sorry–reposted with Yves’ comments included. Please delete the last post.

Yves, your post seems far more emotional than usual (you are normally remarkably level-headed, or at least come off that way through text). Anyway, I still don’t understand your arguments:

//China has, deliberately, for well over a decade, set the value of its currency low to give it an advantage in trade. The Chinese accumulated TRILLIONS of dollars buying US paper to keep the value of the RMB low!//

And by keeping their currency low and creating the effect of low interest rates, China essentially paid a fortune for the privilege. I can see why Chinese savers would be mad about this, but I don’t understand the American anger.

//Had it allowed the RMB to rise, the US would NOT have overconsumed and China would not own tons of US Treasuries and be complaining about it.//

The US could have done plenty of things to have avoided “overconsuming”. Given these cheap rates and free money, the government could have tried to pay down debt. It could have also encouraged businesses and homeowners (via the tax code) to reduce debt. To blame the Chinese government for US policies is really stretching things, though. It’s not like one government is the responsible adult and the other is a reckless teenager–they’re all reckless and short-sighted.

//And many readers are simply incorrect when they speak about labor costs as a % of total costs in manufactured goods. When you factor in raw material cost, transportation (often to and from, for example, in the case of furniture, since the raw material comes from the US), inventory costs (you need more buffers if you are dealing with a remote supplier), capital costs, and high reject rates (and I am told they are still VERY high from China), labor is often NOT the driving cost in manufacturing.//

Now you’re losing me completely. If labor is not the driving cost, then China has*really* shot itself in the foot, because is paying heavily for its artificially low currency by overpaying (in effect) for raw materials and transportation,which are priced in USD.

//I have had multiple US executives tell me there was not a very strong case for their company to outsource to China (the economics were not compelling, and typically fell short of what was expected), but Wall Street wanted it…

Well, why would Wall Street want it? Why would these US executives listen to Wall Street (perhaps they were interested in their options values)? How is this the value of the Yuan at fault for this?

alex:

Obviously I can’t speak for Yves, but my own views may be pertinent.

This isn’t about blaming the Chinese government as though the US government was some babe-in-the-woods that isn’t responsible for its actions. Often when I complain about Chinese currency manipulation people accuse me of “China bashing”, when in fact what I’m really doing is bashing the US government policy of tolerating (or perhaps even fostering) this.

The point is that this is an unsustainable situation, and the longer it goes uncorrected, the more detrimental it is to the US. It needs to be corrected, and I expect (ok, hope) the US government to do something about it. If the Chinese government’s attitude was an unabashed “screw the US” I wouldn’t blame them. Even if they could claim to be representative of their people, their job is to watch out for Chinese interests. It’s the US government’s job to watch out for American interests. And yes, despite China being our bank, we have plenty of leverage. There is no excuse for the US tolerating this as though it was helpless.

As far as other aspects of US policy, we have many sins. I’m not going to claim that currency revaluation is a panacea, but it is an essential step. Even if we revamped our policy so that the US magically became a nation of inveterate savers, without currency revaluation the effect would simply be a greater recession. So we’d wind up with a situation where our debts were being paid but lots of people would be out of work. Not good.

“If labor is not the driving cost, then China has *really* shot itself in the foot, because is paying heavily for its artificially low currency”

Not necessarily. China wants the development and to obtain the know-how, and it may be worth it to them to pay a high short term price for this. Saying that they can’t benefit in the long run is like saying that Standard Oil couldn’t possibly have profited by selling below cost in certain regions to kill regional competitors. If you have deep enough pockets (and China does in the sense of enormous pools of cheap labor) you can do well in the long run by selling at a much lower price until you kill the competition.

“Well, why would Wall Street want it?”

Herd mentality, shortsightedness, lack of understanding (or concern) about producing anything of value rather than making a buck by being the middle man when billions of dollars are pushed this way or that.

“Why would these US executives listen to Wall Street (perhaps they were interested in their options values)?”

Even aside from options, it’s legitimate for management to be concerned about stock price, since it affects the owners (shareholders). Perhaps it’s about short term vs. long term value. But even if responsible management were concerned about long term value, how long will they keep their jobs while Wall St. says “sell”? The market can stay irrational longer than you can stay solvent.

Yves Smith:

Claire,

Readers are simply refusing to acknowledge the role of a massively undervalued currency in a system of fairly open trade. Companies WILL shift production there, retailers WILL buy from there or lose customers. Saying “oh we don’t have to consume from there” files in the face of how modern economies are organized. How often have you CHOSEN to pay 40% more to “buy American” to make up for the massive undervaluation of the RMB?

Now I will agree completely that the US leadership, Washington, Wall Street, and corporate executives, were massively complicit. It takes two to tango. But the flip side is that everyone bought into the free trade logic, and for us to deal with China’s flagrant violations of the rules of the game would require either a WTO case or protectionism of our own. We were afraid to stress the system we set up when it looked to be working in our favor (or to i on the ball’s point, to the favor of those on the top of the food chain here) and we has more clout. Now that we are not so powerful, the long overdue redress looks a bit like sour grapes.

And I suggest you bone up on trade accounting, China’s massive purchase of dollar assets to keep the RMB cheap guarantees they will run a surplus with us. And China is not a alone, merely the most extreme. The other Asian “tigers” pegged their currencies cheap so they could accumulate large FX reserves

MyLessThanPrimeBeef:

This is a 2,000 year old problem.

Ancient Roman matrons spend so much on silk, draining the treasury of gold, silver and I suspect cowrie shells, that Rome had to impose a sumptuary tax on all silk products from Great Cathay, greatly hurting those 900% mark-up middlemen like the Sogdians, the Parthians, the Beduins, etc.

Today, we are again over-spending beyond our means, this time on cheap stuff from modern Cathay. Does it not make sense to learn from the Romans and imposed a cheaply-made-goods tax, so people will stop wasting money on all those cheap stuff?

Looking at more recent history, did not Tokugawa Japan achieve unprecedented prosperity and produce those beautiful ukiyo-e block prints of Edo and Fujisan, after shutting her door for 300 years? Sure, it caught up with her at the end, but 300 years is an awful long time, especially if you don’t age and are stuck with another immortal you are not particularly fond of, like your mother in law.

So, I guess nothing is perfect.

Don the libertarian Democrat:

“The US will not be able to deleverage (absent explicit default) unless we move to a trade surplus.”

There are 3 possibilities in our situation going forward:
1) Raise taxes and cut spending
2) Inflation
3) Default

1 and 2 are a problem since they more directly affect citizens and voters.

3 is the best option. In order to do that, you need to portray the country you’re going to stiff as having caused your problem and acting unfairly. That’s when nationalism is useful. If you want to default, paint the other country as screwing you first, so that you can screw them now.

By the way, I favor 1.

alex:

The problem with (1) is that it only addresses government debt. Private (both consumer and business) is actually a far bigger problem as it’s several times bigger. A current account deficit means that some parties in the debtor country have to go (further) into debt to support it, and as Martin Wolf mentions, US households just can’t do it anymore.

alex:

Yves,

One quibble. Your headline “Calls For Protectionist Retaliation Against China Rise” suggests that we need to move away from free trade, when in fact we need to defeat foreign protectionism and move towards free trade. Admittedly this is a rhetorical matter, but I think it’s important.

After years of being bombarded with commentary on the value of free trade most “right thinking” people think it’s a good idea. I used to complain about our “free trade” policies until I realized that they were anything but.

So now whenever someone says we need more free trade, I agree with them and ask how we can fight the currency manipulation that prevents it. The less thinking commentators don’t often get it, but anyone who understands what free trade actually is finds themselves hard pressed to defend the hypocrisy of calling current policies by that name.

P.S. Overall an excellent article, and after years of complaining about currency manipulation, I’m glad to see it getting more attention. I’m also pleasantly surprised that, as you make clear in comments, you understand the economics of manufacturing better than many (most?) financial and economic commentators. Perhaps your Midwestern childhood helps.

[Dec 7, 2009] Volcker to Bankers- "Wake up, gentlemen"

Mook:

“Has there been one financial leader to say this is really excessive? Wake up, gentlemen. Your response, I can only say, has been inadequate.”

(whispering in the back of the room)

"Inadequate? What does he mean, inadequate?"
"I dunno. Maybe he means we haven't been giving enough money to the banks."
"Or maybe he wants us to cut interest rates some more."
"No can do. Stuck at zero. You?"
"Point-five percent."
"So it's your fault he's yelling at us!"

NOTaREALmerican:

dum luk wrote:

I hate politics, but, seriously, somebody needs to save us from the Libertarians on this site.

This would be political type 3. 15% of the population. You can't make them go away.

EvilHenryPaulson:

crazyv wrote:

Whether Volcker deserves the praise or not is one question. Greenspan would never had the courage to raise rates as high as Volcker did. Firstly, he is too political an animal and secondly he is too analytical

Whose interest do you think Volcker was acting in? The banks who were insolvent and needed a steep curve, or the households whose costs and income were rising together with inflation?

Bernanke would be doing the exact same, except there are 2 notable contextual differences. One is that the debt bubble that stalled out is domestic, and didn't take place in Latin America -- it's easier to feed the foreigners the bitter medicine. The second is that US National debt is high enough that any average interest rate above 5% is automatic sovereign failure.

km4:

"Wake up, gentlemen" does nothing and will be ignored just like Obama and Moe, Larry, Curly ignored this

The Quiet Coup - The Atlantic (May 2009)

"If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform".

- Simon Johnson

crazyv:

merchants of fear wrote:

'I think we can all agree that everyone is to blame.'
Media spin...repeated here and everywhere...

when you go swimming in shark infested waters and get bitten whom do you blame- yourself or the shark?

Wall Street was only doing what Wall street does which is enrich themselves. Our stupidity is not any more evident then them telling us "we are doing gods work" That comment shows what utter contempt they have and how gullible they think we are. A year after they crashed the economy - we are concerned about a climate change bill that will result in GDP being 3.5% lower in 2050. That is what these titans were able to do in six months and yet we have everybody riled about climate change but not about bank regulations. The average joe deserves to be screwed until they realize that they are the problem.

some investor guy:

km4:

"If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform".
- Simon Johnson

I read that report. Didn't see anything about how he suggests doing it. He did say that typically governments eventually had to tell at least some groups of oligarchs that they were no longer going to be protected.

merchants of fear :

Protectionism will be the new Third World Order too...credit freeze will freeze the Global eCONomy...it's in the macro research that the FED didn't look at...or consider...

Whiskey:

merchants of fear wrote:

Whiskey,

Should we leave the fox in the henhouse counterfeiting money and blowing bubbles?

It's not about the people. The institutional inertia that exists is too strong, and to me the "counterfeiting money" is a response to reality. When your leading export is dollars that keep accumulating, dollars should be worth less.

merchants of fear:

Whiskey,

So the 'globalization experiment' that catered to Third World wages and pollution standards...isn't working?

km4:

NOTaREALmerican (profile) wrote :

Not quite.... The irony is most progressives refuse or fail to see through the 'shuck and jive' persona of Obama.

shuck and jive' ( not racist ) urban dictionary definition : Not the whole truth; or manipulating something to get it your way.

merchants of fear:

It (the crash) is 'preventable'...prime rates in 2000 at 9% dropping quickly until 2004/2005 to around 4-5% or so as I remember...the sharp descent in interest rates was too quick and created easy lending along with securitization and deregulation of banking...these policies could have been more restrained in preventing a credit bubble but a bubble was preferred politically after 911.

Whiskey:

merchants of fear wrote:

It (the crash) is 'preventable'.

Two questions:

Where would that investment have gone if not in housing?
Why did the tech bubble happen?

merchants of fear :

orwell,

yeah...need to remember where the bread is buttered for the media pro-bubble spin machine...

poic:

ponzi debt schemes need ever increasing amounts of debt. When debt stops growing the system collapses. New debt is required to service old debt.

The outcome was baked in the cake the minute we started using a credit/debt scheme (about 80 years ago). This is a very well worn path. Same rise, same fall, same political, social, financial machinations every time throughout history.

Slumdog:

Today Jim Sinclair posted on his website exactly what I concluded and posted here, again, recently.

Jim wrote, ""Extend and Pretend" guarantees without any doubt that whatever stimulation is required to the level of infinity will occur. There simply is no other choice!'

Extend and Pretend are the foundational platform of Bernanke, and now all others at financial institutions who have vested interests in this outcome... vested as in that if they don't do this, and fair current value is recognized, they are immediately bankrupt.

The FDIC, as Jim observed, is the current incarnation of the Reagan-caused Resolution Trust.

Jim wrote, "...whatever the cost in terms of continued and increased stimulation, all that is required to infinity will be provided. There will be no serious attempts to drain any liquidity. Interest rates will be held at practically zero for as long as it takes or even if the economic recovery fails."

The veritable torrent of fiat credits and unrealistic valuations will cause the rest of the world, and many in the USA, to be fearful of the outcome, a sudden collapse, and parabolic numbers of store of value holders will seek protection of their assets and incomes. Gold will be one of the anchor assets into which that value will scurry.

I have spoken of The Great Doubling, from 1000 to 2000. During the energetic panic which has imo a very high probability of occuring, no value will be too high for gold. That panic will last for well under one month. In that time, gold holders must be prepared to separate themselves from the insanity and switch into other, more stable assets.

At this time, I have no comfort with any one alternative asset, but I am searching and do invite your thoughts.

 

[Dec 9, 2009] Meredith Whitney- The government is “out of bullets”

...the financial sector is likely to see a more unfavourable economic climate in 2010 than it has done in 2009.

In particular, a looming crisis at the state and local government level, coupled with continued distress at regional and local banks will mean a deadly combination of higher taxes, fewer jobs and less credit for households and small businesses. Unless we see a change in the political climate in Washington, now oriented toward deficit reduction over jobs, we are likely to see a double-dip recession late in 2010 or 2011.

Whitney says “the component parts don’t add up” in addressing the Obama Administration’s conflicting rhetoric on jobs, stimulus and deficit reduction.

What’s so frustrating is you have an administration that is arguing such a populist [rhetoric] and not appreciating all the unintended consequences that the consumer and small businesses have far less credit.

I have said Barack Obama gets it because we have confirmation that he understands that raising taxes or cutting spending is what leads to a double dip recession.

I will accept that not everyone believes we should avoid recession if it means more government spending because of the enormous debt loads in the private sector and the unfunded liabilities in the public sector. Fair enough. I have my own doubts due to concerns about crony capitalism. That is an ideological debate about the role of government.

But in executing actual policy, I believe the President’s words and actions are at odds in part due to the political landscape and the wishes of the corporate interests to which he is beholden.

Witness the duelling headlines today where Joe Klein points out a speech with elbows that the President delivered today.  Michael Tomasky was equally impressed. But, this was just a speech. When it comes to actual policy, Robert Reich was less impressed.

Barack Obama is trying once again for balance. On the one hand, he wants enough government spending to offset the timid spending of consumers and businesses. Otherwise, the jobs and wage recession could drag on for years. On the other hand, he doesn’t want to set off more alarm bells about the budget deficit. Otherwise, conservative Democrats might join forces with Republicans to block heath care. So what does he do? A little bit more stimulus spending, but stimulus spending that doesn’t look like more stimulus because it’s not really adding to the deficit. It’s coming out of savings from money already authorized to be spent on the bank bailout. Hmmm?

No president in modern times walks a tightrope as exquisitely as this one. His balance is a thing of beauty. But when it comes to this economy right now — an economy fundamentally out of balance — we need a federal government that moves boldly and swiftly to counter-balance the huge recessionary forces still at large.

States and cities, for example, are estimated to be $350 billion hole this year and next. They can’t run deficits so they’re wildly cutting spending, cutting jobs, cutting contracts, and raising taxes and fees. That’s a huge anti-stimulus package roughly as big as the remaining direct spending in the old federal stimulus package. Which means, Obama’s "new" stimulus, announced today, is about all we have, and it’s not nearly enough.

I am hearing a figure of $70 billion for a jobs initiative – a pathetically small number in an economy of nearly $15 trillion.  In my view, it is better to do nothing than to do something insignificant that acts to discredit your policies.

Returning to the bank world, Whitney’s recent bearishness has been on target (and one CNBC presenter mentions Goldman Sachs as an example). When asked pointedly whether she was making a general market call, Whitney says no. But she does rightly point out that distress in financials does have a spillover effect on the wider economy via restricted credit and this cannot be positive for shares.

As for TARP, Whitney makes an important point when she says the TARP repayments can be seen more as political calculation than an affirmation of banking sector health.  She believes the government needs the TARP funds to help states in severe budgetary distress because no funding will be forthcoming via legislative approval.

I see this as a textbook Larry Summers play and a continuation of the executive branch’s end-run around Congress to affect fiscal policy. In March I wrote:

The political realities of solving a financial crisis have often meant circumventing legislative approval to meet the exigencies of a particular situation. This was certainly the case in 1995 during the so-called Tequila Crisis in Mexico. And I believe it is the case again today in 2009.

Read that post to see how the Clinton Administration was able to bail out Mexico without legislative approval.  They are clearly seeking to exercise the same tactics in this case again.

The fact that this post has been all about government when I intended to write something about financial services should tell you something is seriously wrong.

Blurtman:

Of course unemployment is the huge elephant in the room, and threatens a FIRE industry focused administration. Sonner or later, Obama will have to achieve either through policy or luck, an improvement of the economic status of Main Street. If not, the door opens wider for third party candidates.

Hugh:

There is a difference between being out of bullets and firing blanks. What we are seeing is not a President without options but one who has no interest in entertaining any. Obama is failing to lead, not because his leadership is constrained but because what we are seeing from him is what he wants.

I have written before we are looking at a three phased event.

With likely disappointing Christmas sales, it is hard to see where the stock market has any room to go but down in the new year. I have the feeling that the only reason the market has stayed up this long is for management to lock in their bonuses for the year.

2010 is an election year so there probably will be some aid for states pushed through for states, less for municipalities. It will not be sufficient for the needs of either but enough to get the economy through the election.

In 2011, I see only depression. We are sinking faster than our elites are bothering to bail out, not the banks, but us. The crash has been going on for 2 years now and look at what they have done. They have either not acted or acted with great stupidity and waste. They have not shown a scintilla of learning during the whole process. There is no reason to think they will think or act better in the future. I would dearly like to be wrong about this, but, unless there is a radical improvement in our political leadership and governance, the chances for which are near zero, I think this is a simple call to make.

mannfm11:

You are giving the government too much credit Hugh. The economy was needing $5 trillion to run before this stuff hit the fan. Much of the money coming out of government is not real money, but a drop in revenues. I am not too sure I don’t pretty much agree with your diagnosis though. 2010 corresponds with 1931 in the last depression and that was when countries started pulling their money from other countries. I believe it was Yves who posted the stuff on China from pivot capital.

Michael above mentiones 10% GDP growth. I doubt China is growing at 10% by building surplus capacity any more the Dubai was and any more than the US grows by the consumer spending 70% of GDP. The expansion of credit in the USA is confused with GDP growth because contrary to FDR destroying the bankers, he empowered them to expand credit until all but a few were broke. FDR and Woodrow Wilson put this corporate/fascism system on us and few understand the wealth the US had rolling before they pulled this stuff.

Even if we could grow 10% annually, where would we get the resources? The entire game is a credit game and the credit needs to be liquidated for it to start again.

Fed Up:

“I will accept that not everyone believes we should avoid recession if it means more government spending because of the enormous debt loads in the private sector and the unfunded liabilities in the public sector. Fair enough. I have my own doubts due to concerns about crony capitalism. That is an ideological debate about the role of government.”

I believe you need to break down private sector into the rich and the lower and middle class. Is it more like when the lower and middle class stopped going into debt to the rich (both domestic and foreign), did the rich get their gov’ts to go into debt for them (the lower and middle class)?

David:

Wow, a sharp comment! With all the government going into debt, I don’t see the debts of the middle and lower classes getting paid down to an adequate degree.

Anon:

I would call Obama/Summers/Geithner idiot savants, but given the adherence to the Bush/Paulson policies, it makes more sense to drop the savant.

Modifications to Taibbi in parens:

“The bad news is our failed health care system (financial system) won’t get fixed, because it exists entirely within the confines of yet another failed system: the political entity known as the United States of America.”

http://www.rollingstone.com/politics/story/29988909/sick_and_wrong

Dave Raithel:

It may be a Larry Summers play, but then he might be some kind of idiot savant, I don’t know – and I’m not here to defend him – from all I’ve read about him, I doubt we’d get along, and I do rather enjoy throwing the first punch once everyone knows somebody has to. But The Columbia Daily Tribune reports today that Missouri expects a drop of perhaps $1 Billion in revenues through 2009 – though nobody knows. The State budget is about $23 billion, including all the Fed money (e.g. Medicaid) that’s spent. So a drop of $1 bill in-house, so to speak, is not insignificant.

But how fortuitous that those who would repay their TARP money, to escape the executive compensation limits, would benefit the political needs of the Administration …?

I don’t know about that, either….

But I have appreciated Mr. Harrison’s early on complaint that Obama needed to act more like a son of a bitch, which he still is not. Reich’s “tight rope” analogy is a too polite way of calling someone a fence-sitter. Throwing elbows, without naming targets, is flailing. So much hope, so much disappointment.

aet:

States and cities facing a 350 billion dollar hole this year?

Good to know Washington has its priorities straight when it come to spending:

http://www.warresisters.org/pages/piechart.htm

http://www.salon.com/opinion/greenwald/2008/01/02/military_spending/

Talk about unproductive spending.

aet:

“Out of bullets”?

With all that Department of War spending over the years, I should have thought that Washington would be flush with bullets.


 

[Dec 7, 2009] Morgan Stanley- Fed to Raise Rates in 2nd Half of 2010

"They must be smoking something. "

Yancey Ward:

I think the Fed has painted itself into a corner, but instead of using paint, it has used mortar and concrete blocks.

crazyv:

they must still believe the fed is an independent apolitical body. Fed is going to jack up interest rates 1.5% with 9.5% unemployment months before an election. They must be smoking something. They maybe right about the end point 2% at the end of 2011 but if anything I think they have their targets reversed. 0.5% by year end 2010 and 2% by year end 2011 makes more sense. BTW just the fact that the Fed is willing to raise rates even a little bit before the 2010 election will prove their anti inflation bona fides.

volker the viking: 

        steelhead wrote:

Debt Jubilee 2010!

I would not be displeased, but it is earlier than my uncertain date.

HollywoodHack:

A dollar crash would effectively be a debt jubilee. Careful what you wish for...
 

Juvenal Delinquent:

 So who gets the heave-ho when piracy on the high seize needs a convenient scapegoat?

ResistanceIsFeudal:

energyecon (homepage, profile) wrote (in reply to...) on Tue, 12/8/2009 - 1:08 pm

edit: seriously, the amount of basic and mission oriented science that could have been purchased instead of propping up zombie asset prices and institutions is just mind boggling...opportunity cost writ large...
Yes. When you are talking Trillions, you are talking about decades of genuinely life-altering technologies that weren't funded in favor of sustaining the lifestyles and passive incomes of a parasitic nobility for a few more years. Opportunity cost indeed.

HollywoodHack:

Hollywood Hack: Cardinals to win WS in 2010

I think I have more credibility on this one.

Comrade Alexei Mikhailovich:

CR,

The historical model is no longer valid.

The great moderation is over, risk will start to be priced accordingly whether we like it or not.

Bob Dobbs:

 ResistanceIsFeudal wrote:

So long as we can sustain the massive social inequality, discourage investment and invention, and reward successful gambling, all will be well. Gambling and thievery are what made this country - it's in our national DNA.

I completely agree. And yet... we're reaching the point where the steal-your-way-to-wealth ethic can no longer coexist within an advanced society. The restraints engineered 75 years ago which mitigated the worst of greedaholism and funneled some of the take back toward the general good have all been slashed.

We as a people had the rage to disavow the greedheads 70 years ago. I only hope we still have it. Well, we do have higher standards than 70 years ago, and the worst hasn't arrived yet. So as far as I'm concerned, this is still early days, 1930. History only happens fast from a distance.

crazyv:

dum luk wrote:

Americans' average Christmas spending prediction is now $638.-

do the people they polled end up with the average national wage or do you reckon that it is just the average response of the people that they polled. Also is that number per person or family or just adults? It seems to me it matters a lot to know what the answers are to those questions. if it is adults that would be 1300 for a family making the median wage of 40,000- 3.25% of your pre tax income on gifts? !!!!

ac:

The conventional wisdom of low interest rates has to be challenged. The problem is that just like drugs each trough needs to be lower than the previous one and finally when you hit zero - splat!!!

Nobody even begins to explain how low rates can address misallocations and structural deficiencies in the economy.

The economists just whip out some simplistic equation that looks like it was written for a discrete system with a handful of components, not an infinitely complex diverse evolving self-reflective organic system.

Those big bushy beards must suck all the nutrients out of their brains.

Vonbek777:

Yes I am sure he would...but you are arguing with a fool who flunked stats 3 times in college because he argued with a very respectable 80yr old prof who finally passed me if I promised not to come back to class and debate him ad nauseam about the very validity of his area of expertise. The very asking of the question, very language that is chosen...influences the results...and then there is the question of why bother determining what the majority of people (whatever the sample size is) matters to the given question at hand. Good for herd management I guess. Polls are a tool used by the elite. As an absent minded philosopher I would rather resort to astrology or augury...they seem the same. I mean no disrespect by the way. To each his own, my prof was very sincere in his belief...I am in mine too. My wife says I don't dwell in 'normal space' anyway, so best just ignore the raving loony in the room. Most people do.

ResistanceIsFeudal:

Vonbek777 (profile) wrote (in reply to...) on Tue, 12/8/2009 - 3:41 pm

Yes I am sure he would...but you are arguing with a fool who flunked stats 3 times in college because he argued with

I argued with a lot of my professors... only students there to punch their ticket got irritated by the distraction, most of the profs genuinely enjoyed the debates... I remember reading that university life used to be like that in the earlier days of the academy.

pavel.chichikov:

IMO, a very important story:

Corruption threatens "soul and fabric" of U.S.: FBI - Yahoo! News

crazyv:

One of these days the bond market is going to wake up- it will be the event that will be the event that will throw all those continuous curve risk models for a complete loop. I remember the debacle with perpetual floating rate notes- one day they were trading at par and the next day they were at 76%. I guess somebody looked at the dictionary and realized the perpetual meant forever...

[Dec 8, 2009] Fed Watch- Structural and Cyclical

December 7, 2009 | Economist's View

Structural and Cyclical, by Tim Duy: For several months, I have been telling stories that decompose US economic activity into what I think of as cyclical and structural dynamics.  I believe the distinction is very important to firms, markets, and policymakers who need to be aware when one dynamic is clouding their view of the other.

The cyclical dynamics, in my opinion, are the most spectacular, the most visible.  The real cyclical fireworks began in the second half of 2009, as the energy price shock decimated household budgets, quickly followed by a financial shock that triggered an additional pullback in demand.  Firms unexpectedly found they had far too much excess capacity in this environment, and began the process of "rightsizing."  Lob losses mounted even as falling energy costs and lower interest rates for those not credit constrained began to put a floor under spending.

Eventually, firms would realign capacity with the new level of demand, and job losses would taper off.  That would mark the early stages of the cyclical bottom, the point at which growths returns.  The initial growth spurt could be very rapid, as firms restock inventory and pent-up demand comes into play.  The additional of government stimulus will add additional fuel to the fire. 

Once the early stages of recovery are complete, the story shifts from cyclical to structural.  The boost from inventory correction, pent-up demand, and government stimulus fade, and the underlying growth rate, the fundamental rates of activity, becomes evident.  Now your expectations about the nation's economic direction depend on the weight you place on the structural factors.  If you place nearly zero weight on those factors, then growth remains fairly high as the economy rapidly returns to potential.  In effect, cyclical dynamics dominate your story; the Fed is simply flipping a switch that shifts the economy from high to low states and back again, a traditional post-WWII business cycle.  If you place heavy weight on structural stories, you talk about the inability to revert to past patterns of consumer spending growth due to excessive household debt, a reversion to global imbalances that supports outsized import growth, lack of an asset bubble to compensate for these structural problems, etc.  With these stories in your toolkit, you expect a low underlying growth rate - barely at potential growth - in which case the gap between actual and potential output remains distressingly high for possibly years to come.

I tend to view incoming data through both cyclical and structural lenses.  The employment report is a prime example.  Clearly, the steady improvement in the rate of deterioration of nonfarm payrolls since the spring follows the cyclical pattern as firms stop chasing demand down and thus stabilize their workforces.  Moreover, recent increases in temporary help hiring also points to firming labor demand in the months ahead.  It would seem that stronger growth does in fact have the desired impact on labor markets, and that fiscal stimulus helped accelerate recovery in the labor markets. 

At the same time, though, one has to wonder what happens as the stimulus begins to fade?  Will there be sufficient demand from other sectors to compensate for fiscal and monetary withdrawal?  It is worth recalling the patterns of labor market dynamics as we exited from the 2001:

FW1206093

After the post-recession boost  -- inventory correction, pent-up demand, etc. -- labor markets quickly returned to a period of stagnation that lasted until the housing bubble began to take hold.  What in the next two years can we expect to take the place of that bubble?  Furthermore, if you are worried about a relapse in the pace of growth, the ISM reports last week were not exactly comforting.  Both revealed an overall slowing of activity, and employment signals were not exactly consistent with a strong rebound in hiring anytime soon.  For that matter, the ADP report, while not one of my favorites to begin with, came in far below the actual NFP numbers, suggesting that maybe this employment report was a little stronger than the underlying trend. 

Also worth noting is the dismal reports on retail sales that appear to have largely slipped below the radar last week.  From the Wall Street Journal:

Many retailers are likely to start offering broader discounts and promotions before the end of the holiday shopping season in response to generally lackluster sales the stores reported for November, retailing experts said Thursday.

Overall, sales at stores open at least a year edged up less than 1% last month compared with a year earlier, according to data collected by Retail Metrics Inc., which catalogs sales at 30 retail chains. Wall Street analysts had been expecting a 2.2% increase.

Consumers did lay siege on retailers during the post-Thanksgiving shopping weekend, but kept to strict budgets, seeking out deals but shying away from anything not marked down.  Households in general appear to be adopting my wife's mantra:  "Fifty percent off just isn't good enough anymore."  Now retailers are faced with the prospect they thought leaner inventories could help them avoid, ongoing markdowns throughout the holiday seasons, albeit not as bad as last year.

The bottom line is that what you need to take away from the current economic environment varies widely.  Business in general should anticipate growth - growth that may be lackluster, vulnerable to policy withdrawal, and less dependent on consumer spending, but growth nonetheless.  And any growth will force firms to reevaluate their hiring, sales expectations, supplier efficiency, etc.  Don't be surprised if anecdotal stories of firms unable to find qualified workers start to emerge.  The skills of those who lost jobs may simply be inconsistent with the needs of employers.  In short, be prepared for scenarios that don't result in the end of the world as we know it, but still a different world with different patterns of activity.

This message to firms, however, is not nearly the whole story as far as policy is concerned.  Policymakers need to be much more focused on the gap in current activity relative to potential than the rate of activity itself.  Indeed, for all the excitement over the end of the recession, the 2.8% growth rate of 3Q09 is in the range of potential growth.  It won't close the output gap, and it won't generate enough job growth to do much more than keep unemployment from rising further.    Can the 2.8% number be maintain as fiscal stimulus fades and consumer spending ekes out historically meager gains?  That should be question number one for policymakers.  Number two should be:  What more can we do to ensure that we push well ahead of 2.8%?

And question number three should be this:  Why did the US economy yield such horrible employment performance this decade?  The fact that we have just experienced a lost decade for jobs should be on policymaker's tongue.   But it is not, I suspect because in many ways the lost decade was hidden by the spectacular rise and fall of housing, leaving few to reflect on the meaning of an economy which would have been in a decade-long jobless recovery without an asset bubble in the middle.

Moreover, policymakers have been lulled into a certain complacency on the job picture because on the exodus from the labor markets, with civilian labor force participation peaking ahead of the last recession, thus keeping a "lid" on unemployment rates:

FW1206091

And a longer view:

FW1206092

The beginning of this decade marked the end of a 35 year trend of increasing labor force participation.  Is is a coincidence that this trend ended as the lost decade for US jobs began?  Are these trends reinforcing each other?  How so, and what does it imply about the prospects for jobs for the next decade?

But these, like the problematic imbalance between China and the US (if the imbalance re-exerts itself in the months ahead, how many of the recently lost US manufacturing jobs are likely to be recovered?), are very big questions.  Questions policymakers are not likely to have much time for as they are lulled into a false sense of security by positive growth and improving nonfarm payrolls numbers - especially if unemployment stops rising. 

The Administration has already made clear its concerns about the deficit.  On the monetary front, those who worry about the yawning gap in potential output believe that more easing is desperately needed.  The employment report, however, will tend to push policymakers in the other direction, a greater willingness to let the Fed's balance sheet contract, perhaps even deliberately rather than via the natural expiration of now unneeded financial market supports.  To be sure, a push to raise the Fed Funds rate is premature; I believe the Fed intends to keep rates at rock bottom levels in the face of high unemployment.  But this is not the relevant policy issue.  The relevant issue is whether or not Fed policymakers are prepared to do more to close the output gap.  Already, only St. Louis Federal Reserve President James Bullard looked open to such policy.  But I suspect his position will only get more lonely as job growth, even lackluster job growth, builds.  Indeed, the policy risk is a more rapid reversal of the Fed's balance sheet expansion as hawks like Richmond Federal Reserve President Jeffery Lacker - already concerned that the Fed need to prove its independence - increasing argue with a more rapid exit from the emergency expansion even as while the main policy rate holds at zero.

Bottom Line:  Cyclical and structural forces are at play.  But be wary about confusing the two; I fear this to be a particular problem for policymakers.  Economic growth is likely to lead to complacency, but such complacency would be ill-advised when the decade's record on nonfarm payrolls leaves the job-generating capacity of the US economy in doubt.

demand side :

"The cyclical dynamics, in my opinion, are the most spectacular, the most visible. The real cyclical fireworks began in the second half of 2009, as the energy price shock decimated household budgets, quickly followed by a financial shock that triggered an additional pullback in demand."

The oil bubble, and really the whole commodity bubble that rose out of the housing bust, was a financial markets phenomenon. The systemic collapse of the financial sector was a financial markets phenomenon. How is this cyclical? The business cycle is broken and growth depends on government stimulus.

I suppose it is a "shock," meaning outside the neoclassical model, but the financial sectors machinations have been going on for twenty years, the debt boom has been going on in earnest since the mid-1980s, with only a short respite in the early 1990s.

"Economic growth can lead to complacency."

Mr. Duy is already complacent absent economic growth. The rest of us are scared.

rjs said...

i take it he meant "second half of 2008", not 2009...

bakho said...

The trend for this entire decade (2001-present) is one of very low job creation (near zero). The restructuring of our economy has been impeded by bad policies including fiscal and regulatory policies. Supporting the status quo dinosaurs headed for extinction (as Bush and Cheney energy policy did) delays economic transformation and puts the US behind other countries in delivering new solutions. The same is true for broadband policy and environmental policies that have protected the status quo rather than forced new solutions.

We need a new regulatory and fiscal environment to change the structural dynamic. The PK column today is but one example of what needs to change.

paine said...

excellent post again by td

the serious structural imbalances might have been laid out in more detail

we have an asset to product price correction  that left this massive of under collaterralized debt  households twin assets their land lots and their hu cap  look to be in a secular slump  both festering away exposed to the gloomy sluggish market elements

such horros create a dramatic block  to rapid net credit increases to householders

and corporates sit on their hands in times like these  so far as productive investments in plant and equipment eh ??

that's a dopuble bulls eyedepartment one and two poked hard

and since we're an open system what outside conditions do seems likely to subtract  if policy attempts to accelerate recovery cause  we still have a serious  terms of trade imbalance with asia  and a serious forex fault line with europe these twi bode bad baby rev up effective demand to stim job creation and watch a trade gap bulge swell frightfully and the dollar droop agin the euro currencies continue

recall the song "under pressure"

bum bum bum diddy dah dah
bum bum bum diddy dah dah

flow5 said...

The FED doesn't generate jobs, the "trading desk", e.g., buys t-bills. The FED cannot achieve "maximium employment" mandates. The FED can only hope to achieve "price stability".

In our perverted world, bankers & economists claim that commercial banks "compete with financial intermediaries (McCulley's "shadow banking system" or the non-banks) for bank deposits on equal terms" (Requiem for Regulation Q; What It Did and Why It Passed Away - Alton Gilbert).

This is the source of the pervasive error that characterizes the Keynesian economics, the Gurley-Shaw thesis, Regulation Q ceilings, the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository Institutions Act of 1982, the Financial Services Regulatory Relief Act of 2006, the Emergency Economic Stabilization Act of 2008 (SEC. 128. ACCELERATION OF EFFECTIVE DATE Section 203 of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. 461) is amended by striking `October 1, 2011' and inserting `October 1, 2008').

It is undisputed that the bankers "compete" among themselves, to pay for what they already own. The source of all time/savings deposits within the commercial banking system, are demand/transaction deposits -directly or indirectly through currency, or the member bank’s undivided profits accounts.

Money flowing "to" these intermediaries (non-banks) actually never leaves the commercial banking system, as anybody who has applied double-entry bookkeeping on a national scale should know. The growth of these intermediaries/non-banks, cannot be at the expense of the member banks. And why should the commercial banks pay for something they already have? I.e., interest on time deposits.

Savings impounded within the commercial banking system are lost to investment, indeed to any type of expenditure (i.e., both consumption & investment has a velocity of zero). If monetary savings are not invested, then prices, production, employment, & incomes will contract (along with the production of goods & services).

evil_redistributionist said...

"...you expect a low underlying growth rate - barely at potential growth..."

With all due respect this came across as more "the FED saved us from another great depression" self-congratulation. Several of the most prescient economists are discussing a second dip (and even a depression). For the structuralist "barely at potential" growth is a BEST CASE SCENARIO.

don said...

"The additional of government stimulus will add additional fuel to the fire."

At this juncture, it looks like that fire will meet the same fate as the one in Jack London's story. Long-lived assets should be priced to cover structure as well as cycle, yet such does not appear to be the case right now.

Well, at least their dim imaginations and myopic horizons keep the investment 'experts' from panic.

What particularly galls me, though, is the government wasting resources to support asset prices, such as trying to keep up housing prices with an expensive tax credit. This is using the long end of the stick if the goal is to help relieve unemployment. Much more effective would be transfers to states to help them maintain services.

[Dec 8, 2009] The Rally Apologista’s Handbook

The Big Picture

Josh Brown penned this amusing and accurate takedown on the anti-Rally squad.

“But the volume is lower than in previous years”

You say: Its time to forget about the volumes we saw during 2006, 2007, 2008. Hedge funds and prop traders will never have access again to the amount of margin that was once freely offered by prime brokerages and investment banks.

“But the volume has declined since the summer/ early fall”

You say: Sure, because no one is in the mood to risk the percentage gains they have on the books until the calendar turns to 2010. How refreshing it is to see people acting responsibly with Other Peoples Money, even if they’re abstaining from trading for selfish reasons (performance bonuses locked in).

“But taxes must be raised next year/ tax incentives will run out”

You say: The removal of fiscal policy may be likely, but the bears argue that incentives like “cash for clunkers” haven’t helped anyway.

“But the worst stocks like AIG and Fannie Mae seem to be leading the markets”

You say: I don’t know if they are leading, although they have made some huge gains. But you can’t have this discussion without mentioning the fact that they were the most crushed stocks going into the rally’s start, some of these names were down 95% from their peaks and probably would’ve gone to zero absent the government’s (ludicrous and illegal) intervention.

“But insiders are still selling, they are closer to the companies’ prospects than anyone”

You say: I have never seen a shred of concrete evidence that shows me that corporate insiders as a group have any edge whatsoever in terms of the timing of their stock buys and sells.

“But interest rates must be raised”

You say: True, and this will mean two things…one, that the markets and economy are no longer on the brink and secondly, just imagine the effect on stocks when all that money in the bond market (from a a total of $67 trillion-ish) comes rushing out, looking for a home.

“But Commercial Real Estate is the Next Shoe to Drop!”

You say:  It will be ugly for the most leveraged among us, as usual, but there is also a tremendous amount of cash lurking out there, waiting to strike.

“But unemployment will remain elevated for quite some time to come”

You say: Congratulations on inventing a time machine that has allowed you to predict with utter certainty that there will not be any new companies/ industries coming out of the woodwork to take advantage of our high capacity labor pool.

“But Healthcare/ Energy Prices/ Aging Workforce will bankrupt the nation”

You say: As we speak, there are brilliant and clever people working on ideas and business models to address all of these issues and others. Human beings have always adapted to difficult circumstances, and American human beings happen to be better at this than any collective in world history.

Selected comments

  1. call me ahab:

    awesome -- here is one they may have forgotten:

    should i invest now- even after the big rally: you say-

    does a cow shit in a pasture?

    when they say- but . ..but

    you say-

    does Raggedy Ann have cotton boobies?

    by then they’ll be writing a check- i’m sure of it
     

  2. Doc at the Radar Station:

    He’s got some good points, but one that he left out was consumer’s propensity to spend. It’s been heading south for nine months straight:

    http://www.calculatedriskblog.com/2009/12/consumer-credit-declines-for-9th.html
     

  3. Byno :
    So…

    I can’t be the only one who sees the irony/cognitive dissonance behind the premise that a retail broker is giving “objective” “stay long” investment advice.

    /former retail broker
    //100% Vanguard in non-trading accounts (IOW all accounts except my trading account)
    ///Still 50/50 stocks/cash, but getting progressively more liquid

[Dec 6, 2009] What is the Rally Telling Us? By Michael Panzner

"Liquidity needs to find a home. And with QE all the rage and not much interest being paid on or to other investments…markets are the place to be. Until their not…"
December 6, 2009

Those who forecast a V-shaped recovery point to the similarly sharp rebound in share prices during the past nine months, which suggests that investors see much better times ahead.

But is that what the current rally is telling us? Technical analysts have noted, for example, that volume has contracted as prices have climbed, which would seem to indicate that investors are becoming less, rather than more, convinced about the outlook.

And contrary to what occurred in some previous bull runs, those who would normally be among the first to see evidence of a robust turnaround – corporate insiders — have remained sizeable net sellers of their companies’ shares.

Also disturbing is the fact that the current rally has been marked by widespread speculation, including heavy trading in the shares of corporate disasters like Fannie Mae, Freddie Mac, AIG, and (the old) GM.

Does that mean these firms are going to lead the way forward as far as growth is concerned?

In a New York Times report, “When the Performance Looks a Little Too Good,” Mark Hulbert, citing research by San Diego-based Ford Equity, raises similar concerns about the frothiness of the current rally.

Since the March lows,…the 20 percent of stocks with [the] smallest market capitalizations have on average outperformed the largest 20 percent by 72 percentage points — only slightly less than the 85-point disparity between the lowest- and highest-quality issues.

By contrast, in the first nine months of all bull markets since 1926, the average outperformance of the small-cap sector was just 21 percentage points, or less than one-third as much as the disparity over the last nine months, according to calculations by The Hulbert Financial Digest.

Only once since 1926 have the first nine months of a bull market produced a gap greater than this year’s. That was in the bull market that began in February 1933, in the middle of the Great Depression, when small caps outperformed large caps by an incredible 196 percentage points.

How can we explain the current extreme performance disparity? The federal government’s stimulus program is the main cause, in the view of Jeremy Grantham, the chief investment strategist at GMO, a money-management firm based in Boston. Mr. Grantham said in an interview that by temporarily reducing the danger of incurring risk, the government had effectively encouraged huge amounts of risk-taking in financial markets. “The sizable disparity of junk over quality should not have come as a big surprise,” he said, “given how massive the government’s stimulus has been.”

Source:
When the Performance Looks a Little Too Good
Mark Hulbert
The New York Times, Dec. 6, 2009
http://www.nytimes.com/2009/12/06/business/06stra.html

  1. Pat G. Says:

    Liquidity needs to find a home. And with QE all the rage and not much interest being paid on or to other investments…markets are the place to be. Until their not…

  2. flipspiceland:

    How to explain?

    The PPT: Goldman Sucks, London central banks everywhere, QE, Treasury manipulation, Paulson, Bernanke, Geithner, Gensler.

    It’s easy to explain when one stops trying to avoid looking into the eyes of the Vampire Squid.

  3. sparrowsfall:

    Yeah, the relative performance of financials versus nonfinancials is pretty amazing. I got curious and charted it:

    http://www.asymptosis.com/gdp-and-corporate-profits-smoke-and-mirrors.html

    Profits for the financials have gone up 258% since Q4 ‘08 (after dropping 78%).

    Profits for nonfinancials have gone up 5.5% (after dropping 22%).

[Dec 6, 2009] Jobs Loss at 169,000 in Nov., Worse Than Expected: ADP

Reuters

U.S. private employers shed fewer jobs in November from October, marking the eighth straight monthly decline in private-sector job losses, a report Wednesday showed. Private companies shed 169,000 jobs last month, fewer than the 195,000 jobs lost in October, suggesting some stabilization in the labor market as the economy emerges from recession, according to the ADP Employer Services report, jointly developed with Macroeconomic Advisers...

[Dec 6, 2009] Goldman Sachs forecasting

Goldman Sachs 2011 forecast: The key features of our 2011 outlook: (1) a strengthening in growth from 2.1% on average in 2010 to 2.4% in 2011, with real GDP rising at an above-potential 3½% pace in late 2011; (2) a peaking in unemployment in mid-2011 at about 10¾%; (3) extremely low inflation – close to zero on a core basis during 2011; and (4) a continuation of the Fed’s (near) zero interest rate policy (ZIRP) throughout 2011. That said we see risks that could upset these markets.  On the one hand, we might be underestimating the vigor of the economic recovery, and therefore the pressures for Fed tightening.  In addition, surging asset prices and worries about a “bubble” could prompt Fed officials to tighten before such a move seems warranted on real-economy grounds.  On the other hand, the economy (and the markets) could struggle under the weight of credit restraint for small businesses, weakness in commercial real estate markets, or fiscal tightening, especially by state and local governments...

Tao Jonesing said...

Hmmmmm . . .

One way to view Goldman Sachs' "forecast" is as a threat. "Unless the Fed keeps interest rates at zero and recharges our balance sheets, we cannot see an unemployment rate any better than 10.75% by the middle of 2011."

Nice.

In my experience, the Goldman Sachs guys really are the smartest clueless guys in the room (but they are really, really aggressive). They also deserve to be taken down a notch or ten.

The fact is that U3 will peak far higher than 10.75% nationwide, and the peak will happen at least two quarters beyond what GS is calling. There is no real recovery happening here. There is only a delusion based upon metrics created in a totally different era in which industrial employment dominated. We have no basis for calling the end of recession based on the economy we actually have.

Brad, can you stop sighing and start stepping up like Lord Keynes did back in the day? We need an entirely new approach to the crap social science we call "economics" these days. "Political economy" was a much more apt label. You and Krugman need to get together and blaze a new trail.

Please?

Tim said in reply to Tao Jonesing:

Tao Jonesing - From where I sit in the semiconductor industry, I definitely see a recovery happening. Revenues are back to pre-crash levels, profits are back, our pay cuts have been rescinded, we're hiring, other people are hiring (I've been contacted by 7 or so headhunters in the last few weeks), all the fabs are at 100% capacity making the entire industry supply constrained, and things are generally looking up.

Is this indicative of the overall economy? Well, maybe. Lots of people are buying a boatload of chips, that's for sure though, and that's good news for everyone.

Mandos:

"If you follow this blog at all you ought to know that if you're looking for iconolasts or reformers, DeLong is just about the very **last** person you want."

Yep. I read this blog regularly not because I expect new insights and approaches from its owner, but rather that it's a great barometer of what the non- (or less-) crazy part of the establishment is thinking.
 

Rusty Rustbelt said in reply to Neal...

State and local governments will be on the verge of collapse at the July 1 start of the 2010-2011 fiscal year.

Those unemployed folks are not paying taxes darn it.

[Dec 6, 2009] Matt Taibbi- Obama's Big Sellout to Wall Street

Taibbi: Obama got elected. On the day after he got elected he put two CitiGroup executives in charge of the economic transition team, especially Froman. Two weeks later they do a gigantic bailout of CitiGroup and that very same day those same, those CitiGroup executives hired Tim Geithner to be the Treasury Secretary. It’s an absolute quid pro quo.

Ratigan: I would say Tim Geithner as the head of the New York Federal Reserve since 2003 as the bank regulator, in New York, over these banks at a time when the banks were accumulating leverage, at a time when the swaps market was continuing to get crazier and crazier, that this, that these people believe, implicitly or explicitly that that type of modeling is somehow good for America, based over a period of years.

Freeland: Well don’t get me wrong; I’ve written a piece complaining…

Ratigan: I know, I’ve read it.

Freeland: …about how the guys at Goldman Sachs…
Ratigan: I get it.

Freeland: …think that they’re Ayn Rand characters, but I just think that we have to be careful to get our facts right and so for example if you talk about CitiGroup, these actions were taken when Obama was not yet in office and I think one of the original sins about the financial bailout was there should have been more strings attached. If you look at the strings that Warren Buffet attached to the money that he lent to Goldman Sachs, he got a better deal tha advisory team and not come out with a windfall profits tax to take back the profits being made this year and all the banks CEO’s compensation for the last ten years, because those people were paying themselves to accumulate risk that they couldn’t accumulate because they legalized doing that.

And the fact of the matter is that I think Matt’s onto something, is there’s a good question to be asked which is why is it we’re not seeing a windfall profits tax? Why is it we’re not seeing a restoration of the rules of lending and investing? And the question you’re asking is maybe there…or the answer you’re positing is maybe the reason you’re not getting that is because the people advising the President don’t want us to have that.

Taibbi: And also you have to look at the way the financial regulatory reform was you know what the White House proposals were on that this fall. All the things that Tim Geithner sent to the Hill were very, you know, soft touches on Wall Street. There was sort of a permanent bailout mechanism written into the resolution authority portions of the House bill.

Ratigan: That’s a fact.

Taibbi: And it required a sort of open revolt in the House to get those measures killed or watered down. That was the White House’s position. They wanted to have basically an automated future bailout system.

Ratigan: So that I can basically pay myself out, torpedo the system and then whoever is left has to pay. It’s totally nuts. And that was a Geithner… (crosstalk)

Taibbi: This was a built in safety net for the top twenty five banks in the country.

Freeland: This is where I’m with you. I think that financial reform has not gone far enough, absolutely.

Taibbi: And that’s all because that it was these people who were writing these bills.

Ratigan: So the issue you take Chrystia is to be cautious in assigning particular blame to Larry Summers or to Bob Rubin at this point because we don’t have enough information to know whose doing or did what. But we know that what’s gone on has been directly offensive and destructive to American and directly beneficial to the banking system.

Freeland: Yeah and look…

Ratigan: We just have to figure out who and why.

Freeland: I think bailing out the financial system, no matter what your politics, you have to be glad that that happened because we didn’t have a second Great Depression.

Ratigan: I disagree. I would say that’s like saying putting out a house on fire—we’ve got to be glad we put the house out that’s on fire…

Freeland: Yes…right…

Ratigan: But I’m more concerned about the fact that the people building our houses build houses that burn everybody in them down every ten years and everyone’s acting as though the fire was an accident and the fire wasn’t an accident. The fire was started consciously by individuals ten years ago and it came home. That’s my… (crosstalk)

Taibbi: It’s also a repeat of a pattern. Let’s not forget that.

Ratigan: Exactly.

Taibbi: This isn’t the first time we’ve bailed out Wall Street. You go back to the Peso Crisis, Long-Term Capital Management, the, you know…Greenspan cuts the rates eleven times after the tech crash, we have the housing bubble. It’s over and over and over again we have the same policies and it’s because it’s the same people who are setting the policies in the White House. I mean it’s not… it’s no accident that this is happening.

Freeland: Well that’s why financial reform legislation needs to be the central part of the discussion. That’s how the new house gets built.

Ratigan: Exactly and more importantly making sure that we identify who burned the house down, who made themselves rich burning the house down, getting the money back from those who made themselves rich burning the house down, punishing those who burned the house down and then building a new house that doesn’t allow people who like to burn houses down to build them. And they’re acting like the house fire was an accident and I think that’s where you run into a lot of problems.

[Dec 6, 2009] alternative-view-of-rising-gold-price

Here's a commentary about the recently rising gold price that sounds a bit more credible on Friday than on Wednesday, but, after taking it all in, it still sounds pretty naive to me.
 

Gold Buyers Nip at Ultimate Emotional Experience: David Pauly

Why is it no matter how much the world advances intellectually and technologically, people keep speculating on gold?

John Neff, who managed Vanguard Group’s Windsor Fund for three decades, once offered this take on the precious metal: “It’s not an investment, it’s an emotional experience.”

Emotions have been running high. Spot gold prices have risen 44 percent in the past 12 months. Gold futures reached a record $1,196.80 an ounce in New York last week before closing at $1,175.50 on Nov. 27.
 
Why do people speculate on gold (apparently you can't just buy or invest in the stuff)?

Because governments own the printing presses and the currency isn't backed by anything other than faith in governments to act responsibly.

For many people, it's as simple as that.

The fact that the metal keeps going up in price now that we've exited the late-1990s nirvana of perpetually rising asset prices, fueled by credit creation and government money printing the likes of which the planet has never seen before, shouldn't be all that surprising.

It's an interesting read to get a better understanding of how some still view precious metals today in a world that is maybe a little less intellectually and technologically advanced than they think it is.

Naturally, readers are reminded that gold pays no interest or dividends - kind of like savings accounts these days - and he wonders why the U.S. doesn't just sell it's useless stash.
 
Gold has to keep rising if current buyers are to get any return. Direct investments in gold pay no interest. Some folks buy gold-mining stocks that pay dividends, but those are subject to declines in the companies’ other mining businesses.

People are speculating in gold because the dollar has been falling and they think gold will hold its value. Others buy gold out of fear the money created as the U.S. props up its banking system will lead to inflation. Others want the metal simply because it’s increasing in value.

Gold’s latest boom offers the U.S. government an opportunity to capitalize on the emotions of speculators and sell off its own horde of the metal.

At today’s prices, the Federal Reserve holds about $300 billion in gold. The Fed’s balance sheet values the holding at just $11 billion, but this is based on a price of about $42 a troy ounce, the so-called official U.S. government price established in 1973.

Something Useful

In these times of trillion-dollar budget deficits, $300 billion may not seem like much. Still, that money could pay some of the costs of any health-care bill that comes out of Congress. Or it could help pay for wars in Iraq and Afghanistan.

The U.S. probably would have to sell its gold a bit at a time so it didn’t cause a slump in prices, partially defeating the purpose of the exercise. U.S. holdings account for 27 percent of the gold held as reserves by central banks.

On second thought, speculators are so hungry for gold, selling by the U.S. may not scare them.

The government, of course, seems content to let its gold investment lay in storage. Some economists would be shocked at the idea of getting rid of the country’s stockpile, which they see as backing for the dollar. Do they think China and Japan buy hundreds of billions of dollar-denominated Treasury securities because America owns some gold? They buy because they’re sure the U.S.’s credit is good.

Trade Tool

Gold long ago was used by nations to balance their trade books. When the U.S. bought more abroad than it sold, it paid the difference in gold.

It’s comical to think of that today. Once the U.S. economy gurgles again, the Fed’s $300 billion in gold would only cover about six months of the nation’s trade deficit.

European and Asian companies don’t collect dollars for their goods because they expect a payoff in gold but because they think the currency has its own value.

Neff, 78, still manages money for himself and his family in suburban Philadelphia. “I’m still in the hunt,” he says.

The hunt has never taken the veteran investor anywhere near gold. While the experience has been exhilarating lately, “I’m not attracted to it,” Neff says.

If only others were so sensible.
What's really comical today is to consider how dangerous global imbalances have become in a world full of paper money and pegged exchange rates where these imbalances can just continue to grow and grow until something really, really bad happens.

Of course, lately, nations with floating exchange rates just seem to blow up after a while.

[Dec 5, 2009]  Asia Times Online Asian news and current affairs

Myth 4: Wall Street has learned its lesson, supports financial reform and is sure that the fiasco will not be repeated. Wall Street bankers have learned very little, possibly nothing, since the onset of the crisis. The only lesson they have learned is the wrong one, namely, that banks can get their way in Washington no matter how egregious their practices, as long as they spend money and keep the revolving door wide open.

Wall Street has the audacity to pay exorbitant salaries and record bonuses while its benefactors, US taxpayers, struggle to put food on the table. Wall Street dares to block meaningful financial reform, regulation and supervision by frightening ordinary Americans into submission. Wall Street shows no remorse for the millions of lives it has destroyed and the trillions of dollars in real economic damage it has caused in the US and all over the world.

The frightening reality is that the crisis is far from over and Wall Street bankers only care about themselves. They don't realize that if the real economy fails to recover, they too will fail.

The Fed has pushed billions of dollars into the US economy and banks are flush with cheap funds. Rather than directing these funds into our real sector, banks are buying safe US government paper, trading on their own account (propriety trading where taxpayers take the risk for their losses and they get the rewards, adding nothing to the real economy), keeping excess reserves with the Fed and getting paid for them, generally making money hand over fist, and slowly returning to their old practices and underestimating risk.

Meanwhile, the US unemployment rate keeps going up, the number of foreclosures increases, the dollar weakens, the Chinese accumulate more US debt, oil and food prices climb, and financial bubbles build.

Where we will go is anybody's guess - a lost decade, as happened with Japan, or inflation. Sustained recovery is, at this point, unlikely, given all the economic and financial uncertainties, the ill-advised bailout policies, the absence of real and effective change in the financial industry, and a Fed that tries to resolve every ill by running the printing press in overtime mode.

Myth 5: Congress can do nothing about Wall Street bonuses and pay structures. With such a dysfunctional economic and social landscape, you would think that Congress would be grilling the perpetrators and adapting legislation to address all the problems at hand to eliminate the likelihood of anything like the current crisis in the future for us, our children and our children's children.

But no; instead, Congress sits idly by watching. Some in Congress plead that their hands are tied! There is nothing they can do! All the while, lobbyists of the financial industry run amuck on Capitol Hill brandishing promises and threats.

The reality is that today Wall Street owns the US Congress lock stock and barrel. Congress will do nothing, even if hell freezes over, unless the American electorate take the time and reclaim their nation that has been sold to the financial industry. Thomas Jefferson must be turning in his grave to see a nation and an electorate that have gone to sleep and are not heeding his warnings about the danger of banks and bankers:

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.
America must awake before it is too late. Americans must force Congress to act, and act now. Our nation must hold the financial industry accountable for the damage it has caused. If we do not act, Wall Street banks will revert to their old ways and the social and economic consequences to future generations will be unthinkable.

To us, the root cause of financial bubbles and the subsequent economic collapse is invariably the creation of excessive debt, something that is sure to be repeated with the current financial system. Recognizing the connection between debt and speculation, John Maynard Keynes even called for "[The] euthanasia of the rentier" (the lender).

A friend, a former Wall Street banker himself who left the financial industry in disgust, expressed surprise at our naivety after reading the above. He told us there was no chance that Congress would enact meaningful reforms to rein in the excesses of Wall Street, and even if Congress did, Wall Street bankers would find ways to get around any restrictions. Either the role of finance has to be redefined and limited to activities that focus the financial sector on its intermediary function or the entire financial sector will have to be taken over and federally administered.

In any case, his advice for us was to expose Wall Street bankers from the moral high ground and encourage a national movement to discredit Wall Street bankers and open up their activities to closer public scrutiny.

[Dec 5, 2009]  Jim Bunning Does Not ♥ Ben Bernanke

  1. odds Says:

    I met Bunning a few years ago. We talked about his stint with the Pirates. Hall of Fame pitcher. I also gave him props for bashing Greenspan over the years. It was 2006 when we spoke, and I asked him what he thought about being the only person to take Greenspan on over the years. He said … and remember, this was during the time frame that the bubble was peaking … that he believed that the reason Greenspan gave him fits was that he used rates to set financial asset price policy, as opposed to inflation policy. He said that (and here comes the political part) George HW Bush was unfairly hosed by Greenspan due to Greenspan’s insistence that any rate cut in 1990 be accompanied by a tax hike. Bunning said they were separate issues. Meanwhile, Clinton was a great beneficiary of easy money going into Y2K, while George W. Bush suffered from a reversal of the easy money policy during his first few months. But then, Bunning said that Bush became a huge beneficiary for several years during the housing boom.

    Bunning’s point was that even though the Fed folks thought they were smart, and they used big words that made the folks in Washington fall all over themselves with adulation, the reality is that bubbles and busts kept getting worse. Funny thing is, he said it all with a slight smile on his face, as if he knew people would soon see why Greenspan deserved the verbal abuse Bunning unleashed.

tradeking13:

A ray of light in an otherwise Bernanke ass kissing session.

censeo:

Amazing, just amazing: to hear an elected official speak truth from his head and not his pocket book. And I love the ultimate denigration of Alan Greenspan, the biggest piece of scum to hit the skids, finally, in a long time. Ayn Greenspan has his place in economic history as the one of the biggest fools. What a piece of ugly, whiney, incoherent crud. Beware, beware of ideologues! I’m beginning to think my one summer course in American Economic History taught me more about the cause of the great depression than Bernanke seems able to conjure.

It has gone out of fashion, but… Before Eeeconomistes got such celebrity status the going truth was: “If you laid every economist end to end they wouldn’t reach a conclusion.” Remember that one, Barry?..

Moss:

The real issue with the Fed is captured in the statement

‘Meanwhile, Clinton was a great beneficiary of easy money going into Y2K, while George W. Bush suffered from a reversal of the easy money policy during his first few months. But then, Bunning said that Bush became a huge beneficiary for several years during the housing boom.’

The Fed, and the potential for easy money policies, are seen by the party in power as a right of passage. Greenspan went one step further and insured that Wall Street and the stock market in particular would also benefit.

the bohemian:

BR- Excellent post-

this quote by Benanke from his last nomination should be all the reason needed to vote against renomination-

Bernanke said at last nomination:

“I believe that the tools available to the banking agencies, including the ability to require adequate capital and an effective bank receivership process are sufficient to allow the agencies to minimize the systemic risks associated with large banks. Moreover, the agencies have made clear that no bank is too-big-too-fail, so that bank management, shareholders, and un-insured debt holders understand that they will not escape the consequences of excessive risk-taking. In short, although vigilance is necessary, I believe the systemic risk inherent in the banking system is well-managed and well-controlled.”

how’d that turn out?

carleric:

It is simply too bad that the James Thurber rule (when a person is more right than his neighbors he constitues a majority of one) doesn’t apply in that nest of morons – our United States Senate. Of course, there are still people that worship at the altar of the GreenspanPut.

scepticus:

This is all bullcrap.

It’s all very well moaning about bernanke and his helicopters but there seems to be an undercurrent of lalaland thinking in much of this criticism – if only we’d had higher interest rates and sensible men at the helm none of this would have come to pass.

It’s BS, it would have come to pass right after 2001 and we would have had a screaming depression then which could only have been countered by printing money like we are now. High interest rates would have made it far worse. The debt was unsustainable then and its unsustainable now, so no point maknig out it would have been OK if it were not for the last 4 years.

None of these distinguished gentlemen want to address the real issues which are unsustainable inequality of income leading to deeply deficient demand everywhere coupled with a merciless wage arbitrage.

Instead they spend their time pissing around wagging their fingers in fits of red faced outrage in a vast blame game which seems to distract wonderfully from the abyss in front. Bernanke sees the abyss – and will have noted its presence in 2001. Of course he has no idea what to do about but print money so what he needs is some adult help.

the bohemian:

well skepticus-

maybe we should have confronted the abyss like adults in 2001-

and what makes you think Bernanke wants help -- somewhat presumptious to assume so- no? And that he was behind covering TBTF bank postitions w/ AIG at 100% w/ no haircut??? That alone shows vast incompetence or disregard for the taxpayer’s money-

so he does need to be fired. Also ZIRP and QE are no way to run an economy. Maybe failures and debt contraction through bankruptcies and write-offs are what is needed to fix an over-indebted nation. Had we done that in 2001 we may have already been through most the hurt.

scepticus:

Mannwich its less about people than it is about the system. A system in place for far too long and with so many dependants from lord blankcheck right down to the lowest food stamper cannot be abandoned at the drop of a hat and will be a train wreck no matter who is in charge.

Try the ‘quick collapse’ route and one just ends up with thugs like hitler taking over when it turns out the ‘quick’ bit was wishful thinking and the hard new man in charge is in fact no more capable of changing things than the predecessor.

Sad fact is a managed decline is the only option, warts and cocked up bailouts and all. The political machine is utterly paralysed by ideological and fiscal gridlock so until the halls of power can unclench their bowels and expell 30 or 40 years of constipation we’ll have to make do with monetary squits instead.

Some patience is going to be required.

scepticus:

“Maybe failures and debt contraction through bankruptcies and write-offs are what is needed to fix an over-indebted nation. ”

A common myth. When they tried that in the early 30s the saving rate was negative by 1933 and the economy was more indebted as a ratio of debt/gdp than when it started.

You can’t write off debt unless you write off savings too. And the savings in question cannot just be bank bond holders. Bank bonds are not money.

Money is deposits in banks, and unless some of these get wiped out writing off debt will make no difference. All deposits are claims on future income, and all other forms of debt are just derivatives of these.

flipspiceland:

@scepticus: So if all benny has to do is print money, why in hell do we need him? What’s so special about acting like Kinko’s on ‘roid rage?

A zombie or corpse could do what he does.

scepticus:

you don’t need ben. that wasn’t my point. Whether you have ben or bob is not the issue.

Had you had a real monetary hawk at the FED in 2008 we’d all be deeply, deeply FUBAR by now, well beyond anything you can imagine. Had you had a bob, much like ben, I don’t think the outcome would have been very different.

Now the total collapse scenario has been postponed, there’s a chance to sort some things out. We should be using the time more wisely than squabbling .

Don’t forget that the last year has only been round one. This, flipper, is the point I am trying to make.

Mannwich :

@scepticus: I never said they were stupid. They know damn well what they’re doing. In fact, I would ascribe more sinister motives to what they do. They simply believe that if they bail out their friends in high places that enough crumbs will fall off the table to feed the Sheeple so that said Sheeple doesn’t disturb the status quo with any nasty uprisings. That’s their bet. I hope it works out..for their sake.

Mannwich:

@ahab, I mean bohemian: Nothing. We’re all just more aggravated, although I’m just posting every now and then for sport. I don’t expect anything to change for the better and I feel somewhat relieved by that acceptance. Heck, I personally have a pretty good life, so eff it. Might as well go out and enjoy it. I’ve long ago come to terms with this train wreck that’s in progress. I’m just a mere observer these days. Got my popcorn, my recliner, and am just watching it unfold. What else can you do?

Adult Franklin411:

... The popular unrest appears to be contained.
Ben Bernanke, December 3, 2009

ab initio:

Scepticus

Deposits are way down the stack. Banks have other liabilities too including preferreds and various classes of debt.

There are many more astute than me including for example John Hussman who posit that if the banks were forced to write down many of their under-water assets – their equity would be wiped out (so shareholders get zero) and as you go down the stack – bond holders would take haircuts but not wipeouts – but depositors would still be whole. This is in general – every banks case would naturally be different.

All the bailouts and money printing by Bernanke, Geithner et al have done is saved the bond holders at taxpayer expense.

Households are doing the right thing now – getting their balance sheet in order – as seen in the contraction of household credit. But the government and the Fed are ballooning their balance sheets – that's why total debt/GDP is rising. Bottom line is that credit growth cannot compound at a rate greater than GDP indefinitely. IMO, countries have to do same thing that businesses and households do when their balance sheet gets out of whack. I don’t think there is any magic here.

There are no instances that I am aware of in history where money printing resolved a balance sheet problem.

DeDude :

the bohemian-

I personally think we should begin the payments on national debt by increasing the top tax rate to the good old Nixonian level of 70%. It would only remove money from where there is so much money that it is destructive (investor class creating bobbles here there and everywhere, screwing up prices on commodities etc.), without harming the consumer class (essential for economic revival). But try getting that through congress

It is unfortunate that the voters of this country will only vote for those who advocate simple pain-free “solutions”, that pretty much ensures that nothing drastic or fast will ever happen regardless of whether it would or would not work. Lets hope that somehow they do not vote for those who peddle quick fix bull crap pain-free “solutions”, but I would be surprised if they don’t.

Mannwich:

@ahab: For Ben To talk about “reducing entitlements” for the masses, while robbing the masses to prop up the elite reveal his elitism and arrogance to a “t”.

Only in a bizarro world like ours would this be even remotely acceptable to even mention, much less do. If Ben and the Fed want to remaind “independent” (which is laughable, since we know who they answer to – not us…their banking masters), then he shouldn’t comment on these political matters. He has a lot of nerve to suggest that we should cut Social Security and Medicare while he uses taxpayer money to bail out his buddies. Good grief.

The Curmudgeon:

@ Mannwich; Ahab:

But it’s all about wage arbitrage. American workers won’t see their pay stop declining until it roughly equals that of a Chinese peasant, with all the lack of government benefits to boot. It is the way of trading partners. The real crime here is that the Chinese are doing all they can to keep their own sheeple completely sheared. It ends up hurting not just their people (but that have never known anything better), but also the American worker that is just too expensive to employ (hence unemployment at 10% plus).

mitchn:

@Mannwich
They don’t care about it — that’s the globalization 3.o paradigm. Wages will be arbitraged to the lowest-cost country while the boys and girls with fractional jet shares flit from safe have to safe haven. Until they don’t. (See Wikipedia: Antoinette, Marie.)
ker

@ab initio
I loathe the man, but you should check out the Brain Wesbury segment (there were two) on Tech Ticker today. BW said pointed out that the market began to rally in mid-March when it became clear that Barney Frank and Congress were going to force FASB to switch back from mark-to-market to mark-to-fantasy. IMO, that’s exactly right.

As for the echo chamber effect that many on this thread are complaining about. Well, nothing much has really changed over the last year, has it? Bubble collapsed and now the powers that be are trying to reinflate it. Same old, same old…
 

[Dec 4, 2009] Open Thread- Is the Fed Chair’s Reappointment at Risk-

TakBak04:

I’d say that Bernie Sanders is the “Real Deal.” But, he doesn’t have much support for his views. So…given that Congress is mostly “Smoke & Mirrors” and “Lobbyists dues in their pockets,” it would mean that Bernanke will be given a good “work over” by the bloviating Senate or House Finance Panels and after he’s been made to sweat a bit and the folks who watch C-Span get their fill…he will be confirmed.

It’s Theater. Sad to say… but having watched and participated in threads following those Senate and House Hearings on any number of big issues since 1999….it always ends up the same. Bloviating followed by Capitulation to whatever appointment or re-appointment the Lobbyists are pushing.

Gotten “fired up” too many times when I was younger and a believer. Now I’m hardened and cynical…or wise and informed.

Winston Munn:

I’ve reached a point where it actually feels a little insulting to be asked what I believe should happen. It no longer matters what We the People want, need, or expect; the only thing that matters is what Me the Lobbyist has paid for.

Bank Lobby=Ben Bernanke.

Don’t even try to kid us that We the People have a meaningful voice – our complaints have been relegated to the comments sections of the blogosphere, while our votes are tallied by television networks who will tell us – during a commercial break for American Idol – who we elected and by how much.

constantnormal:

Let’s take the case of Bernanke being rejected — what would that imply?

It seems to me that it would imply a Congress concerned about pinning the blame on someone other than themselves or their lobbyist friends.

Perhaps he could be rejected.

OTOH, after witnessing the shameful spectacle of senators and representatives ignoring a firestorm of public outrage over the TARP bill to pass it and hand the keys to the kingdom to Hank Paulson, without a concern of their responsibilities under the Constitution, or what the voters obviously demanded, I have no confidence whatsoever in the Congress ever doing the right thing.

I won’t even waste and email encouraging them to vote Bernanke out. But I WILL vote to throw out incumbents in every primary and election for the rest of my days. If everyone did that, in the fullness of time (say a decade or two), the Congress might wake up to the fact that there are voters out there watching.

But the sheeple are too caught up in their hate-the-other party passions to realize that both parties are merely two sides of the same coin, a political duopoly that uses polarization to control the voters and keep them coming back to the Republicans and Democrats forever. In the eyes of the parties, it really doesn’t matter which of them wins, as the other will get a turn in a cycle or two. The parties have learned that sharing power serially works better for them than cooperating to run the nation.

People need to learn that whether you vote for a Republican or a Democrat, that is the real throwing away of your vote.

[Dec 3, 2009] Rosenberg analysys highlights

[Dec 3, 2009] Elizabeth Warren America Without a Middle Class

Today, one in five Americans is unemployed, underemployed or just plain out of work. One in nine families can't make the minimum payment on their credit cards. One in eight mortgages is in default or foreclosure. One in eight Americans is on food stamps. More than 120,000 families are filing for bankruptcy every month. The economic crisis has wiped more than $5 trillion from pensions and savings, has left family balance sheets upside down, and threatens to put ten million homeowners out on the street.

... ... ...

And when various forms of this creative banking triggered economic crisis, the banks went to Washington for a handout. All the while, top executives kept their jobs and retained their bonuses. Even though the tax dollars that supported the bailout came largely from middle class families -- from people already working hard to make ends meet -- the beneficiaries of those tax dollars are now lobbying Congress to preserve the rules that had let those huge banks feast off the middle class.

Pundits talk about "populist rage" as a way to trivialize the anger and fear coursing through the middle class. But they have it wrong. Families understand with crystalline clarity that the rules they have played by are not the same rules that govern Wall Street. They understand that no American family is "too big to fail." They recognize that business models have shifted and that big banks are pulling out all the stops to squeeze families and boost revenues. They understand that their economic security is under assault and that leaving consumer debt effectively unregulated does not work.

America today has plenty of rich and super-rich. But it has far more families who did all the right things, but who still have no real security. Going to college and finding a good job no longer guarantee economic safety. Paying for a child's education and setting aside enough for a decent retirement have become distant dreams. Tens of millions of once-secure middle class families now live paycheck to paycheck, watching as their debts pile up and worrying about whether a pink slip or a bad diagnosis will send them hurtling over an economic cliff.

America without a strong middle class? Unthinkable, but the once-solid foundation is shaking.

Elizabeth Warren is the Leo Gottlieb Professor of Law at Harvard and is currently the Chair of the Congressional Oversight Panel.

 

[Dec 3, 2009] Goldman Forecast: Unemployment to Peak in 2011

What are GS provocateurs trying to feed to an unsuspecting public" "wait 10.75 peak in mid 2011?? what is it now?? 10.2.?? someone pulling my leg... To be filed next to the $200 oil call."
2009-12-02 | CalculatedRisk

James Pethokoukis at Reuters provides excerpts from the most recent Goldman Sachs forecast and writes about the political implications, but the economic implications are also significant. From Goldman:

The key features of our 2011 outlook: (1) a strengthening in growth from 2.1% on average in 2010 to 2.4% in 2011, with real GDP rising at an above-potential 3½% pace in late 2011; (2) a peaking in unemployment in mid-2011 at about 10¾%; (3) extremely low inflation – close to zero on a core basis during 2011; and (4) a continuation of the Fed’s (near) zero interest rate policy (ZIRP) throughout 2011.
You read that right. 2011.

patientrenter:

I love the careful reference to negligible "core" inflation. Wouldn't want to include the stuff that we need that goes up in price, and confuse everyone into believing that the cost of living was rising every year, would we?

Lobbyist Ben Dover:

Just like it is contained to sub prime. Bottom 2013!

wawawa:

 “America Without a Middle Class” by my hero Elizabeth Warren.

Elizabeth Warren: America Without a Middle Class

TJ and The Bear:

(1) a strengthening in growth... ROFL!!!
(2) a peaking in unemployment in mid-2011 at about 10¾% Um, no.
(3) extremely low inflation – close to zero on a core basis during 2011 Maybe.
(4) a continuation of the Fed’s (near) zero interest rate policy (ZIRP) throughout 2011 Absolutely.

Two out of four ain't bad.

[Dec 3, 2009] Fed- We Will Pop Future Bubbles

davossherman@gmail.com:

I don’t think gold is a bubble, I think it is the resultant of the treasury and Fiat dollar bubble that Ben the f*cking moron created.

How in the world could he detect bubbles to pop if the idiot missed the biggest bubble of all time?
http://www.youtube.com/watch?v=HQ79Pt2GNJo&feature=player_embedded

“Maybe” Ben the moron isn’t familiar with Minsky’s work on bubbles.

HYMAN MINSKY’S SEVEN BUBBLE STAGES

The late Hyman Minsky, Ph.D., was a famous economist who taught for Washington University’s Economics department for more than 25 years prior to his death in 1996. He studied recurring instability of markets and developed the idea that there are seven stages in any economic bubble:

[Dec 3, 2009] “In the Eye of the Storm- Updating the Economics of Global Turbulence”

The Asia-Pacific Journal features the Introduction to an updated version of Robert Brenner’s Into the Eye of the Storm (hat tip reader Bill A). I have to make the guilty confession that I’m not familiar with Brenner’s work, and I am kicking myself for that. It dovetails very well with some ground I cover in my book, particularly the idea that what we are in the midst of is a paradigm breakdown. It would have been nice to have fleshed that out a bit more with Brenner’s help. He sees the period we are going through now as a protracted and fundamental transition, as significant as the one between feudalism and capitalism.

What makes this particularly interesting to me is that this analysis (by Tag Murphy, a Japan scholar that I met years ago) focuses on Japan as the exemplar of the intensification of international competition, how that played out (Murphy and Brenner recognize, as too few in the US do, that the Japanese bubble was no accident, but policy, an attempt to use asset prices to stoke domestic demand to compensate from the fall of exports that resulted rise of the yen engineered by the 1985 Plaza Accord). China, of course, emulated that model even though it turned out badly for Japan.

Most important, according to Brenner, bubbles were no accident. The massive expansion of credit was the only way to cope with manufacturing overcapacity (and note Brenner is not advocating this course of action, but depicting it as the least bad of unpalatable choices). As Murphy notes:

If this is correct, there is no easy fix for our problems. The blowing of asset bubbles is not an unfortunate side effect of regulatory capture or Wall Street’s greed. It was the only way governments could keep economic growth from falling below politically dangerous levels once traditional Keynesian methods of fiscal stimulus through deficit spending were no longer adequate to compensate for the sclerosis at the heart of the advanced capitalist economies: “worsening difficulties with profitability and capital accumulation.”

Brenner labels this bubble-blowing “stock market Keynesianism” referring to deliberate measures by governments to steer credit into equity markets.

This piece is more cerebral than the usual NC fare, but is it very important, and I recommend you find a few quiet minutes to read it.

[Dec 2, 2009] Leonhardt on Long Term PEs

patientrenter:

I find it useful to look at the ratio of aggregate equity valuations to corporate earnings, and corporate earnings as a % of GDP. And compare the equity val to GDP ratio to remove the bubbles in corporate earnings.

Bob_in_MA:

I'm not sure you could call the S&P500 a bubble right now. Definitely over-valued, but is it really a bubble?

If there is a bubble now, I'd say it's in base metals. Inventories have been rising since July, right along with prices. Copper stocks are heading right back to their peak last winter:
Kitco - Spot Copper Historical Charts and Graphs - Copper charts - Industrial metals

...and that doesn't include the stocks in China, mostly built over the last six months.

[Dec 2, 2009] The Impact of Stimulus on GDP

Calculated Risk

This is significant looking forward. The stimulus probably had the peak impact on GDP growth in Q3, and the positive contribution will diminish over the next few quarters. Without a pickup in end demand, the economy could slide back into recession next year.

Professor Krugman issued a Double Dip Warning today:

I’ve never been fully committed to the notion that we’re going to have a “double dip” — that the economy will slide back into recession. But it has been clear for a while that it’s a serious possibility, for two reasons. First, a large part of the growth we’ve had has been driven by the stimulus — but the stimulus has already had its maximum impact on the growth of GDP, will hit its maximum impact on the level of GDP in the middle of next year, and then will begin to fade out. Second, the rise in manufacturing production is to a large extent an inventory bounce — and this, too, will fade out in the quarters ahead.
...
I’d be more sanguine about all of this if there were any indications that private, final demand is taking off — consumers, business investment, whatever. But I haven’t seen anything suggesting that sort of thing.

The chances of a relapse into recession seem to be rising.

NOTaREALmerican:

I’d be more sanguine about all of this if there were any indications that private, final demand is taking off — consumers, business investment, whatever. But I haven’t seen anything suggesting that sort of thing.

Who would "invest" in this environment. Jeezzz...

Can somebody explain why people are talking about more stimulus if - as I've read that - the current stimulus won't be done stimulatin' until 2011? Are they saying the current stimulus isn't enough, or we can't wait for the effects? Why not just move up what's already scheduled for stumulatin'?

Angry Saver:

Without a pickup in end demand, the economy could slide back into recession next year. - CR

I don't think the recession ever ended. 11 million in auto sales and we are still setting records lows in actual housing starts every single month. Plus, non-residential construction is cliff diving and employment has not turned.

Nemo:

CR: Nemo, it doesn't work that way. They'd have to increase it every year to keep growth going - and at some point people would be more concerned about the deficit / debt and it wouldn't work at all.

True, but as Krugman is so fond of pointing out, "experts" will not consider the deficit/debt to be a problem with the 10-year yielding 3%.

In short, our government will not permit a deflationary depression -- or even a "double dip recession", in my opinion -- as long as they can borrow long-term money at these rates. Japan-style stagnation is a very conceivable outcome for the next decade or two. With some risks to the downside.

MrM:

Nemo wrote:

Japan-style stagnation is a very conceivable outcome for the next decade or two.

Japan had a current account surplus, a high savings rate and a strong world economy.
How conceivable is it that the US will enjoy these goodies?

1 currency now -yogi:

ON TOPIC:

Using estimates of GDP "growth" to evaluate the sensibility of public spending is just silly. Even if you got the estimates exactly right. Nominal GDP growth as an end goal is foolish. GDP measures little of importance.

mock turtle

Vic, if you are out there thank you, thank you, thank you,.... for the link to the charlie rose interview of sir james goldsmith.

Absolutely electric, especially 1/3r thru where he takes on the clinton appointee, Laura Tyson when a guy like goldsmith, worth billions criticizes GATTt and the destruction of our economic system a decade before it happens, in many of the ways he predicted...

One just has to take notice for those who missed it a thread back... but interested

Charlie Rose November 15 1994

1 currency now -yogi:

Nuke:

I agree that our situation is unsustainable, and Governor Paterson is one of the few willing to say so.

Doesn't mean 1/8 is bad, or that we'd be better off trying to bust public unions. (The MTA/Transit workers problems in NYC did not end with jailing Toussaint: if bonuses are paid, COLA's are not, and public unions' wages and employment chances are cut, GS will need more than pistols, I fear).

Don't you get a military pension? If we cut it and cut ROTC or other education subsidies, are we going to attract people capable of safely operating a sub? We can't experiment. The same holds for State law enforcement. I made a long series of comments in an argument last week about what happened when the City made "emergency" layoffs to my former, seemingly expendable position (law clerk in judge's chambers), before there was a union in the 70's. I'll link if you want.

Many government union jobs seem wasteful until they are eliminated.

a pony in every pot:

Dear CR,

I don't know if you saw this already, but I found this article an interesting (disturbing) read. Basically, the article uses math to help lay people like me understand just how deep the losses on a pool of mortgage-backed securities could be.

Yours truly,

A pony in every pot

The deal: Junk mortgage story just gets worse - Dec. 1, 2009

Nuke:

yogi:

No, no pension for me. I am not doing 20. So, no 401K either. My retirement is my responsibility alone. For the record, I think that the military is un-sustainable, and should be cut. We are reaching the point, especially in NYS, where tough choices need to be made.

Sorry, but I don't see an alternative. Many cities in the Albany area, which are already struggling, are raising taxes 7-10% just to meet pension obligations. This is killing what's left of the private sector. Like I said, I would like to hear your proposals.

CalculatedRisk:

I'm going to write about the deficit soon (I'll pull from many of my old posts).

Most economists agree there is nothing worse than a high employment large structural deficit. That is what we had when this recession started. And that has lead to a budget disaster. The cyclical deficit will be tough to solve because of the long term effects of the financial bubble / bust. The structural deficit will still be with us for years.

Oh well ...

best to all

poic:

Japan had a current account surplus, a high savings rate and a strong world economy.
How conceivable is it that the US will enjoy these goodies?"

we have one thing no other country has. A consumer that drives exports in he rest of the world. I see no evidence yet of other countries sufficiently boosting internal consumption. Until that happens stagflation is areal possibility.

ghostfaceinvestah:

"Of course, it is possible that the USD could lose value against most other currencies, while the high unemployment rate would still keep the USD inflation down. That would be the worst of all worlds."

Actually I think that is the plan.
 

[Dec 2, 2009] The Fed, Treasury and AIG

DownSouth:

Richard Alford,

As much as I admire the analysis you do, I must disagree with the compromise you offer.

The requirement that the only repentance the Fed be made to do is to “cease and desist” in its future dealings rings entirely too much like Obama’s exculpation of other war and white-collar criminals.

Whatever happened to concepts like investigating and punishing crimes? What has happened to concepts like trying to recover stolen property, such as the property the Fed and its accomplices stole from the American people when the Fed conspired with them in its illegal fiscal role?

There’s something that exists in a functioning society called “strong reciprocity”:

By strong reciprocity we mean a propensity, in the context of a shared social task, to cooperate with others similarly disposed, even at personal cost, and a willingness to punish those who violate cooperative norms, even when punishing is personally costly.
http://www.umass.edu/preferen/gintis/SocJusticeRes.pdf

I fully understand that the Unites States’ descent into the moral and social abyss began a long time ago, with the most pronounced downward swing during the Vietnam War.

But just because it’s been like this for a long time doesn’t mean there can’t be a restoration of morality and civil society in America. Anything short of that and I’m afraid the nation has seen its better days.

The rank and file must demand it, because our “elites,” who really aren’t elites at all but a bunch of low-life criminals, will never make the needed changes on their own.

sgt_doom:

Alford’s article is soooo lame, one doesn’t almost know where to begin. First, any Brookings Institution report is generally faulty to begin with — this subject needs no further comment.

Secondly, had the Fed not been criminally derelict in fulfilling its functions under the Federal Reserve Act, namely monitoring banking institutions to be sure the correct capital levels were being maintained, the AIG situation would have become glariling obvious — assuming they weren’t aware of it all along.

Thirdly, AIG had truly sterling directors on their board who should have been aware of this situation: Richard Holbrooke — now doing his equally expert work over in Afghanistan (heaven help us with that fool onboard!), and Martin Feldstein, frequently touted as a “respected Harvard economics professor” (pardon me while I barf!!!).

Since Feldstein is also on the board (or was on the BoD) of HCA (fined $1.3 billion in criminal penalties for Medicare fraud billing), as well as AIG (largest insurance swindle in human history, writing all those policies with no capital on hand to back them up, as well as various criminal penalties for accounting fraud, that one involving Brightpoint comes immediately to mind) and Eli Lilly (we know about those guys!), as well as his membership in Group of Thirty, the Bretton Woods Committee (most anti-worker, anti-union, anti-American bunch around), perhaps we should lay the bulk of the blame with their board of directors who were missing in action?

Brian:

Any compromise such as Mr. Alford’s requires a level of confidence and trust in the Federal Reserve. Today’s announcement regarding the retirement of $25 billion in debt between AIG and the Federal Reserve Bank of New York makes a mockery of any illusion of trust or confidence that remained. The government is canceling $25 billion owed by AIG to the taxpayers of the United States, in exchange for preferred stock in two AIG subsidiaries that we already own (79.9%). Is this $25 billion based on some market value? No. AIG has been trying to sell these subsidiaries for a year now, and has not gotten an offer at any price, let alone $25 billion. Why is this being done? Well, because it suits the purposes of both parties. The Fed gets to pretend that the loans to AIG were a disaster for the taxpayer, and AIG is very happy to get $25 billion in debt in exchange for preferred stock in a company that the taxpayer already owns. And by the way, if this preferred stock is like the preferred we own and the holding company, no dividend need be paid. Ever. Here’s a question for the investing audience — how do you value preferred stock, with no voting rights and no convertible feature, that pays no dividend?

psychohistorian:

This is where I put the tin foil hat on.

Where are the state AG’s and the rest of the judicial system? Is the whole legal system corrupt to its base?

I don’t want to believe it but the facts are becoming insurmountable. No shred of a civilized society left….pityful.

Doug Terpstra:

Alford writes “How exactly was the Fed supposed to develop contingency plans for a business about which it knew next to nothing, attached to an industry- insurance-about which it knew nothing and was not subject to any oversight by any Federal agency?”

It seems this really excuses willfull blindness. This derivative nonsense, “about which [the Fed] knew nothing” was propagated for many, many years, all of it closely tied to instruments under the Fed’s direct regulation with serious implications for leveraged risk. How could they possibly miss that? And if it knew nothing about it, well, duh, why should they be regulating anything?

[Dec 1, 2009] Slugging it out … (in a gentlemanly sort of way) …

FT Alphaville

Not surprisingly, Michael Panzer at financialarmageddon.com doesn’t agree

Aside from discounting the fact that there are aspects to the current unravelling that are historically unique and extraordinarily unsettling (e.g., total credit market debt relative to gross domestic product is well beyond anything this country has ever witnessed), Mr. Grant makes a number of curious assertions.

For one thing, he assumes that the current downturn is near its nadir, instead of a temporary floor built on a massive stimulus injection and a knee-jerk bout of inventory restocking. Among logicians, such an analytical approach might be described as “begging the question.”…..

If savings rates, debt levels, and the share of the U.S. economy accounted for by consumer spending were to return to, say, pre-Greenspan era norms, then one bomb shelter might not be enough to handle the economic onslaught that is still headed our way. 

Interestingly, a recent very informal survey of some of our hedge fund clients found most people pretty much in the middle, with low probabilities assigned to either the “Armageddon” or the “Boom!” scenario for 2010, though most gave the V-shaped version the shortest shrift.

More inclined to fade the extremes, than out and out pessimistic. But no doubt also ready to take whatever opportunities present themselves…

  1. shadow:

    Japan is the lead economic forecaster for the rest of the world. Without serious financial market reforms that puts these hugely dangerous and foolish people firmly back in the box, global growth will be a mirage for a very long time as already the next series of asset bubbles are being created alongside double digit unemployment.

[Dec 1, 2009] Mish's Global Economic Trend Analysis

Zombie Capitalism: Bernanke "Marching Ignorantly Forward" Australian economist Steve Keen has another blockbuster post on the dynamics of debt deflation and the Great Financial Collapse. Please consider Debtwatch No 41, December 2009: 4 Years of Calling the GFC.
During a debt-driven financial bubble, which is the obvious precursor to a debt-deflation, rising levels of debt propel aggregate demand well above what it would otherwise be, leading to a boom in both the real economy and asset markets. But this process also adds to the debt burden on the economy, especially when the debt is used to finance speculation on asset prices rather than to expand production–since this increases the debt burden without adding to productive capacity.

When debt levels rise too high, the process that Fisher described kicks in and economic actors go from willingly expanding their debt levels to actively trying to reduce them. The change in debt then becomes negative, subtracting from aggregate demand–and the boom turns into a bust.

So could the global economy get out of the global financial crisis the same way it got out of the 1990s recession–by borrowing its way up? That’s where the sheer level of debt becomes an issue–and it’s why I stuck my neck out and called the GFC, because I simply didn’t believe that we could borrow our way out of trouble once more. Debt did continue rising relative to GDP for several years after I called the GFC, but it has now reached levels that are simply unprecedented in human history.

For the “borrowing our way out” trick to work once more, we would need to reach levels of debt that would make today’s records look like a picnic. What are the odds that that could happen again?

[Dec 1, 2009] Goldman Staff Packing Pistols to Defend Against Peasants

Yves here.

This isn’t hard to understand at all. Goldman ran afoul of one of Machiavell’s big rules: “Men sooner forget the death of their father than the loss of their patrimony.” Or its 21st century variant: “You can take from all of the people some of the time, and some of the people all of the time, but you cannot take from all the people all of the time. ”

But the banksters, and Goldman in particular, have been determined to push the limits of those formulas, and are learning, much to their surprise, that they neglected to consider the intensity of the backlash that might result from their considerable success in extracting rents from the populace. Or did they?

NS:

Interesting. I remember last year AIG was concerned for their employees based on hate mail, etc.

I wonder if GS is forward looking and more perceptive than is given credit for. GS gave the USA and its citizens the finger, literally. They hold no national interest, their interests are pathologically narcissistic meaning that, as financial sociopaths and terrorists, they cannot realize their gluttony or its consequences except to themselves.

Thus far they have been rewarded with the wealth of pharaohs while they take vaccine from pregnant women since they are so valuable as humans. Based on their record this year for pay, bonuses and profits-these employees are more valuable than the POTUS.

History is replete with examples of what happens next.

Probably the only job growth now is in personal security details. Wonder what happens if they don’t pay enough or that background check due diligence in hiring.

Francois T:

Yet another symptom of the inevitable rise in income inequality. My brother-in-law worked for the Canadian embassy in Mexico. He and his wife were shell-shocked when they arrived there: private bodyguards and chauffeur for bringing the kids to school, heavily armed gated (with barbwire thank you very much) neighborhoods, the works.

It’s not going to be pretty around da hood, won’t it?

DownSouth:

Up until very recently, in Mexico the elite criminals (politicians, financial and industrial monopolists) preyed upon the people and the street criminals preyed upon the elite criminals (kidnap being the preferred manner).

And trust me, the way your friend described the situation is exactly as it is. Without being in Mexico and living it, without having friends and acquaintances who have been the victims of kidnap or murder, the full repercussions of the situation are difficult to fathom. Rich people in Mexico exist in fortresses.

But those fortresses, besides the obvious undesirability of living this way, have become indefensible. Many rich Mexicans have already removed their families to the United States.

But recently something has changed. The street criminals are no longer just preying on the elite criminals. Suddenly they’re targeting people who can pay ransoms as little as $5,000 usd. But these poorer victims don’t have the financial resources to buy bullet-proof vehicles or hire 24/7 security or to remove their families to the United States.

It has therefore become quite clear that those who pay most dearly for the crimes of the elite–for their destruction of morality and the concomitant destruction of civil society–are not the elite, but the rank and file.

And trust me, the way your friend described the situation is exactly as it is. Without being in Mexico and living it, without having friends and acquaintances who have been the victims of kidnap or murder, the full repercussions of the situation are difficult to fathom. Rich people in Mexico exist in fortresses.

But those fortresses, besides the obvious undesirability of living this way, have become indefensible. Many rich Mexicans have already removed their families to the United States.

But recently something has changed. The street criminals are no longer just preying on the elite criminals. Suddenly they’re targeting people who can pay ransoms as little as $5,000 usd. But these poorer victims don’t have the financial resources to buy bullet-proof vehicles or hire 24/7 security or to remove their families to the United States.

It has therefore become quite clear that those who pay most dearly for the crimes of the elite–for their destruction of morality and the concomitant destruction of civil society–are not the elite, but the rank and file.

Robespierre:

All of these could had been avoided had the administration investigated/prosecuted the offenders. As it is at this time the population believes that their government has failed to protect them against these banksters. It is always the same. Vigilantes will form to provide “justice” when the government provides none. My guess is that GS people can see it coming.

Protect & Serve:

Funny stuff.

But don’t the Goldman thieves realize that we in America have learned a few tricks from the Iraqi insurgents. We aren’t going to get them from outside, we will get them from inside…in other words, the populist rage has already flowed heavily into the police forces across this country, as many are getting just as screwed as the average joe sixpack. I wonder how many of those Blankfein private guards are actually populist insurgents just waiting for those cries of ‘help me’, only to laugh and help the other side.

The arrogance of the uber-elite is pathetic at its best, but it can’t win when all it lives by is corruption: government capture and legalized theft.

Who’s protecting you, Lloyd. Blackwater guards? Think they’re on your side still? Good luck with that you greedy fools! Maybe you should start another fund with Warren, donations to the war chest to try to win points with our trained soldiers. You better hope they all stay in Afghanistan, cause when they get home and find their home foreclosed and no job, then you should really start to worry.

Jared:

If that is what is truly reflects, then I am indeed going to watch by back. I guess it is the convenient way out to blame it on someone else, when you lose your underpaid job and your house that you never could afford in the first place. Well, maybe you shouldn’t have bought that house? Maybe you shouldn’t have maxed out three credit cards? Maybe you should have some savings, like the population in most other western countries have? No, you’re probably right. Put a bullet in Lloyd’s head and everything will just go away.

Protect & Serve:

Problem, Jared.

My masters degree in science and full-time employment has never provided me the income to afford a decent house without a stupid debt product since you financial parasites exploded the prices to overvaluation levels that only idiots would jump at. I also have impeccable credit and have a zero balance on my one credit card. Nice job erroneously lumping everyone else together, eh, fraudster?

You see, it is the hard-working middle class people like me who your finance games have hurt the most. I could care less about the deadbeats who got foreclosed because those deadbeats participated in your criminal schemes that have kept me from accessing homeownership. And while I don’t like those participating deadbeats, I know they were only cogs in the financing games of Goldman and others.

You think you only hurt deadbeats and idiots? You are stupider than those deadbeats if that is all you can fathom. No, dumbass, the hard-working, intelligent middle class like me is who has been hurt the most, and we are more pissed off than you can ever imagine. And we’re smart enough to know how and why, and who is responsible for the destruction. The primary blame goes to the financial parasites of Wall Street who packaged up BS mortgages and sold them off, then bought bogus protection to profit while they collapsed.

Yep, Jared, you got some highly-educated and smart enemies just waiting for the right time to join in the orgy of vengeance that is due…and is coming sooner than and from directions that you would never figure out. And that’s because people like me always were the better math students than the blowhards that went off to business school to join the ranks of financial parasites. We were smarter in every subject than parasitic exploiters like you. I know for fact that the only ‘rocket scientists’ that end up at Wall Street are the real ‘losers’ who couldn’t get an honorable job at CERN or Fermilab or JPL. Yep, the real ‘losers’ are the ones at Goldman Sachs.

And I’m more than happy to explain to any of the lesser-educated victims exactly why you are to blame, and you are the reason of our societal decay.

Sleep well, genius.

[Dec 1, 2009]  Deep down, even the fiercest equity bulls must be doubting themselves by Stacy-Marie Ishmael

Dec 01 | FT Alphaville

The latest missive from the dynamic SocGen strategy duo, Albert Edwards and Dylan Grice, landed in the FT Alphaville inbox on Tuesday, and it’s a stunner.

Some of the top lines from the presentation — titled: “The investment opportunity of a generation or the start of another lost decade?” — include (emphasis theirs):

jackson

The quote from Lou Jiwei put it nicely.
"It will not be too bad this year. Both China and
America are addressing bubbles by creating
more bubbles and we're just taking advantage
of that. So we can't lose," he said.

Or, if you prefer quotes from Americans:

What, Me Worry?

Alfred E. Neuman

[Dec 1, 2009] Reckless Myopia - John Mauldin's Outside the Box

Reckless Myopia

John P. Hussman, Ph.D.

I should have assumed that Wall Street's tendency toward reckless myopia – ingrained over the past decade – would return at the first sign of even temporary stability. The eagerness of investors to chase prevailing trends, and their unwillingness to concern themselves with predictable longer-term risks, drove a successive series of speculative advances and crashes during the past decade – the dot-com bubble, the tech bubble, the mortgage bubble, the private-equity bubble, and the commodities bubble. And here we are again.

We face two possible states of the world. One is a world in which our economic problems are largely solved, profits are on the mend, and things will soon be back to normal, except for a lot of unemployed people whose fate is, let's face it, of no concern to Wall Street. The other is a world that has enjoyed a brief intermission prior to a terrific second act in which an even larger share of credit losses will be taken, and in which the range of policy choices will be more restricted because we've already issued more government liabilities than a banana republic, and will steeply debase our currency if we do it again. It is not at all clear that the recent data have removed any uncertainty as to which world we are in.

[Dec 1, 2009] PIMCO - Dec Gross Anything but 01

Raise interest rates with 15 million jobless and 25 million part-time working Americans? All because gold is above $1,100? You must be joking or smoking – something. We will need another 12 months of 4-5% nominal GDP growth before Bernanke and company dare lift their heads out of the 0% foxhole mini-bubbles or not. Instead, the heavy lifting or the charging of enemy lines in the case of this metaphor will likely be done by other central banks – already in Australia and Norway. In addition, and importantly, China may abandon its dollar peg within six months’ time and with it, its own easy monetary policy that has fostered more significant mini-bubbles of lending and asset appreciation on the Chinese mainland.

With renewed upward appreciation of the yuan may come potentially volatile global asset price reactions to the downside – higher Treasury yields, and lower stock prices – which the Fed must surely be leery of before making any upward move, of its own, and before moving on, let me state the obvious, but often forgotten bold-face fact: The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until.

To date that transition is incomplete, mainly because mortgage refinancing and the purchase of new homes is being thwarted by significant changes in down payment requirements.

The Treasury as well, has a significant average life extension of its own debt to foist on investors before the Fed can raise short-term Fed Funds.

OK, so where does that leave you, the individual investor, the small saver who is paying the price of the .01%? Damned if you do, damned if you don’t. Do you buy the investment grade bond market with its average yield of 3.75% (less than 3% after upfront fees and annual expenses at most run-of-the-mill bond funds)? Do you buy high yield bonds at 8% and assume the risk of default bullets whizzing at you? Or 2% yielding stocks that have already appreciated 65% from the recent bottom, which according to some estimates are now well above their long-term PE average on a cyclically adjusted basis?

Two suggestions.

[Dec 1, 2009] Breakfast with Dave: Market and Data Musings

With eurozone at 1% there is not much growth in cards.
Nov 31, 2009

The range on 2010 GDP estimates is: 2.0% to 4.0%; for 2011, 2.5% to 4.6%, and 2.8% to 5.0% for 2012. These two percentage points are huge for a $14 trillion economy — we’re talking about differences that amount to $300 billion!

[Dec 1, 2009] Summary and a Look Ahead

Nov 30, 2009 | www.calculatedriskblog.com
Mr.Kowalski:

Not too sure why we're even trying mortrgage mods.. so many of them fail and we're still headed south on home values anyways. Lower home values will absolutely put pressure on local and state governments.. look out for a Muni Bond Collapse.. The Mean Old Investor: The Problem with Muni Bonds

patientrenter:

We complain about extend and pretend a lot here. But you have to realize that the bubble was unsustainable before it lost some air. So we (as a society) were extending and pretending for years already. What's going on now is merely a continuation, a mutation, of what was going on before. We (the PTB) can keep doing this for a while yet, maybe years, maybe even a decade. After about a decade, I'd say they run out of bullets, and we get to nominal asset price deflation, or consumer price inflation.

Edit: Never mind, I don't want another debate about de/in -flation.

NOTaREALmerican:

Nanoo-Nanoo:

Well now, just imagine the UE rates should those soldiers come home and need work? ugh. Its amazing to me we can be so liberal with our assets overseas which put at risk more than just $$s, so liberal with biggie piggy banks but we just can't muster the courage to get the bankers that got literally trillions to take a little haircut on their yearly bonuses (GS on track for a record year among others) or get the quasi banker/broker/us taxpayer owned to do loan modifications on the bad products they sold.

Tim waiting for 2012 :

"State’s Unemployment Fund Goes Broke | Hartford Business

Oct. 13, and the state has already borrowed $80 million to make up for the shortfall. By the end of 2009, those loan amounts are expected to increase to $260 million. Through 2012, state officials predict the state may need to borrow up to $900 million."

Gee a couple hundred million here a couple hundred million there and pretty soon we're talking real money.

patientrenter:

EvilHenryPaulson wrote:

savings are not a flat distribution, the wealthiest will lose the most in absolute terms just from simple odds.

Taxes are the right place to set redistribution policy. Setting up a giant RE lottery scrambling real net returns doesn't fix the problem of poor income and wealth distribution. It just adds one more layer that distributes wealth lousily and nearly randomly. To those who don't like the existing distribution method that favors the wealthy (because of low taxes on high incomes), this random scrambling of returns, driven by the RE lottery, is satisfying because it favors borrowers, who include poorer people. But it's just adding one nutty distribution system onto another.

Nanoo-Nanoo:

Thats why its too simplistic as the entire kit and hoocoodanode is the complexity of saving, loans, incomes and means of financing. In particular, the financing part which became the most complex allowing risk taking by bankers not formerly allowed under those horrible old fashioned methods of separating utilitarian banking needs including loans vs that of wall street/financial institutions.

This included 'savings' as savers of hard cash money were unrewarded but by magic they could be ultimately rewarded by 'investing' it in all sorts of investment vehicles (in itty bitty small letters...there is always risk involved with any investment choices, be sure to consult a professional). Decreasing real wages/benefits, a declining dollar, didn't help and poor J6P decided those smart amoral scumbags surely could be trusted with his hard earned dollars so one day, he could put Suzie and Sam through college on that second mortgage.

Now price discovery is the problem in a deflationary RRE (and CRE) market which has too many federal fingers in it trying to reflate it again. Meanwhile by chance, bad luck, bad personal financial decision, hoards and hoards on on a slippery slope of complete ruin because all that risk that was to be so rewarding ended up being one big fat lie, be it in their homes or their stock market portfolios. And OH MY, in the interest of those next quarterly returns, their job got axed and now its BK time and a home under that bridge to no where. So now what and how did I do?

NOTaREALmerican (profile) wrote (in reply to...) on Sun, 11/29/2009 - 2:03 pm MrM wrote:

Please read winterspeak's

some investor guy:

Here's an interesting bit of news.

"Banks had to buy back $7.1 billion in defaulted single-family loans in the third quarter to reimburse mortgage investors, up from $1.9 billion in the previous quarter. Federal Deposit Insurance Corp. Call Report information shows that most of the buyback demands fell on JPMorgan Chase and Bank of America. Chase repurchased $2.7 billion in defaulted loans and BoA repurchased $2.3 billion to satisfy investor demands. Both are on the hook for troubled loans they took control of when they purchased ailing mega-thrifts — Countrywide in the case of BoA and Washington Mutual by Chase. The FDIC information also lists buybacks by Citibank ($898 million), National City Bank ($361.6 million), Wells Fargo Bank ($266 million) and SunTrust Bank ($232.3 million). Investors like Fannie Mae and Freddie Mac can require lenders to buy back defaulted loans that don’t comply with their underwriting requirements. Freddie Mac forced its seller/servicers to buy back $960 million in bad mortgages in third quarter. (Fannie does not disclose buyback information.) Ginnie Mae and Federal Housing Administration also require buybacks and indemnifications on bad loans."

www.nationalmortgagenews.com

patientrenter:

 Jonathan wrote:

what if we keep shrinking by 5 - 10% yearly for the next few years? Is it so unlikely?

If you believe that, then.... you are young, in economic education years.

pavel.chichikov:

 *I know we all love wallowing in the schadenfreude and so on, but the US economy is not going to shrink by more than 20%, tops. *

Maybe, but how do you know?

Jonathan:

 patient wrote:

If you believe that, then.... you are young, in economic education years.

I am indeed young, and quite used to being patronized.

However, the question still stands. We need something to create or invent. Something where the US workforce can create value, that grows the economy at a steady 4 or 6% a year, over and above what we have now.

Where does that come from?

TJ and The Bear:

Imagine the US government as the turkey and Treasury investors as the butcher...

CHARLIE ROSE: And what is the story of the turkey?

NASSIM NICHOLAS TALEB: In the book, I have the story of a turkey that is fed for 1,000 days by a butcher, and every day confirms to the turkey and the turkey’s economics department and the turkey’s risk management department and the turkey’s analytical department that the butcher loves turkeys, and every day brings more confidence to the statement. So it’s fed for 1,000 days...

CHARLIE ROSE: Gets fatter and fatter and fatter.

NASSIM NICHOLAS TALEB: Fatter and fatter. On the day when its comfort will be at its maximum, there is going to be a surprise. There will be a surprise for the turkey.

CHARLIE ROSE: Yes.

rosethorn:

Streetwise Professor » Wallison: Timmy!’s Nose is Growing

volker the viking:

Jonathan wrote:

just feeding the unemployed

important for maintaining the status quo

RATM:

patientrenter wrote:

If you believe that, then.... you are young, in economic education years.

Pretending you can see the future and then calling someone dumb, +1

patientrenter:

Jonathan wrote:

Where does that come from?

In a large nation like ours, it is extremely unlikely that any large and successful long term shift in industries will come about as a result of prognostications by an elite group (of people patronizing others .)

But it is clear that we cannot import more than we produce forever, and the rebalancing will likely involve a reduction in the forex value of the dollar. When that happens (and it's been happening some recently) on a large and long term scale, then millions of Americans will find many imports so expensive that enterprising Americans will see the opportunity to make the goods here for less, or even export to other countries for (gasp!) less than the competitors.

I can see fuel becoming more expensive, and that will lead to different commuting habits (including more working from home), and more local production. My personal hope is that somehow Americans will see the light and develop a food culture (in favor of flavor and freshness, not quantity and appearance and shelf life), but that's probably an empty dream.

patientrenter:

RATM wrote:

retending you can see the future and then calling someone dumb, +1

Sorry, RATM. Yes, it is likely that the US economy will shrink annually by 5-10% for years. Carry on.


pavel.chichikov :

 "It's not gonna happen"

The proper response is: It's probably not going to happen. Or: It could happen but the odds are greatly against it happening in the next five years.

No one can confirm that it definitely will not happen. Astronomers can work up a table of odds for Munich re, but even they can only generate estimates. We don't even know how many Earth-orbit crossing bodies exist in our system, or where all of them might be, or where their orbits may carry them, or from what direction they might approach the Earth.

However, if we did know these facts about them, we could probably speak with more confidence about their future positions than we could about what may happen to the global economy in the next five years. Astronomical bodies don't cheat, steal, lie, or even sneak. They aren't greedy, inattentive or incompetent. Neither the long run nor the short run make any difference to them. They don't bluff or make war.

Jackrabbit :

Question: By pegging its currency to the dollar, isn't China defeating the dollar devaluation as a strategy for US industrial competitiveness?

Dollar devaluation then becomes a tax on the world and a way of increasing asset values in the US (so the banks can become solvent), not a means of making our economy competitive (verses China, anyway).

At some point, other countries will be forced to follow China's lead or face really cheap US and Chinese goods (or erect trade barriers).

volker the viking:

Jackrabbit wrote:

By pegging its currency to the dollar, isn't China defeating the dollar devaluation as a strategy for US industrial competitiveness?

notso much defeating as working at cross purposes.

"Dollar devaluation then becomes a tax on the world and a way of increasing asset values in the US (so the banks can become solvent), not a means of making our economy competitive (verses China, anyway)."

I guess we shall see what we shall see on that front.

"At some point, other countries will be forced to follow China's lead or face really cheap US and Chinese goods (or erect trade barriers)."

Perhaps. Unless the economy comes derailed and then all bets are off.

But then, volker don't know shit. volker sell advertising

TJ and The Bear:

Ferguson: How Economic Weakness Endangers the U.S. | Newsweek National News | Newsweek.com

No sweat, reply the Keynesians. We can easily finance $1 trillion a year of new government debt. Just look at the way Japan's households and financial institutions funded the explosion of Japanese public debt (up to 200 percent of GDP) during the two "lost decades" of near-zero growth that began in 1990.

Unfortunately for this argument, the evidence to support it is lacking. American households were, in fact, net sellers of Treasuries in the second quarter of 2009, and on a massive scale. Purchases by mutual funds were modest ($142 billion), while purchases by pension funds and insurance companies were trivial ($12 billion and $10 billion, respectively). The key, therefore, becomes the banks. Currently, according to the Bridgewater hedge fund, U.S. banks' asset allocation to government bonds is about 13 percent, which is relatively low by historical standards. If they raised that proportion back to where it was in the early 1990s, it's conceivable they could absorb "about $250 billion a year of government bond purchases." But that's a big "if." Data for October showed commercial banks selling Treasuries.

That just leaves two potential buyers: the Federal Reserve, which bought the bulk of Treasuries issued in the second quarter; and foreigners, who bought $380 billion. Morgan Stanley's analysts have crunched the numbers and concluded that, in the year ending June 2010, there could be a shortfall in demand on the order of $598 billion—about a third of projected new issuance.

patientrenter:

Jackrabbit wrote:

At some point, other countries will be forced to follow China's lead or face really cheap US and Chinese goods (or erect trade barriers)

Yes, it's not all going to a smooth plan. China needs to revalue its currency vis a vis the dollar, and increase its own internal consumer demand, but it hasn't. So the revaluation implied by the USD's devaluation has been borne by the Euro, mainly. Eventually, Europe could erect trade barriers to Chinese (and US) goods. But at that point China would probably see the light, and start moving. Messy, but that's the way these things happen in the real world. The underlying forces are fairly clear, but the individual steps and timing are unpredictable.

Mr Slippery:

Jonathan wrote:

We need something to create or invent. Something where the US workforce can create value, that grows the economy at a steady 4 or 6% a year, over and above what we have now. Where does that come from?

Exactly. Where does that come from? Until some new technology is invented, probably some new energy technology, we have a long, painful slog ahead.

volker the viking:

patientrenter wrote:

China would probably see the light, and start moving  to a hard money currency in concert with Russia, et alia?

barfly:

"By pegging its currency to the dollar, isn't China defeating the dollar devaluation as a strategy for US industrial competitiveness?"

by pegging to the dollar, China is absolutely in lockstep with us, leaving us with no comparative advantage. Basically, as I've said before, it's economic warfare, with China attached to our Achilles heel like a pit-bull.

volker the viking:

barfly wrote:

it's economic warfare

it's an economic poker game, table stakes

there IFIFY

energyecon:

lubecpat wrote:

EMRATIO - what does this stand for?

Civilian employment over total population, the least gameable measure of unemployment that exists:
St. Louis Fed: Series: EMRATIO, Civilian Employment-Population Ratio

EvilHenryPaulson:

specifically, over total non-institutional (no funny farm, not disabled, not in military) population above age 16

patientrenter:

pavel.chichikov wrote:

The proper response is: It's probably not going to happen.

Yes, you are right, Pavel. But you are older and wiser than me, and more polite.

I get frustrated when I see that people know as little about economics as they would about reading and writing if they had been raised by wolves. It's a sad reflection on our educational setup, and not usually their personal fault. But please, everyone out there should educate themselves about economics. If people knew as much about economics as they do about politics, we'd be making much better political and economic and financial decisions.

Rajesh:

lawyerliz wrote: what the heck is IFIFY

I Fixed It For You.

Eric:

volker the viking wrote:

it's an economic poker game, table stakes

It's definitely NOT table stakes when people bring printing presses to the game.

energyecon:

patientrenter wrote:

I get frustrated when I see that people know as little about economics as they would about reading and writing if they had been raised by wolves.

Entertaining to see folks writing about the energy industry that way as well...

pavel.chichikov:

There are a number of past cases (e.g., France in the 1930s) when nominal rates have risen even at a time of deflation. What's more, it seems to be happening in Japan right now.

France in the 1930s is a dreadful example of how the morale of an entire country can disintegrate.

Anonymous Bosch:

Focus Fusion is still twelve to eighteen months away.

All would (not "create") but employ millions of people with the requisite or approximate skills.

We're never going to pull ourselves out of the manufacturing mess by building eBay trinkets. And we're never going to achieve independence until we do so from the energy cartel. (Both foreign and domestic.)

Jackrabbi:

I know the US economy is resilient. But I think this recession is different than any postwar recession.

We have an extraordinary set of challenges. On multiple levels. Tradition political economics in the "real world" is to deal with them when they become a problem. Special interests love that.

Just look at the auto industry. Talk about extend and pretend!

If we care about our grandchildren, we need to address competitiveness in a way that is holistic and forward looking.

patientrenter:

Best way by far to achieve energy independence:

Announce a schedule of annually increasing taxes on most fuels, with small (3-6%) increases each year for 20 years.

That way, people can plan for the adaptations that need to be made.

State clearly the benefit for which the pain would be borne - a future where we don't have to send our money to people who don't like is very much (and who keep funding extremism all around the world that we send our armies to fight and die against).

Fund various alternative energy research programs, but let the winners be determined by the market (tilted ever more in favor of all the alternatives by the fuel tax).

TJ and The Bear:

patientrenter wrote:

Announce a schedule of annually increasing taxes on most fuels

Carbon tax - Wikipedia, the free encyclopedia

In 1993, then President Bill Clinton proposed a BTU tax. It would have taxed all fuel sources based on their heat content except for wind, solar, and geothermal. It was never adopted.

The East Coasters first objected, stating that they shouldn't be penalized for heating their homes. Then the West Coasters objected, stating that gasoline is critical to people's livelihoods given the much greater distances involved. It all went nowhere, of course.

km4:

Former rebel leader is Uruguay's president-elect - Yahoo! News

MONTEVIDEO, Uruguay – A plain-talking former leader of leftist guerrillas who once sought power through kidnappings and bombings is now the president-elect of Uruguay.

The right wing wackos will put even more pressure in Obama that South America ( except for bought and paid for Columbia courtesy of CIA ) is becoming another threat just like those Muslims in Middle East.

Anonymous Bosch:

We're not coming out of the mess because, sadly, the numbnuts and asswipes we elected, yes all of us elected, are focused on restoring the "Party Like It Was 2005". The problem is that during said party, we threw up all over the sofa, pissed in the potted plants (and killed them,) punched out the caterers, and knocked up the dog.

I haven't heard one single forward looking, forward thinking, forward planning word from the Bozos in Charge.

Throw so much money at the banksters, they don't collapse. What's next? Refund losses in Vegas?

Cash4HopelessGamblers?

Now we're going to get the economy revved up by killing (still) more people?

patientrenter:

TJ and The Bear wrote:

It all went nowhere, of course.

And maybe it would go nowhere now. But since then 9/11 happened. And we have become bogged down in a war against an enemy sheltered in Pakistan, where it grows within madrassas and other organizations funded by wealthy zealots from Saudi Arabia. And the folks who think that the country will support more expensive fuel primarily in order to reduce carbon emissions are smoking something. That works in Berkeley and Cambridge and college communities across the country, but that's not broad enough. There is a chance the country could get behind cutting off our funding of the source of the extremism. That would appeal in Kentucky as well as Manhattan.

Jackrabbit:

patientrenter wrote:

Announce a schedule of annually increasing taxes on most fuels

A lot of our problems are political, not economic. Until we are faced with the possibility of terrible outcomes, making for public debate, special interests force changes that benefit them to the detriment of everyone else.

The attempt by the financial industry to have any TBTF resolution authority not be funded is a case in point.

While there are some benefits in efficiency, it seems that industry concentration is detrimental in the long run: oligarchs have too much influence with government, and their rent-seeking reduces innovation.

EvilHenryPaulson:

barfly wrote:

that's maybe what it looks like, but I think his real objective is in keeping interest rates low, to increase discretionary spending, as Broward has mentioned previously. This POV holds a lot of water with me, for some obscure reason.

they are connected. without restoring the apparent positive wealth of the household balance sheet, they will not spend like they did. ditto for bank lending. it's what I said at the outset, and surprise surprise bank reserves are the only thing going up in this world.

patientrenter:

Jackrabbit wrote:

The attempt by the financial industry to have any TBTF resolution authority not be funded is a case in point.

The funding is a red herring. Just like the FDIC. Banks today are being bailed out regardless of the FDIC finances. When TARP was being debated, no one said, "Oh, wait, we can't spend more than is in the FDIC fund". They'll bail and spend regardless of whether the fund is there, and regardless of how much is in it.

Jackrabbit:

 Patientrenter:

"The funding is a red herring. . . . They'll bail and spend regardless of whether the fund is there, and regardless of how much is in it."

We'll yes and no.

Yes, the government is going to do what it takes to protect the financial system, BUT I used it as an EXAMPLE of how industry has undue influence, and I'm not sure that your counterpoint reflects that and ...

The industry didn't want it funded because they know that it is MUCH more likely that the resolution authority will be used if it is funded. Resolution generally means a bank is put out of business BEFORE your problems are so immense that it threatens the financial system.

Having it funded benefits the taxpayer because it makes bailouts (using taxpayer $$$) less likely. Bank executives don't want it to be funded because they are much more likely to keep their jobs in a bailout vs. resolution. (as we have seen)

Comrade Alexei Mikhailovich:

 TJ and The Bear wrote:

In a reflection of how sure investors were that Dubai would meet these payments, the bonds were trading at a 10 percent premium to face value earlier this week. They are now trading at around half of face value.

Another 50% drop and you'll have a chance at making a killing. Dubai as an international financial center didn't make much sense as even GE is getting into Islamic finance, as a travel destination they only have 5 months of decent weather, none of which are during when Euros holiday. Logistics and a waypoint for air travelers? Sure.

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