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Financial Skeptic Bulletin, January 2010

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Everybody expected the inflation would pick up and bonds will go down. That did not happened in 2010 (althouth bonds, especially munis, were smashed in Novemeber-Decemeber).

The HFT-induced stock rally resumed in October-December period just in time to same the year. Nobody cares about quality of earnings anymore...

As Michael Hudson noted:

 "But the deficits that the Bush-Obama administration have run are nothing like the familiar old Keynesian-style deficits to help the economy recover. Running up public debt to pay Wall Street in the hope that much of this credit will be lent out to inflate asset prices is deemed good."

Best | Rest

Testimony the FCIC should really be hearing…

 FT Alphaville

Optimist

“Dear, what did you expect, she is just a dog !” is probably the maxim that reflects the behaviors of people in large financial organizations better then one might think from the first sight.  Organization induced idiocy might be another term.

And the problem is not only with rules. Probably overcomplexity dooms the current financial industry: no matter what set of rules is imposed on the players, the game just switches to finding a loopholes. Entities must became much smaller, lines of business less diverse and complex and accounting more transparent for any set of rules to be marginally effective. I think the New Deal creators understood this issue at least implicitly. Size really matters ;-)

May be the charter should be revoked automatically from any financial organization which reached certain size and/or certain age. This way top management would have more difficulties to instill imperial thinking when expansion via acquisitions becomes the mode of existence and with the complacent board blessing create "after me deluge" situation like happened with Citi. Fish rot from the head down as do organizations… Investment banks might benefit from being limited to partnerships.

Contrary to what Harley Bassman preaches "Too big to jail" entities are rules averse by definition and that rules aversion start at the very top. Quantity turns into quality. They also are more susceptible to "strong ruler" trap. I think this is a situation somewhat similar to totalitarian states dynamics. The society is simply captured until the crash of the regime occurs. Dictators can be very efficient at the beginning and solve problems quicker and more comprehensively then democratic states, but the problems always arise as the regime ages and the crash, not reform is the usual outcome.

[Jan 29, 2010] Grantham: Lessons Learned in the Decade By Barry Ritholtz

January 28, 2010 | The Big Picture

I always enjoy reading Jeremy Grantham’s missives, and his most recent comments do not disappoint. They are packed with great tidbits and insight.

My favorite part was this list of “Lessons Learned in the Decade” — the full list is available at GMO.com.

Here is an abbreviated version:

Fascinating stuff from Jeremy Grantham of GMO.

Source:
What A Decade!
Jeremy Grantham
GMO, 1/25/2010

farmera1:

“Congress is nearly dysfunctional, primarily controlled by large corporations;”

If you thought this was bad last decade wait until this decade with recent SCoUS ruling that corporations can give to/buy/bribe politicians without limits. As the saying goes,” you haven’t seen anything yet.” This party is just starting.

http://www.nytimes.com/2010/01/22/us/politics/22scotus.html

Freedom of speech for corporations (artificially created entities). Suppose that is what the framers of the Constitution had in mind when they wrote the bill of rights. I doubt it. This will get real ugly in a hurry.

First Amendment to the Constitution

“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.’

DL:

If not for those damn corporations, the U.S. would have no debt, no unfunded liabilities, and we’d have lower taxes, and higher economic growth.

Bring in the trial lawyers, the environmentalists and labor unions to run the economy.

Mannwich:

“Perceived” influence, that is. Mass delusion often works well…….until it doesn’t.

TakBak04:

Jeremy Grantham’s missives are an excellent read..

I’ve read his stuff before but lost touch somewhere along the way and was reading Bill Gross more than Grantham.

Actually going to the site and reading more beyond what you focused on is also a good read.

What I wonder about with you “BR” is that your “Fusion IQ” seems to be so much more optimistic than the links to folks you agree with and what seems to be your own views of the stuff you post here on your blog for us to read.

I guess you’ve said you are a Contrarian…but it must be hard to operate given the dire predictions of the folks predictions you link your blog readers to. Most of the folks you link us to are seeing very hard times for US Markets in the coming years.

Yet, your own charts and signals seem to be based on “market sentiment through charts” which somehow seem linked too much to the Quant Side of Math…rather than the Sociological Sentiment of Crowds.

When folks don’t have money out there…they need to cash in those 401-K’s to pay mortgage or the credit cards in default… and the older crowd just won’t go near this crazy market having been wiped out by the implosion of 2000, 2001…2007 and ‘08 . But, remember they got wiped out by the “Dot Com. Crash” and then went into Real Estate and also at the end back into stocks in their “fixed income” stuff. I’m talking about the older folks, here who still had some cash left to burn and were still employed enough that they’d saved some stuff, even after the two Bubbles. They’ve BURNED IT or had it burned by investments in schemes (think of the Florida and Greenwich Crowd burned by Madoff and his cronies living the “high life.” There’s some dark stuff out there, but assume that “Fusion IQ” and others seem to have strategies that feel they can work around this?

So…Who is Left to Invest? EXCEPT the BIG GUNS? And how is it that there are “BIG GUNS” who have anything left after “Hair on Fire …we are poor and on the brink and we are going down unless TAXPAYERS GIVE US THE MONEY! I guess that’s the splitting of the Big Pie into slices. What’s left over..the rest of us have to make money out of just to make that living in these times.

Anyway…I liked Grantham’s views….and I’ve always been a big reader of Bill Gross’s Newsletter every month. Bill Gross has made me money on his calls. Whatever he does in his investing life…his newsletter is “very populist.” And his sense of irony and humor is great for “between the lines” reading. I made money on his “TIPS” (actually the investment) and when he warned to get out of it….I cashed in. He’s been warning not to buy bonds. For a Bond Billionaire to say that…gives him lots of creds for the “small investor.”

Whatever… I assume your views are making money for your clients who probably have very different goals that some of us out here who have some substantial cash…but are hugely cautious and like to “micro-manage” our own stuff and have done well enough that we won’t change. LOL’s ….Contrarian….

[Jan 26, 2010] The Myth of Recovery  by Michael Hudson

See also Michael Hudson

The current economy is best viewed as the FIRE sector wrapped around the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs. This by and large parasitic sector ensures that 401K investors will be much poorer at the time they need to retire
When listening to the State of the Union speech, one should ask just which economy Obama means when he talks about recovery. Most wage earners and taxpayers will think of the “real” economy of production and consumption. But Obama believes that this “Economy #1” is dependent on that of Wall Street. His major campaign contributors and “wealth creators” in the FIRE sector – Economy #2, wrapped around the “real” Economy #1.

Economy #2 is the “balance sheet” economy of property and debt. The wealthiest 10 per cent lend out their savings to become debts owed by the bottom 90 per cent. A rising share of gains are made in extractive ways, by charging rent and interest, by financial speculation (“capital gains”), and by shifting taxes off itself onto the “real” Economy #1.

John Edwards talked about “the two economies,” but never explained what he meant operationally. Back in the 1960s when Michael Harrington wrote The Other America, the term meant affluent vs. poor America. For 19th-century novelists such as Charles Dickens and Benjamin Disraeli, it referred to property owners vs. renters. Today, it is finance vs. debtors. Any discussion of economic polarization between rich and poor must focus on the deepening indebtedness of most families, companies, real estate, cities and states to an emerging financial oligarchy.

Financial oligarchy is antithetical to democracy. That is what the political fight in Washington is all about today. The Corporate Democrats are trying to get democratically elected to bring about oligarchy. I hope that this is a political oxymoron, but I worry about how many people buy into the idea that “wealth creation” requires debt creation. While wealth gushes upward through the Wall Street financial siphon, trickle-down economic ideology fuels a Bubble Economy via debt-leveraged asset-price inflation.

The role of public spending – and hence budget deficits – no longer means taxing citizens to spend on improving their well-being within Economy #1. Since the 2008 financial meltdown the enormous rise in national debt has resulted from the reimbursing of Wall Street for its bad gambles on derivatives, collateralized debt obligations and credit default swaps that had little to do with the “real” economy. They could have been wiped out without bringing down the economy. That was an idle threat. A.I.G.’s swap insurance department could have collapsed (it was largely in London anyway) while keeping its normal insurance activities unscathed. But the government paid off the financial sector’s bad speculative debts by taking them onto the public balance sheet.

The economy is best viewed as the FIRE sector wrapped around the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs.

Say’s Law of markets, taught to every economics student, states that workers and their employers use their wages and profits to buy what they produce (consumer goods and capital goods). Profits are earned by employing labor to produce goods and services to sell at a markup. (M – C – M’ to the initiated.)

The financial and property sector is wrapped around this core, siphoning off revenue from this circular flow. This FIRE sector is extractive. Its revenue takes the form of what classical economists called “economic rent,” a broad category that includes interest, monopoly super-profits (price gouging) and land rent, as well as “capital” gains. (These are mainly land-price gains and stock-market gains, not gains from industrial capital as such.) Economic rent and capital gains are income without a corresponding necessary cost of production (M – M’ to the initiated).

Banks have lent increasingly to buy up these rentier rights to extract interest, and less and less to promote industrial capital formation. Wealth creation” FIRE-style consists most easily of privatizing the public domain and erecting tollbooths to charge access fees for basic necessities such as health insurance, land sites, home ownership, the communication spectrum (cable and phone rights), patent medicine, water and electricity, and other public utilities, including the use of convenient money (credit cards), or the credit needed to get by. This kind of wealth is not what Adam Smith described in The Wealth of Nations. It is a form of overhead, not a means of production. The revenue it extracts is a zero-sum economic activity, meaning that one party’s gain (that of Wall Street usually) is another’s loss.

Debt deflation resulting from a distorted “financialized” economy

The problem that Obama faces is one that he cannot voice politically without offending his political constituency. The Bubble Economy has left families, companies, real estate and government so heavily indebted that they must use current income to pay banks and bondholders. The U.S. economy is in a debt deflation. The debt service they pay is not available for spending on goods and services. This is why sales are falling, shops are closing down and employment continues to be cut back.

Banks evidently do not believe that the debt problem can be solved. That is why they have taken the $13 trillion in bailout money and run – paying it out in bonuses, or buying other banks and foreign affiliates. They see the domestic economy as being all loaned up. The game is over. Why would they make yet more loans against real estate already in negative equity, with mortgage debt in excess of the market price that can be recovered? Banks are not writing more “equity lines of credit” against homes or making second mortgages in today’s market, so consumers cannot use rising mortgage debt to fuel their spending.

Banks also are cutting back their credit card limits. They are “earning their way out of debt,” making up for the bad gambles they have taken with depositor funds, by raising interest rates, penalties and fees, by borrowing low-interest credit from the Federal Reserve and investing it abroad – preferably in currencies rising against the dollar. This is what Japan did in the “carry trade.” It kept the yen’s exchange rate down, and it is lowering the dollar’s exchange rate today. This threatens to raise prices for imports, on which domestic consumer prices are based. So easy credit for Wall Street means a cost squeeze for consumers.

The President needs a better set of advisors. But Wall Street has obtained veto power over just who they should be. Control over the President’s ear time has been part of the financial sector’s takeover of government. Wall Street has threatened that the stock market will plunge if oligarch-friendly Fed Chairman Bernanke is not reappointed. Obama insists on keeping him on board, in the belief that what’s good for Wall Street is good for the economy at large.

But what’s good for the banks is a larger market for their credit – more debt for the families and companies that are their customers, higher fees and penalties, no truth-in-lending laws, harsher bankruptcy terms, and further deregulation and bailouts.

This is the program that Bernanke has advised Washington to follow. Wall Street hopes that he will be kept on board. Bernanke’s advice has helped bolster that of Tim Geithner at Treasury and Larry Summers as chief advisor to convince Pres. Obama that “recovery” requires more credit.

Going down this road will make the debt overhead heavier, raising the cost of living and doing business. So we must beware of the President using the term “recovery” in his State of the Union speech to mean a recovery of debt and giving more money to Wall Street Jobs cannot revive without consumers having more to spend. And consumer demand (a hateful, jargon word, because only Wall Street and the Pentagon’s military-industrial complex really make demands) cannot be revived without reducing the debt burden. Bankers are refusing to write down mortgages and other debts to reflect the ability to pay. That act of economic realism would mean taking a loss on their bad debts. So they have asked the government to lend new buyers enough credit to re-inflate housing prices. This is the aim of the housing subsidy to new homebuyers. It leaves more revenue to be capitalized into higher mortgage loans to support prices for real estate fallen into negative equity.

The pretense is that this is subsidizing the middle class, but homebuyers are only the intermediaries for government credit (debt to be paid off by taxpayers) to mortgage bankers. Nearly 90 per cent of new home mortgages are being funded or guaranteed by the FHA, Fannie Mae and Freddie Mac – all providing a concealed subsidy to Wall Street.

Obama’s most dangerous belief is in the myth that the economy needs the financial sector to lead its recovery by providing credit. Every economy needs a means of payment, which is why Wall Street has been able to threaten to wreck the economy if the government does not give in to its demands. But the monetary function should not be confused with predatory lending and casino gambling, not to mention Wall Street’s use of bailout funds on lobbying efforts to spread its gospel.

Deficit reduction

It seems absurd for politicians to worry that running a deficit from health care or Social Security can cause serious economic problems, after having given away $13 trillion to Wall Street and a blank check to the Pentagon. The “stimulus package” was only about 5 per cent of this amount. But Obama has announced that he intends on Tuesday to close the barn door by proposing a bipartisan Senate Budget Commission to recommend how to limit future deficits – now that Congress is unwilling to give away any more money to Wall Street.

Republican approval would set the stage for Wednesday’s State of the Union message promising to press for “fiscal responsibility,” as if a lower deficit will help recovery. I suspect that Republicans will have little interest in joining. They see the aim as being to co-opt their criticism of Democratic spending plans. But in view of the rising and well-subsidized efforts of Harold Ford and his fellow Corporate Democrats, the actual “bipartisan” aim seems to be to provide political cover for cutting spending on labor and on social services. Obama already has sent up trial balloons about needing to address the Social Security and Medicare deficits, as if they should not be financed out of the general budget by taxpayers including the higher brackets (presently exempted from FICA paycheck withholding).

Traditionally, running deficits is supposed to help pull economies out of recession. But today, spending money on public services is deemed “bad,” because it may be “inflationary” – that is, threatening to raise wages. Talk of cutting deficits thus is class-war talk – on behalf of the FIRE sector.

The economy needs deficit spending to avoid unemployment and poverty, to increase social spending to deal with the present economic shrinkage, and to maintain their capital infrastructure. The federal government also needs to increase revenue sharing with states forced to slash their budgets in response to falling tax revenue and rising unemployment insurance.

But the deficits that the Bush-Obama administration have run are nothing like the familiar old Keynesian-style deficits to help the economy recover. Running up public debt to pay Wall Street in the hope that much of this credit will be lent out to inflate asset prices is deemed good. This belief will form the context for Wednesday’s State of the Union speech. So we are brought back to the idea of economic recovery and just what is to be recovered.

Financial lobbyists are hoping to get the government to fill the gap in domestic demand below full-employment levels by providing bank credit. When governments spend money to help increase economic activity, this does not help the banks sell more interest bearing debt. Wall Street’s golden age occurred under Bill Clinton, whose budget surplus was more than offset by an explosion of commercial bank lending.

The pro-financial mass media reiterate that deficits are inflationary and bankrupt economies. The reality is that Keynesian-style deficits raise wage levels relative to the price of property (the cost of obtaining housing, and of buying stocks and bonds to yield a retirement income). The aim of running a “Wall Street deficit” is just the reverse: It is to re-inflate property prices relative to wages.

A generation of financial “ideological engineering” has told people to welcome asset-price inflation (the Bubble Economy). People became accustomed to imagine that they were getting richer when the price of their homes rose. The problem is that real estate is worth what banks will lend – and mortgage loans are a form of debt, which needs to be repaid.

[Jan 10, 2010] Bill Moyers Journal

Slightly naive, but an interesting read.  There is no countervailing power, so the crash is the only natural outcome.
PBS

The ancient Romans had a proverb: "Money is like sea water. The more you drink, the thirstier you become."

That adage finds particular meaning today on Wall Street, which began this New Year riding a tidal wave of bonuses in a surging ocean of greed.

Thanks to taxpayers like you who generously bailed banking from the financial shipwreck it created for itself and for us, by the end of 2009 the industry's compensation pool reached nearly $200 billion. And despite windfall profits, the banks will claim almost $80 billion in tax deductions. And nearly $20 billion of those deductions will go to just three institutions — Morgan Stanley, JP Morgan Chase, and Goldman Sachs.

Ah, yes — Goldman Sachs, that paragon of profit and probity — which bet big on the housing bubble and when it popped — presto! — converted itself from an investment firm into a bank so it could get your bailout money.

Now consider this: in 2008, Goldman Sachs paid an effective tax rate of just one percent. I'm not making that up — one percent! — while their CEO Lloyd Blankfein pulled down over $40 million. That's God's work, if you can get it. And, believe me, Wall Street bankers know how to get it.

What's their secret? How do the bankers pick our pockets so thoroughly with barely a pang of guilt or punishment? You will find some answers in this current edition of "Mother Jones" magazine, one of the best sources of investigative journalism around today. Most of this issue is devoted to what the editors call "Wall Street's accountability deficit."

In it, the Nobel Prize economist Joseph Stiglitz writes of the "moral bankruptcy" by which bankers knowingly trashed our economy and tore up the social contract.

The magazine's David Corn examines why there's no mass movement demanding fundamental change.

And blogger Kevin Drum tours Washington's heart of darkness from down Pennsylvania Avenue, over to K Street where the lobbyists cluster like vultures, then past the local branch of Goldman Sachs — also known as the U.S. Treasury — and up to Capitol Hill, where key members kneel in supplication to receive their morning tithes from the holy church of the almighty dollar. As Kevin Drum writes, a year after the biggest bailouts in U.S. History, Wall Street owns Washington lock, stock and debit card.

Kevin Drum, formerly with "Washington Monthly," is now the political blogger at "Mother Jones." He's here to talk about his report, along with David Corn, who's been covering Washington for 23 years and is now "Mother Jones'" Washington Bureau Chief. Welcome to you both.

BILL MOYERS: Welcome to both of you.

DAVID CORN: Good to be with you, Bill.

KEVIN DRUM: Good to be with you, Bill.

BILL MOYERS: Let me read you a letter that was posted on our website a few days ago from a faithful viewer. His name is Mike Demmer. I don't know him personally, but I like to hear from him. He says, dear Bill, I watch your program all the time. What I don't understand is how a bunch of greedy bankers could bring the world to the edge of catastrophe and then in less than a year, already move back to their old ways. How do they do it?

KEVIN DRUM: Well, that's the $64 million question. Or maybe it's the $64 billion question these days. Yeah, how they do it? They've got all the money. And they use all the money. And they use it in Congress to get rules passed and get laws passed that they want. They use it to lobby the Fed, they use it to lobby the S.E.C. They use it to lobby the executive branch. And they get rules passed that allow them to make a lot of money. Just like any of us would. It's not that American bankers are greedier than anybody else's bankers. It's that our rules, our laws, allow them to do things that they can't do everywhere else. We let them take advantage of the system.

BILL MOYERS: But how do you measure their power? Lobbying doesn't happen in the public, in the open. We can't sit in the bleachers and watch the game being played. How do you know they have this power?

DAVID CORN: You can read the lobbying reports. You know that there are scores if not hundreds of lobbyists. And where do they come from? They come from the committees that they're lobbying. People used to work on the committee, whether they were members, Congressmen or Senators, or staffers. And they spent a lot of time — because, ultimately, Bill, this is about knowledge. This is about information. This stuff is really complicated and convoluted. And, you know, you try reading any of one of these bills and figuring out what's actually being said. It's mystifying. And so, these guys who know the rules, they know the language, and they have the access, and they're giving contributions to the people writing the rules, have all the advantages.

BILL MOYERS: But Barney Frank would disagree with both of you. I don't know that he's read your piece yet, but I'm sure he will.

DAVID CORN: Yeah, I'm sure he would.

BILL MOYERS: Barney Frank, Chairman of the House Committee on Financial Services, and a liberal Democrat, said the other day, look, it's not — I'm not affected by campaign contributions. The members of my committee are not affected by campaign contributions. The problem is democracy. He says everybody sitting on this committee represents somebody back home, a local bank, a car dealer, an insurance company. And they come to the committee and they press, as you do in a democracy, for their interests as you just said.

DAVID CORN: But wait a second. I mean when you look at something like derivatives — derivatives, which were used to enable the subprime lending mess that led to the near collapse of the U.S. and global economy- I'm not sure there are bankers back home who are lobbying, you know, the committee. There aren't local derivative dealers that you meat in Main Street, when you go back to town hall meetings. It's a very small group of people who understand this. And we have seen-- the "Wall Street Journal" is reporting this week that there's no real action on regulating derivatives.

BILL MOYERS: I brought that story, because I wanted to read it. Quote, "Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place. Derivatives take blame for some of the worst debacles of the financial crisis. But a year after regulators and critics began calling for an overhaul in the way they're traded, some efforts have been shelved, and others have been watered down." What does it say when "Mother Jones" and the "Wall Street Journal" reach the same conclusion? That our government cannot stand up to the lobby even on an issue like derivatives, which were at the root of much of our problem over the last few years?

KEVIN DRUM: Well, it doesn't say anything good. And derivatives are a good example of how this stuff works. I mean, take a look at what happened. Derivatives were at the center of the financial meltdown in 2008. And at first everybody was all ready to regulate derivatives. And the big idea was to put them on an exchange, like a stock exchange, where they're all traded publicly and transparently. What happened was there were corporations — you know, if you're an airline, and you're worried about the price of jet fuel, you might want to buy a hedge. Hedge the price of jet fuel. And so, the airlines and some other companies went to Congress and said, look, those are derivatives, but they shouldn't be traded on the exchange, because that's not the financial stuff that blew up the world. No problem. Everybody pretty much agreed they ought to be exempted from that. But then it's all in how you write the rules. So, the rules got written. And as they slowly got changed, it turns out you've got to define who is an end user. Who is a corporation, as opposed to a bank? And the rules got written and they got written a little more broadly and a little more broadly until eventually if you read the rules right, it looked as though pretty much anybody was an end user. Goldman Sachs would end up being an end user. And 80 percent of the derivatives would have been exempt.

BILL MOYERS: And what does that say to us?

KEVIN DRUM: It says that the banks are in charge. And they're in charge, they get people, you know, right now, banks are in, you know, nobody wants to be around Goldman Sachs, right? So, what they do is what you were talking about. They get the car dealers and they get the local banks and the credit unions and so forth to basically front for them. And these corporations go in and they say, "We want an end user exception." And they get it. And then all it takes is a few congressional aides here and there to change the wording a little bit--

DAVID CORN: Now, the interesting thing is at this point having a conversation like this, we've already lost. Because now we're arguing about how the technical side of things are handled. And we- what the Wall Street collapse didn't really lead in Washington or anyplace else was sort of a reevaluation of what finance is supposed to be about. And what government's role might be in advancing a financial system that benefits citizens at large. Wall Street has become a place- and the banking industry, where you don't lend money to improve local businesses and industry. You basically, you know, create new- they call them instruments, devices- to make money yourself. It's really turned into nothing except a casino, in which they lend money and then they make bets and side bets and bets on the side bets about what's going to go up and down. So, a lot of the action is really, at the end of the day, not about providing credit and keeping capital flowing. It's about what- how they think they can make more money through more trades.

BILL MOYERS: Yeah, I was struck by the — by that paragraph in your story, where it said the financial industry has persuaded us, convinced us over the last 30 years that the purpose of the financial industry is not to serve companies needing capital or consumers needing credit, but to make money for themselves. And you go on to say that in a very fundamental way, this financial lobby has changed America. What do you mean by that? That goes deeper than campaign contributions and money and even influence in Washington. You say they've changed our framework.

KEVIN DRUM: Yeah, yeah. It goes a lot deeper. It's what Simon Johnson the chief- former chief economist for the I.M.F., it's what he calls Intellectual Capture. And-

BILL MOYERS: Intellectual Capture.

KEVIN DRUM: Right. It goes beyond regulatory capture, where, say the banks control the S.E.C. That's one thing. Intellectual Capture means that essentially the financial industry has convinced us, you know, in the '50s what was good for General Motors was good for America. Now it's what's good for Wall Street is good for America. And they've somehow convinced us that we shouldn't ask about what's right or what works or what's good for America. We should ask what's productive, what's efficient, what helps grow the economy.

DAVID CORN: This is the Stockholm Syndrome. Where you're hostage starts identifying with the people holding them captive. Americans have been, you know, have been talk- said- told over and over again that if the Dow's going up, if Wall Street's making money, it's good for you.

BILL MOYERS: Often when workers are being laid off. That's-

DAVID CORN: Yeah, but other measurements of the economy aren't taken to- aren't held in such high esteem. And so, when I was talking to members of Congress and pollsters about why there was not more popular, you know, revulsion against Wall Street that was leading to action in Washington, Congressman Brad Sherman — he's a Democrat from California. He led during the whole TARP argument- what he called the skeptics caucus. They were kind of opposed, but they were just raising questions. And he says the problem is that people are told that if you don't serve Wall Street, Americans will be out on the streets fighting for rat meat. That basically the whole-

BILL MOYERS: Rat meat?

DAVID CORN: Rat meat. Those- that's his- those are his words, not mine. I never- think I never would come up with that. With that image. But that- basically, we'd all be out fighting for grub on our own. And that so- what happens is people are — while they're angry at Wall Street, particularly on the, you know, on the corporate compensation front, which is very easy to get angry about. They also are fearful of taking Wall Street on, because they've been taught that if, you know, if the DOW falls, if you take on the big banks, it's going to be bad for all of us. So, it really is this Stockholm Syndrome, where we're forced to identify with people who are holding us hostage without our interest in mind.

BILL MOYERS: So, your conclusion from all of this is, and I'm quoting you, "Б─╕the simplest, most striking proposals for reigning in bank behavior aren't even getting a serious hearing."

KEVIN DRUM: Back in March of last year Congress was considering a bill to deal with bankruptcy and home foreclosures. And the Obama Administration thought this goal was a shoe in. They really didn't think they were going to have any problem passing it. And it failed. And--

BILL MOYERS: Fail? You mean it was beaten?

KEVIN DRUM: It was beaten by the banks. They got the bill rewritten. And in fact, not only did they get the bill rewritten the way they liked it. They actually got several billion dollars of extra bailout money put in at the same time.

BILL MOYERS: This was the cram- so called cram down proposal that was designed to help homeowners who were in trouble get through the hard times?

KEVIN DRUM: That's right. And I think what happened was the Obama Administration saw what happened with a bill that they thought would pass easily, and they realized what they were up against. And so, even their original proposals, I think they were watered down even before they went to Congress. And then once they're in Congress, they get watered down some more. And once it gets to the Senate, it's going to get watered down even more.

BILL MOYERS: So, if we get financial reform at all, it will be financial reform riddled with loopholes to benefit the very people who got us in this mess in the first place?

KEVIN DRUM: It's going to be financial reform on the margins. You know, complexity is the friend of the financial industry. If you really want to control them, you need simple rules. So, for example, Paul Volcker, former Fed Chairman. He thinks that we ought to simply prevent banks from being in the securities business. They should make loans. They should underwrite bonds. They should give advice on mergers and acquisitions. The sort of things they've done for years. But they shouldn't be trading securities. We should leave that to hedge funds. We should leave that to other people for--

BILL MOYERS: Take the- let them take the big risks. Don't take the big risks with the money you and I deposit.

KEVIN DRUM: Don't take risks inside the banking system, where you can blow up the world.

DAVID CORN: Where you're also federally insured.

KEVIN DRUM: Right.

DAVID CORN: Right? With our money.

BILL MOYERS: It's government-backed money that they're taking the risk with, right? And so, they tried to eliminate that.

KEVIN DRUM: And that- but that was never on the table. That sort of simple regulation was never on the table.

BILL MOYERS: Why?

DAVID CORN: That's what I mean. They're — for all the talk of what goes on in Washington. And, you know, there's reams of newspaper stories. There are hearings every other week. I mean, there's a lot of activity on this front. But it's on the edges, and it's not about any paradigm shifts. It's about just trying to keep things going as they are. You know, so the airplane, you know, has a few holes in the wings. Let's patch it up and keep flying the same way. And this is where, you know, I think Kevin's right. You need someone to step in whether it's the President or some other voice and say, "Wait a second. There's something cockamamie about the entire system. There's something rotten at its core. We want to look at it deep down."

BILL MOYERS: But don't you think people sense that? That there's something rotten at the core?

DAVID CORN: Yes! But I think they don't know where to turn to. I think a lot of people would follow the President if he did this. He made an early decision in his presidency. And it happened even before he was elected. It was, you know, September 2008, when the market tanked that day and John McCain was flailing and not knowing whether he was going to listen to Newt Gingrich or somebody else. And Obama came out with press conferences, surrounded by Robert Rubin, Larry Summers, and all the guys who had a hand in what went wrong. And saying, hey, I'm with the adults. What he was saying, really, was, I'm with the conventional thinkers.

KEVIN DRUM: There's also tremendous pressure on presidents. I mean, when Bill Clinton came into office, there were things he wanted to do. And he learned very quickly that he had to do what the bond market wanted him to do. And he famously said what? "I have to do what the bond market says?"

BILL MOYERS: What does that mean? To do what the bond market wants?

KEVIN DRUM: It basically means doing what Wall Street wants. It means that if you run a big deficit, if you raise taxes, the interest rates will go up. The economy will tank. And that's what he was told. And eventually he caved in.

BILL MOYERS: In the magazine you have a story about how there was a hearing before Barney Frank's House Financial Services Committee. This was on the derivatives reform. Called seven witnesses for the banking industry and only one critic of the banking industry. And he'd only gone six and a half minutes before the Chairman cut him off. Now, what does that tell you?

KEVIN DRUM: It tells you that the banking industry has convinced us that only the banking industry has the expertise to deal with these very, very complex issues. And we bought it. We all believe that. These guys are the experts. And it is very complicated. This stuff is very, very complex. And that is exactly the reason why you need simple rules to rein it in. Because the more complexity you have, the more loopholes there are. The more you can take advantage. The banks-

BILL MOYERS: But you said a moment ago that you have to save the bad guy to serve the good guy. The airline industry needed the quote derivatives in order to get that, they had to go and give the banking the very- almost the same power they had prior to the meltdown.

DAVID CORN: Well, they don't have to

KEVIN DRUM: They didn't have to, but they did.

DAVID CORN: Yes.

KEVIN DRUM: It probably was-

BILL MOYERS: And they did because?

KEVIN DRUM: It probably was a good idea to try to exempt ordinary corporations who were just trying to hedge uncertainty. But then they took that and expanded it. They didn't have to do that. They did that because the banks were in there lobbying. And it looked like they could get away with it. I mean, the wording was very, very tricky. I mean, you would never notice it unless you were a real expert and looked at the legislative language and realized that a word here and a word there and a word here changed the whole thing.

DAVID CORN: It's like money in politics, which we're talking about a little bit, too. You try to set up these convoluted rules to deal with campaign cash and deal with constitutional issues and it's almost, you know, it's- I won't say it's impossible — but it's tremendously difficult to do it in a way so that you don't leave openings for others to take advantage of, particularly when they have access to the people writing the laws. I mean- Mark Mellman, a Democratic pollster told me, listen, if 99 percent of Americans can't understand derivatives, you can't regulate derivatives in our Democratic process. And I think there's a lot of truth to that. I mean, people have to understand it. If only the people who benefit from them understand what's going on, they have the leg up. And there's no way for average citizens to even enter the process.

BILL MOYERS: Well, yeah, the one guy who goes into the House Financial Services Committee and raises questions about derivatives, he's given six minutes and shown the door, right?

DAVID CORN: Right.

BILL MOYERS: What does this say to you from your many years in watching Washington? Barney Frank's committee, The House Committee on Financial Services received more than $8 million from the industry last year, 2009. Might that explain why seven witnesses for the industry got a hearing?

DAVID CORN: Well, the House Banking Committee is called a money committee. And Congress on the House and Senate side, there are couple committees that they refer to as money committees. Not because they necessarily deal with money. It's because if you serve on that committee, you have access to a lot of money. Campaign cash. Because you deal with industries that are wealthy. As Kevin said, the banks have all the money, literally. And they will give money to people on the committee, if not to vote their way, at least to hear them out. So, their witnesses get perhaps more attention at some of these hearings. And also what the Democrats do, and it's common practice, is you take vulnerable freshman and you put them on the House Banking Committee so they can raise a ton of cash and maybe scare away Republican opponents.

KEVIN DRUM: This is why Barney Frank can tell you he's not affected by campaign contributions. Well, maybe he's not. His seat is safe. But, you know, there's a lot of people on his committee, the freshmen, the second term congressman, who are affected by money, because they do need to get reelected.

BILL MOYERS: Did you see the posting on TalkingPointsMemo.com this week? While Congress was trying to write these new rules to clamp down on the risky derivative trading that we were talking about, several of these New Democrats were in New York meeting privately with executives from Goldman Sachs and J.P. Morgan. And they also managed, while they were here, to sandwich in a fundraiser. I mean, does this raise your eyebrow just a tiny bit?

DAVID CORN: Well it does, and I mean, this stuff happens all the time. It's not new. And, of course, you know, we're talking about the Democrats, because they control Congress. Now, look, Republicans do it when they don't control it. And when they had control, they had lobbyists actually in writing legislation, as well, on financial and other industry matters.

Why do these people feel they can do this without any risk to them? Well, that's because I don't think their voters or voters in general are saying, "Wait a second. This really ticks me off. Why are you meeting with Goldman Sachs and J.P. Morgan? These guys who nearly, you know, brought down our economy. Why talk to them at all outside of a hearing room? You know, outside of grilling? You know, let alone, why take cash?" I mean, our whole system where the guys in charge of regulating or writing the laws would take cash from the people who want favors, you know, it's kind of, you know, bizarre to begin with.

BILL MOYERS: It's a little bit like going to the umpire behind the plate before a game, isn't it? And saying, you know, "Here's $1,000 bucks for whatever purpose. I'll lend it to you."

DAVID CORN: Exactly. So, but there's not the popular revulsion against this S.O.P., the standard operating procedure that happens all the time. And even after what we've seen with Wall Street and even after people who are indeed mad at least in a general way with big banks, these guys still feel they can, you know, fly up or train up to New York City and hang out with them. Take their money. And then go back to Washington and do the people's work?

BILL MOYERS: Look at this. This is a list of all the contributions over the last 20 years to Members of finance-related Congressional Committees. Let's just take the first eight. Out of the first eight, six of them are Democrats. And those six Democrats have received from the financial industry some $68 million. What does it mean to take that much money? And it's Democrats at the top of this.

KEVIN DRUM: It's Democrats and Republicans. But, yes. Look, there's no way you can take that money. I mean, if you talk to Chuck Schumer, you talk to Barney Frank, you talk to these guys. They'll tell you that they take the money, but then they're going to do the right thing anyway. Well, that's just not possible. You know, Chuck Schumer to take an example, he raised so much money up through I think 2004-2005. He actually stopped taking personal contributions.

He had so much money, he stopped taking contributions and headed up the Democratic fundraising Senate Committee. The overall Senate Fundraising Committee. Raised a couple hundred million dollars, a lot of it from the financial industry. And that went to all Democrats. Not just Schumer. It went to all Democrats who were running for the Senate. Well, there's no way you can take that money and not at least be leaning in their direction, one way or another.

BILL MOYERS: Well, let's one example that you report in your story in "Mother Jones." This is the carried interest rule. The one that declares that compensation from capital gains will be treated as ordinary income. So that the tax rate for hedge fund managers will be 15 percent instead of 35 percent.

They're paying a lower tax rate than secretaries, janitors, nurses, school teachers, members of our team here. What happened when reformers tried to eliminate that loophole?

KEVIN DRUM: If you're running a hedge fund, you are using other people's money and investing it. Now, by any ordinary definition, that's just ordinary income. If I make ten percent or 20 percent, I'm paid basically a commission, that's ordinary income. But the law right now says it's capital gains.

There no excuse for that. There's no excuse for it to be taxed at the lower capital gains rate. It should be taxed at the higher rate. In 2007, after Democrats took over Congress, there was a movement to change that. To tax it as ordinary income, which is how it should be taxed.

And what happened was that the hedge funds who had not really had a big lobbying presence on the Hill before. Because they weren't regulated, so they didn't really need to. They suddenly got religion. And the private equity contributions to Members of Congress suddenly skyrocketed. And eventually Chuck Schumer decided that he would only support a change to the law if it also affected some other industries. And that was just enough to get opposition from other quarters and the bill failed.

DAVID CORN: He basically found a poison pill way to kill it. And Chuck Schumer could say, "Hey, you know, this is a New York issue. Hedge funds are based in New York."

BILL MOYERS: My constituents.

DAVID CORN: "For my constituents." But you know, but really. I mean, you look at all his constituents out in Staten Island and Brooklyn and upstate New York. And you say, "Does this really serve them? So that the guys who play with money, the hedge fund managers, you know, personally, are taxed at 15 percent rather than 35 percent. Is that really a good deal for everybody writ large? The answer, of course, is no.

BILL MOYERS: You know, I've been around a lot longer than the two of you. And I'm still amazed, though, at how brazen this is. I mean, capital gains are, as you said, the profits you make on investing your own money. But these guys, as you also said, were investing other people's money and getting a piece of the action. Under what Webster definition can you call that ordinary income?

KEVIN DRUM: You can't. That is what makes this so brazen. They're not just lobbying for things, "Well, you could argue one way or the other. Maybe one side is right." This is something where there's simply no excuse. And yet, they get away with it anyway.

BILL MOYERS: How do they get away with it? Because, the tea party was about taxes, right? The — one of the causes of the American Revolution was unfair taxation. And yet--

DAVID CORN: We've been talking a lot about politicians and money. There's something they care about more than money, ultimately. And that is votes. That is their job, you know, protection. People in Congress generally want to win their next reelection.

BILL MOYERS: Well, 96 percent of the incumbents usually do.

DAVID CORN: And they usually do. So, they would care to a certain degree about popular anger if it was pointed enough and directed at them sharply enough. But, you know, people don't raise a fuss about this, if there's an angry editorial in the "New York Times" or we rail about it at "Mother Jones" or you do a commentary. You know, they can survive that.

Believe you me, they may not like it. Maybe next time, you know, you run into Chuck Schumer somewhere. He'll point his finger at you. But they can survive that. What they can't survive is people realizing, "Hey, you're not looking out for me. You're looking out for those rich other guys. Because they're giving you money."

And until people get, you know, demonstrate in big enough numbers, that this is a direct concern to them. And every once in awhile, you know, there's an eruption. There's a bubble of activity along those lines. They don't have to worry about it. They live in their own Washington bubble. And they see, you know, they have decades of empirical evidence to base their actions on. They can say, "Yeah, I can get away with this. I can get away with that. I can get away with this. Guess what? I can get away with most anything I try."

BILL MOYERS: Your article confirms for me, reinforces for me what David is talking about. That there are two parallel universes in America today. And that Washington is, as you said a moment ago, a bubble in which they know, the people who write the rules, the beltway press, the people in power, know that they can get away with this, because there's no significant way that the popular angst can penetrate that bubble.

DAVID CORN: Well, I wouldn't say--

BILL MOYERS: We live in two different worlds.

KEVIN DRUM: One thing we haven't talked about yet. And one place where I think you lay some of the-- we should lay some of the blame is the media. And the financial media. I mean, you talk about the carried interest rule that we were just talking about. That's complex. It's sort of down in the weeds. And it gets no attention. People don't see it enough to get angry about it. You can't get angry about something unless you're told about it.

And if you go out and talk to people, there isn't one person in 100, who even knows the carried interest rule was ever up before Congress. Let alone what it means, why it's outrageous, and why they should care about it. And they can't care about it until they know about it.

BILL MOYERS: Where is the countervailing power in Washington? If the press is falling down. If the executive branch is compromised, as you said earlier, by Obama's approach to conventional wisdom. If the bankers are in charge of Congress, and you described there. You also make the very strong case in your article that the Fed is involved in this, as well. The bankers really know how to work the Fed. Where is the countervailing power?

DAVID CORN: There isn't any countervailing power.

BILL MOYERS: You mean I have cancer and there's nothing I can do about it? I'm serious.

DAVID CORN: Well, there could be.

BILL MOYERS: This discourages a lot of people when you give this depressing analysis.

DAVID CORN: I understand that. And I wish I could be more hopeful. And we had a President who ran on a hope platform. You have just described all the major actors in Washington. And, you know, they are, to some degree, responsive to what happens outside of Washington. But if there's no pressure coming into Washington on this stuff, particularly given, as we've talked about, its tremendously profound complication. Then things just sort of, the status quo wins out.

BILL MOYERS: I mean, in Washington, if you are a critic, if you're a journalist in Washington, who reports the kind of-- on Washington the way you do, you get marginalized right?

KEVIN DRUM: Yes. Yes. I think you do. You're not part of Wall Street. You don't really understand what's going on. That's how they feel about it. I think that the Obama Administration — all the people in there — I think they have become convinced, like a lot of people, that if they don't do what Wall Street says, terrible things are going to happen. I mean, if they try to reign in Wall Street, all of our financial business will move to the Bahamas. And we'll lose trillions of dollars. And they believe that. And that's what the banks are--

BILL MOYERS: But as you say so astutely in this article, that happened for 20 years. Washington-- 30 years. Washington did what Wall Street wanted. And we had a debacle anyway.

KEVIN DRUM: Right.

BILL MOYERS: Have we learned nothing?

KEVIN DRUM: The Stockholm Syndrome, as David puts it, is so strong that they still believe it. And, you know, one of the things that happened here is that the bailout last year succeeded in a way, too well. I mean, it worked. TARP worked. All the actions that Ben Bernanke--

BILL MOYERS: Kept us from going over.

KEVIN DRUM: Took us-- yeah, kept us from getting into a second Great Depression. And so, now, what we've got is to a lot of people, just a big recession. There's a lot of unemployment. But it seems familiar. It's a recession. The crisis is over. And now we can go back to business as usual. Because maybe it wasn't as bad as we thought. Memories, memories fade. But, you know, the same thing is going to happen again if we don't reign in the banks.

BILL MOYERS: Yeah, you make that point is that they've actually set up a situation in which we can repeat what happened 18 months ago, right?

KEVIN DRUM: You know, the key thing, I mean, the key thing that drove the housing bubble of the last decade was debt. Was leverage. Banks weren't just making investments, they were borrowing huge sums of money to make investments. That's what makes a bubble bad. Is huge amounts of leverage. Huge amounts of debt.

DAVID CORN: And betting on those--

KEVIN DRUM: Right. Betting with borrowed money. That's the key. You know, the dotcom bubble, when it burst, it was not that bad. There was a recession that followed, but no banks failed. The financial system didn't meltdown. The reason is because it was a bubble, but it wasn't debt-fueled. The housing bubble was debt-fueled. The--

DAVID CORN: 'Cause when we've had housing bubbles in the past that have failed, without, you know, the daisy chain effect.

KEVIN DRUM: We had one in Southern California, where I live. Back in the late '80s and early '90s. And it was bad for Southern California, because again, it was debt-fueled. Now, the regulations that are being pushed through Congress right now, they do almost nothing about that. I mean, they talk about derivatives. They have a consumer finance protection agency. Those are good things.

But the key thing they ought to be getting at is debt. They need to restrict the amount of debt, the amount of leverage that the financial system can use. You don't get rid of it. Credit is the oxygen of the financial system. But you've got to limit it. And they've done almost nothing about that.

BILL MOYERS: And this is-- why?

KEVIN DRUM: Because debt and leverage are the keys to making money. The one thing that Wall Street needs to make money is lots of leverage. They have to have that to make money. So, that's the one thing they will fight for harder than almost anything. And they fought for it so hard that, in fact, the regulations hardly do anything at all.

BILL MOYERS: Well, as you say in the piece, the overdraft fees that they can now charge can equal something like 10,000 percent? I mean, the mafia would like that, right?

KEVIN DRUM: That's right. It's, you know, it's a small part of the picture, but it shows how much power they've got. What happened was overdraft fees on your debit card. The average overdraft is $17. And it's not hundreds or thousands of dollars. The average overdraft is $17. And it gets paid off in five days. And the average overdraft charge is $39. Now, do the math on that, and that's a 10,000 percent rate of interest.

And the only reason banks can do that is because in 2004, the Fed, after being lobbied by the credit card industry, being lobbied by the banks, ruled that even though overdraft protection was marketed as a loan, was marketed as a line of credit, consumers all thought of it that way. It wasn't, in fact, a loan. And so, since it's not a loan, they can charge any interest rate they want.

DAVID CORN: Well, you know, one of the small debates in Washington has been what type of consumer financial protection agency there should be that would look at things like this.

Elizabeth Warren, it was her idea, initially, to even have such an agency, which she proposed a couple years ago. And she wants it, you know, have the power to regulate, you know, banks and credit card companies and others that provide financial services and financial products. And she wants there to be some very simple rules.

For instance, like you have to-- every credit card company would have to provide what they call vanilla products. Whereby, "Here's your credit card. You have, I don't know, 12 percent interest. It doesn't change. No other fees. Until we let you know in a letter with bold print that it's going to change. And we give you the right to keep the card or not keep the card." Something very simple.

And the agency would also have the right to, you know, write these rules and then regulate the companies. So, it goes into, you know, the Washington hopper. And now, you know, it starts getting watered down. They take out the vanilla product stuff. So, the things that would make things easy for consumers to avoid getting caught in scams like the one that Kevin just described, you know, is removed from the bill.

And they say, "Well, you know, maybe we'll have this little agency write its little rules. But we'll let the banking regulators enforce them." The groups that, to date, have really been held hostage by the people they're supposed to regulate. We have a lot of debate in Washington over this. You know, compared to the big picture that Kevin and others have described, this is really a minor reform. But even this minor reform gets sliced and diced until yeah, something might pass.

KEVIN DRUM: People are more afraid of big government than they are of big banks, despite what happened over the last couple of years. And they shouldn't be. They should be-- what they should be is demanding a better government. A government that regulates without being captured by all the special interests. A government that puts in place regulations that are simple and clear. So, David, what you're saying. The vanilla products option, for example, in the CFPA was a nice-- the reason the banks hated it was because it was so simple.

A nice simple regulation. There's no way to get around it. If the rule says you have to offer as an option, this is not the only thing. You have to offer if you're going to do a home loan one option has to be a standard, 30-year, fixed rate mortgage. And you can have all your other options, but you've got to at least tell people they can have that. That's a very simple regulation. There's no way to get around it. And that's why banks hate it.

DAVID CORN: Bill, you keep coming back to the same question. How can they get away with it? I mean, that's really what it all boils down to.

BILL MOYERS: And it's a serious question for this reason. You know, we don't always have popular representation in the government. But from time to time, Civil Rights movement, Suffragette movement, the Gilded Age, the first time-- people do get heard. And men and women in power begin to speak for them. The worry is have we become so big and things become so complex. Have people been so politically abused as a psychologist recently said, that the will to fight for democracy, the political will has been dissipated?

DAVID CORN: Well, I think there may be something to that. It's also-- you know, it takes time and energy to do that. You know, people who are stressed out over, you know, losing jobs or maintaining their jobs, you know, may not, you know, sometimes that leads people to fight. Sometimes it leads people to resignation. Sometimes it leads people just to focus on getting by.

Think about what's happened to our economy. For the aughts, the last decade, there was no net job growth, at all, from 2000 to 2009. For every other decade prior to that, whether it was Republican or Democratic President in charge, the growth was between 20 percent and 38 percent in jobs. So, we've gone from-- that's pretty healthy. Even though at times there have been recessions and wages may not have gone up as much as the number of jobs created. But in the aughts, nothing. This represents, I think, a fundamental turning point for our economy. And that has people--

BILL MOYERS: For our country.

DAVID CORN: Our country. Wigged out. They don't know the future. They don't know who to turn to. They saw what happened with the economic collapse last year. And, you know, it's hard to know, you know, if you can be angry, who to march on. Or whether you're going to hunker down, and try to just get by on your own. They look at rising powers, economic powers overseas. And how we're going to compete with them. It may be a form of abuse, but they certainly look to the Washington system. And this gets to the point that, you know, that Kevin raised. You know, in poll after poll for decades now, if you asked people who are you more scared of in terms of America's future, is it big government or big corporations? Big government always wins by a landslide.

KEVIN DRUM: And remember one thing is that over the last 20-30 years, people have been told over and over and over again that the economy is doing well. The economy's doing great. The Dow is up. And yet, they themselves, most of them, aren't actually making more money. Median wages have hardly gone up at all in the last 30 years. So, you've got all these people who aren't really making any more money. They're treading water. And yet, everywhere they turn, they're being told the economy's doing well. And they start, I think, a lot of people start to blame themselves. They wonder, "If the economy's doing so well, how come I'm not doing better? It must be me." And what they don't see is, no, it's not them. It's the way the system works.

BILL MOYERS: The Republican Congressman from Wisconsin, Paul Ryan, wrote an essay in the December issue of "Forbes" magazine, the title of which was "Down with Big Business." What do you make of that?

DAVID CORN: Well, the Democrats have to worry. Because there is an opening here for the Republicans. If the Republicans looked at what the, you know, see any anger out there about the economy. And they, you know, start attacking the Democrats and say one reason that this is going on is because of Democrat ties to business and show that chart. And yes, we've had our own problems as well. You know, it could be sort of you know a major shift. I don't think they're going to do that. I don't think they're smart enough to do that, quite frankly. Or have the courage to do that. But that is one opening to have a major strategic change in the face of American politics.

KEVIN DRUM: You know, one thing that certainly the Democrats need, I think the country needs is, you know, President Obama really needs to take the lead on this. And he hasn't. He has been in favor of financial reform, but he hasn't really spoken out about it. He hasn't really pushed the banks. He has made a strategic decision that he needs to cooperate with the banks. Cooperate with Wall Street so as not to cause more panic.

And, you know, it this is not this is not something like health care or climate change, where you can see a lot of moving parts that go together. And you can sort of understand why there's a lot of compromise in those things. With financial reform, he could go out there and start pushing on bits and pieces of it. And even if he loses, even if he loses, it doesn't wreck all the rest of it. He doesn't wreck the chances of financial reform in general if he pushes on one pieces and loses.

DAVID CORN: But better yet, that would mobilize people. I mean, sometimes in politics-- I mean, you know this. Sometimes a clear loss is actually a win politically. Because you draw the lines. You show people who's on what side. And you show them what you're fighting for.

BILL MOYERS: Someone said to me the other day, "Obama has not had his Reagan moment. His defining moment." Remember in the early '80s, when Reagan came to the White House. The one of the first things he did was to fire the air control workers. And it was the moment that for conservatives and a lot of independents, who wanted a tough President to stand up to something, I'm not saying Obama should fire anybody. But he hasn't defined himself by his stand.

KEVIN DRUM: Obama wasn't even willing to fire Ben Bernanke. The head of the--

DAVID CORN: Who's now "Time" man of the year.

KEVIN DRUM: The head of the Federal Reserve. And, you know, Ben Bernanke did, I think, a good job after the crisis hit. He didn't recognize the crisis before it hit. After the crisis hit, he did a good job. But that doesn't mean-- you don't deserve to get reappointed to the Federal Reserve. He did a good job managing the crisis. What we need now, though, is somebody who is going to manage the aftermath of the crisis. Somebody who is genuinely dedicated to re-regulating the financial sector.

BILL MOYERS: Let me show you something that Ben Bernanke said to the annual meeting of economists earlier this week, last Sunday, I think it was.

BEN BERNANKE: The best response to the housing bubble would have been regulatory, not monetary. Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach for constraining the housing bubble than a general increase in interest rates.

DAVID CORN: Whoops.

Selected Comments

(The Big Picture)

digistar:

The predicament that Bill and his guests describe, and that most of us are having to endure, is very frustrating and demoralizing.

While Bush was still in office, I thought that the only way we would ever get rid of him and his Republican enablers would be for him to screw up big time. Really let the country go to pieces. Really let rich people and corporations run wild.

He, and they, did all that. Obama and the Democrats were handed the the opening they needed.

I voted for Obama, taking him at his word that he was going to bring change and hope. As President, he is the only individual who could bring this mess into focus for the voters and champion real reform. No other single individual can do it.

Unfortunately, it turns out that Obama is just another politician.

And the Democrats are no better than the Republicans. OK, they are preferable to Republicans, at the margins, but there is no fundamental difference. They are all politicians.

So, we are well and truly screwed.

Now, I’m back to thinking that only a much bigger screw up will make an opening for change. And next time, it won’t be any of the current crop of politicians that benefit. Next time could be very nasty as we will see a bigger financial crisis and much more economic hardship for the population.

The person that leads us out of that coming disaster will have grass roots backing. That person could be a savior or a tyrant.

Maybe I’m wrong and we will just become a pure banana republic. All the little people will live in cardboard boxes while the politicians, lobbyists, super rich and corporate officers live in gated communities with armed guards.

At least, with the help of Bill Moyers and people like him, we have been allowed to see how America really works. Its not what we were taught in school. Rather, its like Paul Simon sings in Kodachrome:

“When I think back
On all the crap I learned in high school
It’s a wonder
I can think at all
And though my lack of education
Hasn’t hurt me none
I can read the writing on the wall”

number2son:

And here I am, one of the sheep, opening up the most recent statement for my son’s college tuition. I see that, yet again, this well-known private university has increased his fees so that now, 2 and one-half years into this thing, we are now paying about 30% more than when he started. And of course, in that same time frame his scholarship has gone up by 0%, I have had a single salary increase of less than 2% and my wife’s pay has had her public school teacher salary reduced.

So, yes, to answer David Corn, those of us not connected to Washington, are preoccupied with the struggle if day-to-day problems. And in the meantime, those we have elected continue to betray the public trust.

I will write my senators and congresswoman yet again and refer them specifically to the Moyer interview and the Mother Jones article. I will also tell them that I will not vote for them again unless they take direct action to correct the problem.

No doubt this sort of thing makes characters like Mark E. Hoffer chortle and snort. But who cares what the swine believe or what stake they have in this impossibly corrupt system that makes them so. As Corn says, people need to start acting in ever larger numbers to effect change.

[Jan 6, 2010] TrimTabs on that ‘US government-rigged stock market’ by Tracy Alloway

The first HFT-induced rally ?
FT Alphaville loves a good conspiracy theory, so here’s one to kick off Wednesday morning.

It’s the TrimTabs report referenced in this morning’s 6am Cut, questioning whether the US government is secretly propping up stock markets. FT Alphaville loves a good conspiracy theory, so here’s one to kick off Wednesday morning.

It’s the TrimTabs report referenced in this morning’s 6am Cut, questioning whether the US government is secretly propping up stock markets.

And here it is, in full, with our emphasis:

TrimTabs Investment Research Asks Whether Federal Reserve and U.S. Government Rigged Stock Market, Pushing Market Cap up $6+Trillion since Mid-March

Only Logical Conclusion as to Why Market Soared, While Economy Faltered and Traditional Sources of Capital Remained Neutral

Sausalito, Ca, Jan. 5 – TrimTabs Investment Research CEO Charles Biderman in a special report said today that it wasn’t traditional sources of capital that pushed the U.S. markets up more than $6 trillion since March, and wondered whether it was the Federal Reserve and the U.S. government pulling the levers behind the sharp rise.

“We have no way of proving this,” said Biderman, “but what we do know is that it was neither the economy nor traditional sources of capital that created the boom in equities.”

Biderman warned that if government has been behind the sharp stock rise, it could trigger a major equities meltdown when the government stops buying and even worse, starts selling.

The special report follows below:

The most positive economic development in 2009 was the stock market rally. Since the middle of March, the market cap of all U.S. stocks has soared more than $6 trillion. The wealth effect of rising stock prices soothed the nerves and boosted the net worth of the half of Americans who own stock.

We cannot identify the source of the new money that pushed stock prices up so far so fast. Historically, the market cap has risen about 10 times the amount of net new cash invested in equities. For the most part, the roughly $600 billion of net new cash since March needed to boost the market cap $6 trillion did not come from the traditional players that provided money in the past:

If the money to boost stock prices did not come from the traditional players, it must have come from somewhere else. We know that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?

Related links:
This bank-engineered equity rally – FT Alphaville
Whitney: “I call this the great government momentum trade” – FT Alphaville
The (QE)uropean equity rally and yields – FT Alphaville

As far as we know, it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P 500 futures. Moreover, several officials have suggested the government and major banks could support stock prices. For example, former Fed board member Robert Heller opined in the Wall Street Journal in 1989, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.” In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equities directly, not just futures. The official mentioned that the Fed could “theoretically buy anything to pump money into the system.” In an article in the Daily Telegraph in 2006, former Clinton administration official George Stephanopoulos mentioned the existence of “an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem.”

Think back to mid-March 2009. Nothing positive was happening, and investor sentiment was horrible. The Fed, the Treasury, and Wall Street were all trying to figure out how to prevent the financial system from collapsing. What if Ben Bernanke, Tim Geithner, and the head of one or more Wall Street firms decided that creating a stock market rally was the only way to rescue the economy? After all, after-tax income was down more than 10% y-o-y in Q1 2009, and the trillions the government committed or spent to prop up various entities was not working.

One way to manipulate the stock market would be for the Fed or the Treasury to buy a nominal $60 to $70 billion of S&P 500 stock futures each month for as long as necessary. Depending on margin levels, as little as $5 billion to $15 billion per month was all that was necessary to lift the S&P 500 by 67%. Even $15 billion per month would have been peanuts compared to what was being doled out elsewhere.

Since the stock market was extremely oversold in early March, not only would a new $60 to $70 billion per month of buying power have stopped stock prices from plunging, but it would have encouraged huge amounts of sideline cash to flow into equities to absorb the $295 billion in newly printed shares that have been sold since the start of April.

This type of intervention could explain some of the unusual market action in recent months, with stock prices grinding higher on low volume even as companies sold huge amounts of new shares and retail investors stayed on the sidelines. Some market watchers have charted that virtually all of the market’s upside since mid-September has come from after-hours futures activity.

Much more over at the conspiratorially-inclined Zero Hedge.

Growler

Sorry; was it a secret then?

How else did the frequent "Stick-saves" pushing the day's close $50 higher in the last five minutes happen? Did 90% of buyers that day think: "I'll wait until the last five minutes and then buy at a much higher price..." Look at the ludicrous volume figures on those days.

With HFT agents backed by nearly-free FED Queasing money - the Plunge Protection Team could push a low-volume market anywhere they wanted to.

Psychology is just one of the tools used to fight a recession.

I am the Walras

"You can not have capitalism without allowing people who made bad bets to fail."

Nice sentiment, but in the real world letting the lot fail would have been far worse. Also, again in the real world, capitalism has always been crony capitalism. What's the point of accumulating all that wealth if there's no power and influence to go with it?

pegnu

@Harry Tuttle:

exactly right. We now live in a kleptocracy with a system of crony capitalism. Our political and financial leaders have shown themselves to be crooks willing to bail out the well-connected at any cost and give the bill to the tax payer. There has obviously been a huge amount of fraud over the past 10-20 years - it is time the fraudsters went to prison.

You can not have capitalism without allowing people who made bad bets to fail.

Harry Tuttle:

The fact that people consider this plausible shows what is, in my opinion, the real cost of this crisis. The credibility of American capitalism has been lost and it will not be easily repaired. The consequences will be worse than many expect.

pegnu:

given how desperate the situation was/is and the astonishing level of support already in place and how mad/corrupt our political/financial elite have become, I wouldn't find it surprising one bit.

praxis22:

I posted this in the long room last week! Possibly even last year :) That said it was on Zero Hedge at the time, but if the president can have a "working group on markets" I don't see why they can't actually be given so work to do once in a while. It is not now, nor has it ever been a "free market" regardless of what the market zealots tell you :P

Zero:

S&P futures bids looked extremely suspicious; between Aug and November on days when ES moved over 10 points over a short time (eg in an hour or less) during Asian and European hours, there would be less than 20 bids with over 400 offers on the queue, and the ES keeps going up, not saying that is not possible, but if it happens day after day, then it's rather scary. Like Biderman said, nothing wrong with the US govt supporting the stock market, they are already doing it in the bond and currency markets, so why fight the government? Just go long, like HK in 1999, might be cheaper way than bail out Frandie.

January

[Jan 31, 2010] Guest Post Sham Transactions That Led To AIG's Downfall The Ugly Truth Was Hiding In Plain Sight

zero hedge

The Aaa ratings at TRIAXX 2006-2A remained in effect at the time AIG collapsed, and at the time the CDOs were sold at par to Maiden Lane III. Nonetheless, Goldman had demanded, and received about $1 billion in cash collateral postings prior to the date when the New York Fed took the exposure off of AIG's books. About a month after Maiden Lane III closed out its books for the year, on December 31, 2008, TRIAXX 2006-2A suffered a downgrade, to Caa.

Those eight-month-old public disclosures are very incomplete, but they reveal a lot. They indicate that these CDO deals were not, by any stretch of the imagination, conducted on an arms-length basis, and that the these transactions took forms that were designed to conceal the true economic interests of the parties. I'm always amazed by what people, especially people not from the financial world, don't know. Big banks are not like the Pentagon or the Coalition Provisional Authority. Billion dollar amounts do not just slip through the cracks. There is no way that the very top people at AIG and Deutsche Bank would not be thoroughly briefed about every aspect of a $5.4 billion credit default swap for a CDO called Max 2008-1.

The newly disclosed information, which reveals the redacted parts of AIG's May 15, 2009 filing, serves to confirm what we already realized. At AIGFP's CDO business, nothing was what it seemed.

B9K9 :

Ned, you're not asking the existential question, which is "Why aren't they prosecuting?" And the answer is ... national security - including blanket immunities and pending presidential pardons.

It's all right out there in the open. As if anyone needed additional proof, this week provided it in spades. The government in essence has said, come hell or high-water, it is absolutely committed to the FIRE economy. IOW, national security.

In their minds, little things like paying off some connected, private parties to the tune of a couple hundred $bil is small potatoes when considering what is at stake. But if you read between the lines, they are in effect admitting that other than FIRE, we don't have game.

Those $trillions in mal-investment? Sorry, they can't be re-purposed to effect net production. So we're gonna just have to make do with what we have. Labor arbitrage? Sorry, we cannot reduce wages or repeal regulations to be more competitive. So we're gonna just have to make do with what we have.

They are all in. There is no other way other than we MUST have credit-leveraged asset-inflation in which to resume driving a consumption based economy. If you don't believe we can pull it off (again), as if there were some math proofs or something laying around that dispel such a notion, then you might have some inkling as to what's in store for us.

(Curse you Goodwin.) This is our Stalingrad; Hitler (in the form of our collective representation) has made the decision to stand or die.

Anonymous:

Does "national security" mean "security of the global oligarchs who own the Federal Reserve banks"?

Ned Zeppelin:

Yes, and the phrase "systemic risk" can be used interchangeably, and in fact should be used interchangeably to confuse the sheeple as much as possible.

pros:

The GS/AIG transactions were a sham, and fraud ab initio...

a fraudulent conveyance for no consideration

The AIG entity was not capitalized sufficiently.

The government can sue to unwind the transactions and place the losses back on GS' balance sheet...

and get fraud damages as well

But the government is acting for GS, not for US taxpayer..

but the taxpayer is not obligated to support actions of government officials undertaken for the interests of private parties and against the public interest...those are obligations of the private parties...the GS employees planted in the "government" and GS.

Waterfallsparkles :

That is my question how many Counter Parties received huge sums of money from Aig prior to the AIG bailout to cover the decrease in value of the CDO investments with the Downgrades by the Rating Agencys. As you have previously stated the Contract called for Aig to pay to the Counter Party the decrease in value.

So, if these Banks got paid 100% on the Dollar, what about the Money they already received from AIG.

Did the Banks get 150% or more on the dollar with the AIG Bailout?

I also wonder about the Rating Agencys. They appear to be bought and paid for by thoes creating the CDO's. Were they also bought and paid for to Downgrade the CDO's to give the Banks huge payouts? I think so.

Then you have the FED paying them 100% on the Dollar after they received substancial sums from their Contractural Obligation to Pay the other party the loss of value in the CDO's.

I want to see the Books as to what was previously paid by AIG to the Banks and what they received from the FED.

You have to remember that Goldman was ready to tear up their CDS's because they were Hedged. I happen to think that the Hedge was that they already recieved most of the money from AIG thru their Contractural Agreement of AIG paying them the loss in value. Then I believe they got another 100% from the Government or us the People of the United States.

Something is very wrong with this. But, I am sure it will take time to get to the Bottom of it.

I still think this was a scam on the American People.

Kayman :

Hey Gio

In a "normal" commercial insolvency, AIG's receiver/trustee would have told GS, Deutsche, etc. to GO TAKE A HIKE.

But, this scam was/is so wide-spread, with the patty-cake paper game between the "banks" (now there is a contradiction in terms), the (non-existent) rating agencies, and the so-called insurers, that only insiders, well-connected politically, got out alive.

By comparison, if AIGFP was the AIG commercial insurance division, it would be like me buying insurance on a building, that I had already set on fire, and having AIG pay me out in full. This DOES NOT HAPPEN IN THE REAL WORLD.

It would take 5 to 10 years of real growth in the U.S. economy to make up for the losses foisted onto the American Middle Class by these crooks.

Perhaps you are willing to do your part, by purchasing, at par, the (used only once) toilet paper held by the Federal Reserve.

Anonymous :

Is it in any way clear that Deutsche were acting on their own behalf for Max 2008-1? Or were they an intermediary for someone else? What if they were an intermediary for AIG itself? (Like the insurance arms). It has been rumoured (more than rumoured?) that AIGFP was writing insurance on assets owned by some of the AIG insurance and reinsurance entities. (The situation being that the insurance companies bought duff assets, had Deutsche roll them into a CDO and insure them (with AIGFP as it happens) magically turning them into insurance grade reserves). If this was the case, then the failure of AIGFP would have brought down significant portions of the pensions and life insurance markets.

mikla :

This is *outstanding* work.

To re-emphasize the punchline:

Those eight-month-old public disclosures are very incomplete, but they reveal a lot. They indicate that these CDO deals were not, by any stretch of the imagination, conducted on an arms-length basis, and that the these transactions took forms that were designed to conceal the true economic interests of the parties. I'm always amazed by what people, especially people not from the financial world, don't know. Big banks are not like the Pentagon or the Coalition Provisional Authority. Billion dollar amounts do not just slip through the cracks. There is no way that the very top people at AIG and Deutsche Bank would not be thoroughly briefed about every aspect of a $5.4 billion credit default swap for a CDO called Max 2008-1

Anonymous:

My theory is that back in 2007, the treasury made a deal to "fix" the problem of bad assets by offloading all of the risk to AIG. AIG has been willing to help out the USA when big problems arise (e.g. dubai ports world situation).

This makes political sense because gov't prefers to tackle one big problem instead of dozens of messy smaller problems -- any one bank bailout raises suspicions of favoritism and back-room dealing, whereas bailing out a lynchpin of the economy (as it was presented) is understood by [some of] the public as preventing a nuclear meltdown.

So, transfer the risks to AIG, AIG fails, bail them out, presto! problem solved.
Funny I haven't heard much about CITI's SIVs lately.

Anonymous:

So banks were stuffing AIG with their risks and AIG (taxpayers) took a fall for it. Was it intentional?
Deutsche Bank bought this CDS in June 2008. Subprime crisis was well known since 2007. Bear Stearn fell in March 2008. It all looks suspect. How many banks got away with free money? Did Paulson, Bernanke arrange it so as to save favored firms?

[Jan 31, 2010] U.S. regrets China's response to arms sales -  News

Yahoo (Reuters)

The United States said on Saturday it regretted China's announced cuts in bilateral contacts and its plans to punish U.S. companies involved in a $6.4 billon arms package for Taiwan.

While China said the arms sales "damaged" its national security and reunification efforts with Taiwan, the Obama administration defended the package sent to the U.S. Congress on Friday as boosting regional security.

[Jan 31, 2010] Jim Jubak Prepare your portfolio in case economy doesn't recover - MSN Money Jim Jubak

What if consumer demand is dead and will remain dead for the nest decade ?

Consumer demand isn't coming back. Not anytime soon. Not for a decade or more. Not anything like the levels of 2006 or 2007, before the global economic crisis hit full force.

I know that's not the conventional wisdom right now.

You've heard the current version of history over and over. Consumers got ahead of themselves in the past few years and spent money that they didn't have by running up balances on their credit cards and treating their houses as ATMs.

The consensus opinion on Wall Street, in Washington, D.C., and on Main Street is that it will take some time, maybe as long as two years, to work off the excesses of the past couple of years. And then consumer demand will return to something like the level of the years before the global economic crisis. Consumers may not go back to spending like it's 2007, but they will spend like it's 2006 or 2005 or . . .

Frankly, I don't think anyone is terribly convinced by that story. It's just that the alternative is too grim to contemplate. Most folks in the financial-advice industry and most politicians in Washington would rather go whistling past the graveyard and hope nothing bites them.

But I think there's a good chance this story and this reading of history are wrong.

Not a certainty, mind you, but a very good chance. And if you don't at least consider the possibility that the story and the history are wrong, you can't possibly hope to protect your portfolio or come up with a strategy to grow its value.

I think there's an alternative history of the global consumer that makes waiting for demand to come back to "normal" absolutely wrong. It's at least as likely -- more so, I think, but you decide after you've read my arguments -- as the mush that clogs the political and economic discourse of the moment.

Demand: Gone but not forgotten

The result of investing in anticipation of demand coming back to pre-crisis levels would be absolutely painful if it's wrong. Stop worrying about whether the current downturn will become a full-scale correction of 10% or worse. We've been through that. We know -- sort of -- how to deal with it.

But if global consumer demand isn't set to bounce back, then we as investors face a huge challenge. And we'd better face up to it and formulate some strategies for coping with it, even if it's not a certainty.

I'm increasingly convinced that the behavior of global consumers in general, and of U.S. consumers in particular, over the past 20 years was an aberration. And that what we're seeing now isn't the beginning of a gradual recovery to the spending levels of the years before the global economic crisis but a return to the long-term spending (and saving) trend that stretches back to 1945.

If that's the case, the global economy is indeed awash in excess manufacturing and service capacity because companies and industries had projected future consumer demand by drawing trend lines from consumer behavior over the past couple of decades. They then built factories and service networks to meet that projected demand.

The global economy isn't going back to that trend line. Over the next decade or more, industry after industry isn't going to gracefully absorb that temporary extra capacity. Instead, the global economy is in for a decade or more of tooth-and-claw fights for market share, bloody consolidation as industries are forced to radically shrink capacity, and an increasing number of the walking dead that are kept alive only by large infusions of capital from national governments.

This isn't the first time recently that I've said this.

I've referred to this scenario in a number of recent blog posts, including one in which I even suggested a couple of ways to cope with this scenario as an investor. But a recent piece from global consulting company McKinsey fleshes out some of the details of this alternative history. (You can find the article at McKinsey's online journal, the McKinsey Quarterly.)

Like many other consultants these days, McKinsey has been busy asking consumers about their spending plans. In March 2009, for example, 90% of the U.S. households McKinsey surveyed said they had reduced their spending because of the recession. About 33% of respondents said they'd reduced spending significantly. Roughly 45% of those who had reduced spending did so because of necessity. More than half of those who said they had reduced spending said they planned to keep their spending down after the recession.

Consumers are not only spending less; they're also borrowing less and saving more. In the quarter ending in June 2008, net consumer mortgage borrowing turned negative for the first time since 1946. In March 2009, the personal savings rate reached 5.7% of disposable income, a 14-year high. That still lags the post-1945 average of 9%.

There's nothing startlingly new in these findings. Everybody who does a survey these days is finding that consumers are spending less. With unemployment at 10% officially -- 17% if you count the discouraged who've stopped looking and the people working part time who want full-time jobs -- any other result would be surprising

But what is unusual in McKinsey's survey is the consulting group's willingness to think that the trend of the data depends on how long a slice of time you look at. If you look at just the past 20 years or so, then the move to a 7% savings rate and a negative number on net mortgage borrowing seems like the outlier that will be hammered into insignificance by the trend. If you take a longer view, however, and look at the years stretching to 1945, then it's the zero savings rate of 2008 and the mortgage debt blowout of 2006-07 that look like outliers.

It reminds me of a conversation I had with Nobel economist Paul Samuelson many years ago when I was a cub reporter sent out by my editor to find out what average annual returns investors could expect after some big market crash. In the nicest possible way, Samuelson (who died last month at age 94) laughed at my question. You know, he said, we've got only 80 years of good data on the stock market. And we don't know whether that information is a good representation of the long-term behavior of stocks or whether the period we're looking at is a total outlier.

We ought to start out admitting the same when we try to figure out what consumer spending will look like over the next 20 years. And we certainly shouldn't assume that the past 10 or 20 years is either the long-term trend or the outlier.

I don't think we can say anything certain about that trend. But I do think the odds increasingly point to a conclusion very different from a scenario in which consumers will relatively quickly start spending like it's 2006 again. Even though we can't say anything about the long-term trend with complete confidence, I don't think that means we can't say anything at all.

First, we do know from the evidence of the Great Depression and other economic events that what changes consumer behavior is duration. The Great Depression was formative of consumer and economic attitudes in ways that the 13-month Panic of 1907, for instance, wasn't because the former went on and on and on. From the crash of 1929 to the true recovery of 1940 or so was more than a decade of economic pain when millions of people lost jobs and stayed jobless, when millions lost their life savings, when millions lost their homes.

The Great Recession hasn't yet lasted nearly that long -- if you define it narrowly from the financial crisis of fall 2008 (the Lehman Brothers bankruptcy) or the stock market top of October 2007.

But periods aren't defined quite so neatly. The stock market bubble that broke in October 2007 was the second bubble of the decade. The combination of the two -- the tech bubble that broke in 2000 and the mortgage bubble that broke in 2007 -- marks out what many of us have begun to call the lost decade for U.S. investors, in which the stock market indexes went nowhere and net returns were close to zippo.

The pain drags on

This was also a period when a relatively shallow recession was followed by extraordinarily slow job growth, when real incomes stagnated and when workers learned that just about anyone -- union or nonunion, big company or small, profitable enterprise or money-losing turkey -- could lose a job to a buyout, to off-shoring, to global competition.

By itself, the Great Recession is the longest economic downturn in the United States since the Great Depression. Measured in terms of economic insecurity, stagnant incomes and falling stock portfolios, it's roughly of the same duration as, though by no means anywhere near equal in pain to, the Great Depression.

And it's really not over yet, even though the economy managed to show positive 2.2% gross domestic product growth in the third quarter of 2009.

For one thing, continuing high unemployment makes the recession feel like it's still going on. And home prices, the major store of wealth for most American families, are still falling in most markets. Real incomes are falling if you consider such things as rising health insurance premiums and co-pays. Real living standards are falling if you factor in price hikes and/or cuts in public services.

Second, we know from past economic events that how people feel about the future is a key determinant of things like consumer spending and saving in the present. The future to many people in the United States is a landscape under a black cloud. The current season of political protest -- I don't know of anybody who's happy, whether it's Republicans, Democrats or independents -- is fueled by a pervasive sense that things are going to get worse. And considering the size of our budget deficits, the quality of our political leadership and the intense global competitive challenges the United States faces, it's hard to be hopeful about our ability to solve our problems.

And third, we know that consumer spending and saving are closely linked to the life cycle of individuals. Early in their working careers, individuals spend more freely. In the middle, during what are called the peak earnings years, people stash as much as they can into savings. They've gotten close enough to paying for college or retirement to feel a pressing need to save. Then, as people get older, they start to draw down on those savings and, these days, to very carefully watch every penny of spending because so many are now worried about outliving their retirement nest eggs.

That pattern holds, economists theorize, across economies and societies as well. As societies age, we surmise, they spend more on health care and retirement services and less on things like flat-screen TVs, second or third cars, or dress clothes. We don't know any of this for a fact, as disease and war have limited the world's experience with whole societies aging. But these guesses on spending patterns are logical, and they do bode ill for consumer spending in some of the industries that have, globally, expanded production capacity most rapidly during the past 20 years.

The Myth of Recovery  by Michael Hudson

See also Michael Hudson

The current economy is best viewed as the FIRE sector wrapped around the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs. This by and large parasitic sector ensures that 401K investors will be much poorer at the time they need to retire
When listening to the State of the Union speech, one should ask just which economy Obama means when he talks about recovery. Most wage earners and taxpayers will think of the “real” economy of production and consumption. But Obama believes that this “Economy #1” is dependent on that of Wall Street. His major campaign contributors and “wealth creators” in the FIRE sector – Economy #2, wrapped around the “real” Economy #1.

Economy #2 is the “balance sheet” economy of property and debt. The wealthiest 10 per cent lend out their savings to become debts owed by the bottom 90 per cent. A rising share of gains are made in extractive ways, by charging rent and interest, by financial speculation (“capital gains”), and by shifting taxes off itself onto the “real” Economy #1.

John Edwards talked about “the two economies,” but never explained what he meant operationally. Back in the 1960s when Michael Harrington wrote The Other America, the term meant affluent vs. poor America. For 19th-century novelists such as Charles Dickens and Benjamin Disraeli, it referred to property owners vs. renters. Today, it is finance vs. debtors. Any discussion of economic polarization between rich and poor must focus on the deepening indebtedness of most families, companies, real estate, cities and states to an emerging financial oligarchy.

Financial oligarchy is antithetical to democracy. That is what the political fight in Washington is all about today. The Corporate Democrats are trying to get democratically elected to bring about oligarchy. I hope that this is a political oxymoron, but I worry about how many people buy into the idea that “wealth creation” requires debt creation. While wealth gushes upward through the Wall Street financial siphon, trickle-down economic ideology fuels a Bubble Economy via debt-leveraged asset-price inflation.

The role of public spending – and hence budget deficits – no longer means taxing citizens to spend on improving their well-being within Economy #1. Since the 2008 financial meltdown the enormous rise in national debt has resulted from the reimbursing of Wall Street for its bad gambles on derivatives, collateralized debt obligations and credit default swaps that had little to do with the “real” economy. They could have been wiped out without bringing down the economy. That was an idle threat. A.I.G.’s swap insurance department could have collapsed (it was largely in London anyway) while keeping its normal insurance activities unscathed. But the government paid off the financial sector’s bad speculative debts by taking them onto the public balance sheet.

The economy is best viewed as the FIRE sector wrapped around the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs.

Say’s Law of markets, taught to every economics student, states that workers and their employers use their wages and profits to buy what they produce (consumer goods and capital goods). Profits are earned by employing labor to produce goods and services to sell at a markup. (M – C – M’ to the initiated.)

The financial and property sector is wrapped around this core, siphoning off revenue from this circular flow. This FIRE sector is extractive. Its revenue takes the form of what classical economists called “economic rent,” a broad category that includes interest, monopoly super-profits (price gouging) and land rent, as well as “capital” gains. (These are mainly land-price gains and stock-market gains, not gains from industrial capital as such.) Economic rent and capital gains are income without a corresponding necessary cost of production (M – M’ to the initiated).

Banks have lent increasingly to buy up these rentier rights to extract interest, and less and less to promote industrial capital formation. Wealth creation” FIRE-style consists most easily of privatizing the public domain and erecting tollbooths to charge access fees for basic necessities such as health insurance, land sites, home ownership, the communication spectrum (cable and phone rights), patent medicine, water and electricity, and other public utilities, including the use of convenient money (credit cards), or the credit needed to get by. This kind of wealth is not what Adam Smith described in The Wealth of Nations. It is a form of overhead, not a means of production. The revenue it extracts is a zero-sum economic activity, meaning that one party’s gain (that of Wall Street usually) is another’s loss.

Debt deflation resulting from a distorted “financialized” economy

The problem that Obama faces is one that he cannot voice politically without offending his political constituency. The Bubble Economy has left families, companies, real estate and government so heavily indebted that they must use current income to pay banks and bondholders. The U.S. economy is in a debt deflation. The debt service they pay is not available for spending on goods and services. This is why sales are falling, shops are closing down and employment continues to be cut back.

Banks evidently do not believe that the debt problem can be solved. That is why they have taken the $13 trillion in bailout money and run – paying it out in bonuses, or buying other banks and foreign affiliates. They see the domestic economy as being all loaned up. The game is over. Why would they make yet more loans against real estate already in negative equity, with mortgage debt in excess of the market price that can be recovered? Banks are not writing more “equity lines of credit” against homes or making second mortgages in today’s market, so consumers cannot use rising mortgage debt to fuel their spending.

Banks also are cutting back their credit card limits. They are “earning their way out of debt,” making up for the bad gambles they have taken with depositor funds, by raising interest rates, penalties and fees, by borrowing low-interest credit from the Federal Reserve and investing it abroad – preferably in currencies rising against the dollar. This is what Japan did in the “carry trade.” It kept the yen’s exchange rate down, and it is lowering the dollar’s exchange rate today. This threatens to raise prices for imports, on which domestic consumer prices are based. So easy credit for Wall Street means a cost squeeze for consumers.

The President needs a better set of advisors. But Wall Street has obtained veto power over just who they should be. Control over the President’s ear time has been part of the financial sector’s takeover of government. Wall Street has threatened that the stock market will plunge if oligarch-friendly Fed Chairman Bernanke is not reappointed. Obama insists on keeping him on board, in the belief that what’s good for Wall Street is good for the economy at large.

But what’s good for the banks is a larger market for their credit – more debt for the families and companies that are their customers, higher fees and penalties, no truth-in-lending laws, harsher bankruptcy terms, and further deregulation and bailouts.

This is the program that Bernanke has advised Washington to follow. Wall Street hopes that he will be kept on board. Bernanke’s advice has helped bolster that of Tim Geithner at Treasury and Larry Summers as chief advisor to convince Pres. Obama that “recovery” requires more credit.

Going down this road will make the debt overhead heavier, raising the cost of living and doing business. So we must beware of the President using the term “recovery” in his State of the Union speech to mean a recovery of debt and giving more money to Wall Street Jobs cannot revive without consumers having more to spend. And consumer demand (a hateful, jargon word, because only Wall Street and the Pentagon’s military-industrial complex really make demands) cannot be revived without reducing the debt burden. Bankers are refusing to write down mortgages and other debts to reflect the ability to pay. That act of economic realism would mean taking a loss on their bad debts. So they have asked the government to lend new buyers enough credit to re-inflate housing prices. This is the aim of the housing subsidy to new homebuyers. It leaves more revenue to be capitalized into higher mortgage loans to support prices for real estate fallen into negative equity.

The pretense is that this is subsidizing the middle class, but homebuyers are only the intermediaries for government credit (debt to be paid off by taxpayers) to mortgage bankers. Nearly 90 per cent of new home mortgages are being funded or guaranteed by the FHA, Fannie Mae and Freddie Mac – all providing a concealed subsidy to Wall Street.

Obama’s most dangerous belief is in the myth that the economy needs the financial sector to lead its recovery by providing credit. Every economy needs a means of payment, which is why Wall Street has been able to threaten to wreck the economy if the government does not give in to its demands. But the monetary function should not be confused with predatory lending and casino gambling, not to mention Wall Street’s use of bailout funds on lobbying efforts to spread its gospel.

Deficit reduction

It seems absurd for politicians to worry that running a deficit from health care or Social Security can cause serious economic problems, after having given away $13 trillion to Wall Street and a blank check to the Pentagon. The “stimulus package” was only about 5 per cent of this amount. But Obama has announced that he intends on Tuesday to close the barn door by proposing a bipartisan Senate Budget Commission to recommend how to limit future deficits – now that Congress is unwilling to give away any more money to Wall Street.

Republican approval would set the stage for Wednesday’s State of the Union message promising to press for “fiscal responsibility,” as if a lower deficit will help recovery. I suspect that Republicans will have little interest in joining. They see the aim as being to co-opt their criticism of Democratic spending plans. But in view of the rising and well-subsidized efforts of Harold Ford and his fellow Corporate Democrats, the actual “bipartisan” aim seems to be to provide political cover for cutting spending on labor and on social services. Obama already has sent up trial balloons about needing to address the Social Security and Medicare deficits, as if they should not be financed out of the general budget by taxpayers including the higher brackets (presently exempted from FICA paycheck withholding).

Traditionally, running deficits is supposed to help pull economies out of recession. But today, spending money on public services is deemed “bad,” because it may be “inflationary” – that is, threatening to raise wages. Talk of cutting deficits thus is class-war talk – on behalf of the FIRE sector.

The economy needs deficit spending to avoid unemployment and poverty, to increase social spending to deal with the present economic shrinkage, and to maintain their capital infrastructure. The federal government also needs to increase revenue sharing with states forced to slash their budgets in response to falling tax revenue and rising unemployment insurance.

But the deficits that the Bush-Obama administration have run are nothing like the familiar old Keynesian-style deficits to help the economy recover. Running up public debt to pay Wall Street in the hope that much of this credit will be lent out to inflate asset prices is deemed good. This belief will form the context for Wednesday’s State of the Union speech. So we are brought back to the idea of economic recovery and just what is to be recovered.

Financial lobbyists are hoping to get the government to fill the gap in domestic demand below full-employment levels by providing bank credit. When governments spend money to help increase economic activity, this does not help the banks sell more interest bearing debt. Wall Street’s golden age occurred under Bill Clinton, whose budget surplus was more than offset by an explosion of commercial bank lending.

The pro-financial mass media reiterate that deficits are inflationary and bankrupt economies. The reality is that Keynesian-style deficits raise wage levels relative to the price of property (the cost of obtaining housing, and of buying stocks and bonds to yield a retirement income). The aim of running a “Wall Street deficit” is just the reverse: It is to re-inflate property prices relative to wages.

A generation of financial “ideological engineering” has told people to welcome asset-price inflation (the Bubble Economy). People became accustomed to imagine that they were getting richer when the price of their homes rose. The problem is that real estate is worth what banks will lend – and mortgage loans are a form of debt, which needs to be repaid.

[Jan 31, 2010] The Houdini Recovery by Dave Rosenberg

Jan 29, 2010 | gluskinsheff.com

The growth bulls are out in full force today in the aftermath of the headline 5.7% QoQ annualized print on fourth quarter GDP growth in the U.S. We offer a slightly different perspective.

First, the report was dominated by a huge inventory adjustment — not the onset of a new inventory cycle, but a transitory realignment of stocks to sales.

Second, it was a tad strange to have had inventories contribute half to the GDP tally, and at the same time see import growth cut in half last quarter. Normally, inventory adds are at least partly fuelled by purchases of foreign-made inputs. Not this time.

Third, if you believe the GDP data — remember, there are more revisions to come — then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising — just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm. Sorry, but we're not buyers of that view.

Fourth, while the Chicago PMI and the revision to the University of Michigan consumer sentiment index also served up positive surprises, the “hard” data in terms of housing starts, home sales and consumer spending suggest that there is little, if any, momentum heading into early 2010. Moreover, the prospect that we see a discernible slowing in the pace of economic activity this quarter and a relapse in the second quarter is non trivial, in my view — by then, today's flashy headline will be a distant memory.

[Jan 31, 2010] debt_and_deleveraging_full_report

The decade of deleveraging is still ahead of us. Recovery will fail unless we break the financial oligarchy that is blocking essential reforms.
www.mckinsey.com

DELEVERAGING HAS ONLY JUST BEGUN

While the crisis abruptly halted the growth of credit in many economies, the process of deleveraging is just starting. As of the second quarter of 2009, we find that total debt relative to GDP had fallen, and only slightly, in just a handful of countries, including the United States, the United Kingdom, and South Korea.

One reason for the small overall deleveraging to date has been the increase in government debt, which has offset declines in household sector debt. The current projections for rising government debt in some countries, such as the United Kingdom and the United States, may preclude any significant deleveraging of the total economy over the next few years. ...

[Jan 31, 2010]  Summers Statistical recovery and a human recession

Calculated Risk

Quote of the day ...

"What we see in the United States and some other economies is a statistical recovery and a human recession."

Larry Summers, Davos, Jan 30, 2010 (via CNBC)

rich:

Could it be that Obama stimulus, bank bailouts and Fed policies are designed to pump statistics...not help humans?

You think?

double inverse recession:

The human recession is a direct result of pursuing a statistical recovery. He knows that. Did he know that before pursuing a statistical recovery. Criminal or negligent?

Comrade Peronista:

double inverse recession wrote:

The human recession is a direct result of pursuing a statistical recovery. He knows that. Did he know that before pursuing a statistical recovery. Criminal or negligent?

You are giving him way too much credit. He is misguided. He is not alone.

splat:

I guess this is one of the benefits of off-shoring your economy. Lots of increased leisure time -- ~splat

Nanoo-Nanoo:

yes and a much reduced quality of life meaning that basic necessities like food, shelter, water, health care, adequate sewage treatment, transportation, education will deteriorate along with meager means of earning a living for the above mentioned quality of life.

Nanoo-Nanoo:

He showed me 4 fingers and asked me how many were there, I said 5 so I wouldn't get electrocuted again.

Bubblisimo Gerkinov:

Nanoo-Nanoo wrote:

I said 5 so I wouldn't get electrocuted again.

Now you're getting it.

km4:

The Summers deluded hubris continues.....and Obama will likely go down in 2012 because he will not replace his imbued team

Financial capitalism, the owner of Western Civilization's Universal Empire is an institution. It has taken on a life of its own at the global level and is no longer an instrument of cultural advancement for Western Civilization. It will advance its interests at the expense of everything else. From outright fraud (the Shadow Banking system) to rentier lawfare (the proliferation of intellectual property protection to usury), financial capitalism will enrich itself mightily while the world stagnates endlessly.

Global Guerrillas: THE EVOLUTION OF CIVILIZATIONS

SNAFU:

km4 wrote:

and Obama will likely go down in 2012

O and gang realizes, smart folks that they are, that in 2012 UE is likely still be ~10%. High UE is now considered structural and not just cyclical.

Rob Dawg:

unirealist :

What, nobody's yet made the "neutron bomb" recovery metaphor yet?

The possibility of disrupting the feeding cycle is too great. Better a "human recession" than wholesale dieoff. Besides destitute humans are so much more manageable.

JimPortlandOR:

Disempowered Paper Pusher wrote:

broward's 32 hour work week is looking better all the time.

I don't think we have any chance to increase employment (instead of paying unemployment insurance as a work-around) except to cut back the work week. Productivity (world wide), robotics, and developing countries aspirations and accomplishments can only mean to many workers for nearly stable short run outputs. There is nothing sacred about the 40 work week. We need to share jobs so that the social contract doesn't turn into a walkaway underwater mortgage.

kidbuck:

Mr Slippery wrote:

Even if a law was passed to force a 32-hour work week...

If I can't live on 40 hour's pay, how can I live on 32?

Seriously, I missed the reasoning here.
 

km4:

SNAFU (profile) wrote (in reply to...) on Sat, 1/30/2010 - 1:01 pm
km4 wrote:and Obama will likely go down in 2012.O and gang realizes, smart folks that they are, that in 2012 UE is likely still be ~10%. High UE is now considered structural and not just cyclical.

Yup!

10% U3 is likely the new normal for sometime ( then almost 2x for U6 )

30% of US workforce are already temps, contractors, consultants, part time workers etc that has resulted in:

Nonetheless Obama the Speak Transparency, Obama Speaks Transparency, Practices Subterfuge | Threat Level | Wired.com will continue to spew

ResistanceIsFeudal:

"An economy based upon slave labor precluded a middle class with buying power. The Roman Empire produced few exportable goods. Material innovation, whether through entrepreneurialism or technological advancement, all but ended long before the final dissolution of the Empire. Meanwhile the costs of military defense and the pomp of Emperors continued. Financial needs continued to increase, but the means of meeting them steadily eroded. "(from the Wikipedia article on the fall of the Roman Empire)

ResistanceIsFeudal:

merchants of fear:

This Fall of the Roman Empire comparison to the U.S. Empire with some obvious similiarities of decline is eerie...

He left out the escalating costs of supporting government entitlements and a burgeoning bureaucracy as private employment collapses, The increasing reliance on mercenary armies to further the goal of maintaining and expanding a sprawling and ever-more ungovernable world empire is there, however.

t r orwell:

Me and my friend, Dirt Van Dickens, a very respectable and knowledgeable man, but noonetheless, a fallen away stockbroker, do not believe the 5.7% growth in GDP for the 4th quarter. Why? Same reason Dirt left the church of finance, no transparency, all artificial, all induced by government borrowing, spending, and printing, just plain communism, not capitalism.

PS My friend slumdog might be right however, what with the sale of weapons to Taiwan. Hu knows, maybe the straw that broke the camel's back or maybe just a wet noodle. Did we backdate the 6.4 billion Taiwan sale to last quarter to shimmy sham the exports popup, just food for thought.

double inverse recession:

As it stands today if we looked at earnings vs. full bailout (including alphabet soup programs) is banking really that profitable? Especially compared to (everyone's favorite scapegoat) oil companies or (our last line of competitive advantage) technology conglomerates and their start-up acquisitions?

Banks only have promises from the government and debt slaves for future payments, yet they have very little they can do if the payments stop. That is the only form of revenue they have. No product or service to withhold, no supply chain to disrupt. And if the payments stop, then the rest of the economy will become profitable again. Why?

You can't invest in business, you can't hire new people and you can't generate NPV projects which generate strategic options (future economic growth) when you suffer debt overhang. This is as true for small/medium/large business as it is for government. To stay alive companies have cut variable cost (employees, investment, R&D) because fixed costs (debt) are just that. A fixed cost. If we want to become competitive as a nation, we need start shedding this burden right now.

It would be ultimately pathetic if we lose our footing at the top of the world because we didn't have the stomach to call the banks bluff and subsequently become their breathing apparatus. Hegemony will end someday, but why not let a competitor beat us with superior performance rather than destroying ourselves?

[Jan 29, 2010] Chicago Fed: Economic Activity Moved Lower in December

Jan 28, 2010 | CalculatedRisk

From the Chicago Fed: Index shows economic activity moved lower in December

Led by declines in employment-related indicators, the Chicago Fed National Activity Index decreased to –0.61 in December, down from –0.39 in November. Three of the four broad categories of indicators that make up the index moved lower, although both the production and income category and the sales, orders, and inventories category made positive contributions.

... ... ...

In contrast to the monthly index, the index’s three-month moving average, CFNAI-MA3, increased slightly to –0.61 in December from –0.68 in November. December’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend; but the level of activity remained in a range historically consistent with the early stages of a recovery following a recession.

[Jan 29, 2010] Grantham: Lessons Learned in the Decade By Barry Ritholtz

January 28, 2010 | The Big Picture

I always enjoy reading Jeremy Grantham’s missives, and his most recent comments do not disappoint. They are packed with great tidbits and insight.

My favorite part was this list of “Lessons Learned in the Decade” — the full list is available at GMO.com.

Here is an abbreviated version:

Fascinating stuff from Jeremy Grantham of GMO.

Source:
What A Decade!
Jeremy Grantham
GMO, 1/25/2010

farmera1:

“Congress is nearly dysfunctional, primarily controlled by large corporations;”

If you thought this was bad last decade wait until this decade with recent SCoUS ruling that corporations can give to/buy/bribe politicians with out limits. As the saying goes,” you haven’t seen anything yet.” This party is just starting.

http://www.nytimes.com/2010/01/22/us/politics/22scotus.html

Freedom of speech for corporations (artificially created entities). Suppose that is what the framers of the Constitution had in mind when they wrote the bill of rights. I doubt it. THis will get real ugly in a hurry.

First Amendment to the Constitution

“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.’

DL:

If not for those damn corporations, the U.S. would have no debt, no unfunded liabilities, and we’d have lower taxes, and higher economic growth.

Bring in the trial lawyers, the environmentalists and labor unions to run the economy.

Mannwich:

“Perceived” influence, that is. Mass delusion often works well…….until it doesn’t.

TakBak04:

Jeremy Grantham’s missives are an excellent read..

I’ve read his stuff before but lost touch somewhere along the way and was reading Bill Gross more than Grantham.

Actually going to the site and reading more beyond what you focused on is also a good read.

What I wonder about with you “BR” is that your “Fusion IQ” seems to be so much more optimistic than the links to folks you agree with and what seems to be your own views of the stuff you post here on your blog for us to read.

I guess you’ve said you are a Contrarian…but it must be hard to operate given the dire predictions of the folks predictions you link your blog readers to. Most of the folks you link us to are seeing very hard times for US Markets in the coming years.

Yet, your own charts and signals seem to be based on “market sentiment through charts” which somehow seem linked too much to the Quant Side of Math…rather than the Sociological Sentiment of Crowds.

When folks don’t have money out there…they need to cash in those 401-K’s to pay mortgage or the credit cards in default… and the older crowd just won’t go near this crazy market having been wiped out by the implosion of 2000, 2001…2007 and ‘08 . But, remember they got wiped out by the “Dot Com. Crash” and then went into Real Estate and also at the end back into stocks in their “fixed income” stuff. I’m talking about the older folks, here who still had some cash left to burn and were still employed enough that they’d saved some stuff, even after the two Bubbles. They’ve BURNED IT or had it burned by investments in schemes (think of the Florida and Greenwich Crowd burned by Madoff and his cronies living the “high life.” There’s some dark stuff out there, but assume that “Fusion IQ” and others seem to have strategies that feel they can work around this?

So…Who is Left to Invest? EXCEPT the BIG GUNS? And how is it that there are “BIG GUNS” who have anything left after “Hair on Fire …we are poor and on the brink and we are going down unless TAXPAYERS GIVE US THE MONEY! I guess that’s the splitting of the Big Pie into slices. What’s left over..the rest of us have to make money out of just to make that living in these times.

Anyway…I liked Grantham’s views….and I’ve always been a big reader of Bill Gross’s Newsletter every month. Bill Gross has made me money on his calls. Whatever he does in his investing life…his newsletter is “very populist.” And his sense of irony and humor is great for “between the lines” reading. I made money on his “TIPS” (actually the investment) and when he warned to get out of it….I cashed in. He’s been warning not to buy bonds. For a Bond Billionaire to say that…gives him lots of creds for the “small investor.”

Whatever… I assume your views are making money for your clients who probably have very different goals that some of us out here who have some substantial cash…but are hugely cautious and like to “micro-manage” our own stuff and have done well enough that we won’t change. LOL’s ….Contrarian….

[Jan 29, 2010] Why we should expect low growth amid debt By Carmen Reinhart and Kenneth Rogoff

January 27 2010 | FT.com

As government debt levels explode in the aftermath of the financial crisis, there is  growing uncertainty about how quickly to exit from today’s extraordinary fiscal stimulus. Our research on the long history of financial crises suggests that choices are not easy, no matter how much one wants to believe the present illusion of normalcy in markets. Unless this time is different – which so far has not been the case – yesterday’s financial crisis could easily morph into tomorrow’s government debt crisis.

In previous cycles, international banking crises have often led to a wave of sovereign defaults a few years later. The dynamic is hardly surprising, since public debt soars after a financial crisis, rising by an average of over 80 per cent within three years. Public debt burdens soar owing to bail-outs, fiscal stimulus and the collapse in tax revenues. Not every banking crisis ends in default, but whenever there is a huge international wave of crises as we have just seen, some governments choose this route.

We do not anticipate outright defaults in the largest crisis-hit countries, certainly nothing like the dramatic de facto defaults of the 1930s when the US and Britain abandoned the gold standard. Monetary institutions are more stable (assuming the US Congress leaves them that way). Fundamentally, the size of the shock is less. But debt burdens are racing to thresholds of (roughly) 90 per cent of gross domestic product and above. That level has historically been associated with notably lower growth.

While the exact mechanism is not certain, we presume that at some point, interest rate premia react to unchecked deficits, forcing governments to tighten fiscal policy. Higher taxes have an especially deleterious effect on growth. We suspect that growth also slows as governments turn to financial repression to place debts at sub-market interest rates.

... ... ...

Another big unknown is the future path of world real interest rates, which have been trending downwards for many years. The lower these rates are, the higher the debt levels countries can sustain without facing market discipline. One common mistake is for governments to “play the yield curve” – as debts soar, shifting to cheaper short-term debt to economise on interest costs. Unfortunately, a government with massive short-term debts to roll over is ill-positioned to adjust if rates spike or market confidence fades.

Given these risks of higher government debt, how quickly should governments exit from fiscal stimulus? This is not an easy task, especially given weak employment, which is again quite characteristic of the post-second world war financial crises suffered by the Nordic countries, Japan, Spain and many emerging markets. Given the likelihood of continued weak consumption growth in the US and Europe, rapid withdrawal of stimulus could easily tilt the economy back into recession. Yet, the sooner politicians reconcile themselves to accepting adjustment, the lower the risks of truly paralysing debt problems down the road. Although most governments still enjoy strong access to financial markets at very low interest rates, market discipline can come without warning. Countries that have not laid the groundwork for adjustment will regret it.

Markets are already adjusting to the financial regulation that must follow in the wake of unprecedented taxpayer largesse. Soon they will also wake up to the fiscal tsunami that is following. Governments who have convinced themselves that they have done things so much better than their predecessors had better wake up first. This time is not different.

Ms Reinhart is professor of economics, University of Maryland, and Mr Rogoff is professor of economics, Harvard University. They are co-authors of ‘This Time is Different: Eight Centuries of Financial Folly’ (Princeton)

Adam Bartlett

The outlook is not nearly so bleak. The unqualified assertion that higher taxes are especially bad for growth is plain wrong. Per IMF figures and Lord Skidelsky's recent book, the period which saw the highest global growth in the last century was the Keynesian golden age from 1951 – 71 where it averaged 4.8%. In the Washington Consensus period global growth was only 3.2% , with unemployment much higher, despite the positive effect of rapid development by the BRICS. Yet the Keynesian period saw some of the highest taxation the world has ever seen.

Sudden market discipline is only possible if bond holders have somewhere else to put their money. 15 years back near the middle of the WC there were plenty of options promising a "sound" return, so if a government became too progressive the masters of the universe could indeed pull the plug in an instant. Now money has no where else to go, theres a dearth of genuine investment opportunities in the west:; China already has massive over capacity; India and Brazil are implementing capital controls as they don’t want money flooding in. Secondly, governments are now happy to buy their own debt when they need to drive down prices. For these and other reasons power has shifted from the bond holder to government, with the sad exception of a few small ones who are still vulnerable.

One core assumption of the article is correct. Deficits have to be reduced, and inflating them away is not an option, though we may see a return to a more industry friendly average rate of about 4%. In the short term, the political momentum seem s to be growing for spending cuts – so there is indeed a prospect of low growth for the next few years.

In the medium term the critical importance of increasing aggregate demand will become increasingly well recognised, and then we will see the very necessary expansion of the state and more collaborative global cooperation to address imbalances and to mitigate the environmental impact of increased output. Theres talk of a targeted wealth tax, which like the long awaited transaction taxes will be implemented globally so capital can simply relocate to escape.

[Jan 28, 2010]  Goldman Sachs Research -- 10 Questions for 2010

GS forecast contradicts most predictions by Byron Wien:

Our forecast for 2010 features sluggish GDP growth, employment gains that are too slow to prevent a further modest increase in the unemployment rate, low (and probably falling) core inflation, and a Federal Reserve that "exits" from some unconventional monetary policies but keeps the funds rate at its current near-zero level. For the last US Economics Analyst of the year, we try to answer what we think are the 10 most important questions for 2010.

Key questions on the economy include whether house prices have bottomed (we think not); whether banks will become more willing to lend (only very gradually), whether firms will hire vigorously (probably not); and whether the saving rate will rise further (we think so).

Key questions on inflation are whether the amount of slack in the economy matters and whether it is large (yes to both) and how big a risk dollar depreciation would pose (small, in our view).

Finally, key policy questions include whether Congress will pass more fiscal stimulus (of course, but not enough to overcome the move from a strongly expansionary to a neutral or even slightly restrictive stance); how the Fed will sequence its "exit" (an end to the asset purchases and perhaps some reserve draining in 2010, but with rate hikes and asset sales far off); and whether the end to Fed asset purchases in the first quarter will tighten financial conditions (probably to some degree, but we’re highly uncertain).

[Jan 28, 2010] Quantitative Easing: We Are All Central Planners Now

January 26, 2010 | Jesse's Café Américain

"What does the Fed think will change if they can avert a crash again and maintain the status quo at the cost of yet another asset bubble?

Is the Fed trying to maintain an inherently unstable economic order that requires increasingly extraordinary means and greater imbalances to keep from collapsing? I believe that they are.

Will the Fed have to keep assuming more and more power and control over the real economy to sustain the unsustainable until they destroy what they had intended to save? I think the answer is yes."

Quantitative easing effectively means providing the financial system with liquidity well in excess of organic commercial demands and conventional open market operations. The Fed does this by expanding its balance sheet extraordinarily, hence the spectacular growth in 'excess reserves' of commercial banks.

The Fed does this for several reasons. The first obviously is to supply reserve capacity to the banks when their own reserve base has deteriorated badly to the point of insolvency. A second reason is to permit the Fed to expand its Balance Sheet in an extraordinary manner, in order to absorb assets that cannot be marked to market by a commercial bank without significantly damaging their own balance sheet. A third reason of course is to take an accommodative stance with regard to real interest rates when nominal rates approach zero.

One of the issues that quantitative easing creates is that it is problematic to continue to effect a fed funds rate. The usual method is to set a target, and then make changes in the levels of liquidity in the system through adds and drains of financial assets like Treasuries to achieve it. This is why Fed Funds is called a 'target rate.'

But how can one do this when the tool of policy making has been thrown in a ditch by the adoption of quantitative easing, by definition driving rates to zero? It is all "adds" and no drains, stuffing the goose beyond its capacity as it were.

Make no mistake: quantitative easing is to central banking what the introduction of nitroglycerin was to conventional warfare. It kicks the power of financial engineering up a notch, to say the least, and brings in an element of risk of more than normal inflationary pressures.

The Fed can set a 'floor' under the overnight interest rate without engaging in open market operations by offering to take reserves and pay a set rate as interest. Presumably banks will take a riskless .25% rather than place funds in the markets at something lower than this. They will not achieve a higher return for a commensurate risk because the system is awash with liquidity.

This works in the first wave of quantitative easing. But what happens when the Fed seeks to add additional tranches of funds through market purchases of even more dodgy assets, or even begin to exercise more control over the banking system as the economy recovers to avoid a hyperinflation? "Draining" through open market operations is not easy if the banking system is still more fragile than its nominal balance sheets would suggest.

The Fed is now seeking a 'deposit rate' which in addition to its 'overnight rate' would commit banks to place funds with the Fed for a set period of time, in the manner of a certificate of deposit rather than a demand account.

This article from Bloomberg is an indirect pre-announcement from the Fed that they may abandon the notion of 'target rates' altogether, and set interest rates by fiat, rather than achieving them in the marketplace by adjusting levels of short term liquidity. This marks a transition from 'phase I' to 'phase II' of Bernanke's monetary experiment.

I want to emphasize the significance of this change.

This is becoming a pure 'command and control' economic financial engineering by the Fed, in which it sets rates by its decision, without engaging in market operations which could encounter headwinds against those policy decisions. It is similar in magnitude to the Fed monetizing Treasuries directly without subjecting interest rates to the direct discipline of the market. This is of a pedigree more in keeping with a command and control Five Year Plan than a market economy. Extraordinary times call for extraordinary measures the Fed and its apologists might say.

I do not wish to overstate this, but it also suggests that a continuation of the Fed's open market purchases would place an excessive strain on its own balance sheet, which has a much lower percentage of Treasuries than at most times in its history. One would have to wonder if the Fed itself could pass a stress test or a serious audit of the quality of its stated assets.

It is less costly for the Fed to pay interest directly on bank deposits and just set the rate, especially if they are in the form of time defined certificates of deposit, than if it were to continue buying up decaying financial assets to achieve its goals.

In a sense, the Fed is competing with commercial enterprise in 'borrowing' from the banks for its own balance sheet, to affect its policy measures. This is what is meant by setting a floor under the short term rates.

As an aside, I found this quote in the Bloomberg article quite to this point:

"By raising the deposit rate, now at 0.25 percent, officials reckon banks will keep money at the Fed and not stoke inflation by lending out too much as the economy recovers."
The reserves they are holding through their interest program is being used to throttle lending to the commercial markets at clearing rates. Granted this is all a part of interest rate policy, but it represents another level of financial engineering and explicit control of money flows corrosive to a market system.

The US Federal Reserve did not originate the concept of quantitative easing. It began with the Japanese central bank, which one might uncharitably say erred on the side of supporting the banks and the corporate conglomerates, and drove the economy into a protracted slump. There were, we should add, significant mitigating factors including the Japanese demographics and penchant for high savings at low rates in the government postal system.

This is an 'experiment' on the part of the UK and US in their own go at quantitative easing. The risk is obviously inflation, and they are seeking to downplay that at every turn. It is the perception of inflation that the Fed will seek to quell, as it continues to adjust the money supply in ways and with tools that it thinks it understands, but which it has never used before. Perception of inflation is their greatest fear. Once it takes hold it is difficult to stop.

One has to wonder what the endgame is. Since 1999 the financial engineers at the Fed have been unable to achieve sustainable growth in the current national economy as is it is now constituted without generating asset bubbles through low interest rates.

What does the Fed think will change if they can avert a crash again and maintain the status quo at the cost of yet another asset bubble?

Is the Fed trying to maintain an inherently unstable economic order that requires increasingly extraordinary means and greater imbalances to keep from collapsing? I believe that they are.

Will the Fed have to keep assuming more and more power and control over the real economy to sustain the unsustainable until they destroy what they had intended to save? I think the answer is yes.

Bloomberg
Fed Weighs Interest on Reserves as New Benchmark Rate
By Scott Lanman

Jan. 26 (Bloomberg) -- Federal Reserve policy makers are considering adopting a new benchmark interest rate to replace the one they’ve used for the last two decades.

The central bank has been unable to control the federal funds rate since the September 2008 bankruptcy of Lehman Brothers Holdings Inc., when it began flooding financial markets with $1 trillion to prevent the economy from collapsing. Officials, who start a two-day meeting today, have said they may replace or supplement the fed funds rate with interest paid on excess bank reserves.

“One option you might want to consider is that our policy rate is the interest rate on excess reserves and we let the fed funds rate trade with some spread to that,” Richmond Fed President Jeffrey Lacker told reporters on Jan. 8 in Linthicum, Maryland.

The central bank needs to have an effective policy rate in place when it starts to raise interest rates from record lows to keep inflation in check, said Marvin Goodfriend, a former Fed economist. Policy makers are concerned that the Fed funds rate, at which banks borrow from each other in the overnight market, may fail to meet the new target, damaging their credibility and their ability to control inflation as the economy recovers.

‘Extended Period’

The choice of a benchmark is the “front line of defense against inflation, and also it’s at the heart of the central bank being able to precisely and flexibly guide interest-rate policy in the recovery,” said Goodfriend, now a professor at Carnegie Mellon University in Pittsburgh.

The Federal Open Market Committee is likely to maintain its pledge to keep interest rates “exceptionally low” for an “extended period” in a statement at about 2:15 p.m. tomorrow, economists said. The Fed probably won’t raise interest rates from record lows until the November meeting, according to the median of 51 forecasts in a Bloomberg survey of economists this month.

Fed Chairman Ben S. Bernanke, in July Congressional testimony, called interest on reserves “perhaps the most important” tool for tightening credit.

Inflation Concerns

Banks’ excess reserves, or deposits held with the Fed above required amounts, totaled $1 trillion in the two weeks ended Jan. 13, compared with $2.2 billion at the start of 2007. The Fed created the reserves through emergency loans and a $1.7 trillion purchase program of mortgage-backed securities, federal agency and Treasury debt.

By raising the deposit rate, now at 0.25 percent, officials reckon banks will keep money at the Fed and not stoke inflation by lending out too much as the economy recovers.

The new policy may be similar to what the Bank of England does now, said Philip Shaw, chief economist at Investec Securities in London. The U.K. central bank’s benchmark interest rate, now at 0.5 percent, is the rate it pays on the reserves it holds for commercial banks. It may drain excess liquidity from the system by selling back the gilts it has purchased through its so-called quantitative easing program, Shaw said.

Communications Strategy

Policy makers will need to adopt a communications strategy to explain the new benchmark because “people might have had a hard time getting their mind around the idea that the official rate had become the interest on reserves rate,” said Kenneth Kuttner, a former Fed economist who has co-written research with Bernanke and now teaches at Williams College in Williamstown, Massachusetts.

Without a federal funds target, banks might have to find a new way to set the prime borrowing rate, the figure most familiar to consumers that that is now pegged at three percentage points above the fed funds target.

In the past, the Fed had controlled the rate by buying or selling Treasury securities, adding or withdrawing cash from the system. That mechanism broke down when the Fed started flooding the system with cash after the bankruptcy of Lehman Brothers to prevent a financial meltdown.

The deposit rate would help set a floor under the fed funds rate because the Fed would lock up funds by offering a fixed rate of interest for a defined period and prohibiting early withdrawals.

‘Risk Free’

In general, banks will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve,” Bernanke said in an October speech in Washington.

The New York Fed has been testing another tool, reverse repurchase agreements, as a way of pulling cash out of the financial system. In that case, the Fed would sell securities and buy them back at an agreed-upon later date.

There could be complications to using the deposit rate. Banks may be able to generate more revenue by lending at prime rate rather than by earning interest at the Fed, said William Ford, a former Atlanta Fed president at Middle Tennessee State University in Murfreesboro.

Also, the Fed’s direct control over a policy rate --instead of targeting a market rate -- could skew trading and financing toward short-term borrowing once investors know the rate won’t change between Fed meetings, said Vincent Reinhart, a former Fed monetary-affairs director.

The new reliance on reserve interest could also increase the policy clout of Fed governors in Washington at the expense of the 12 regional Fed bank presidents, Reinhart said.

Congress gave only the Fed governors the authority to set the deposit rate. The presidents have historically favored higher rates and voiced more concern about inflation.

“The Federal Reserve Act puts a very high weight on comity,” said Reinhart, now a resident scholar at the American Enterprise Institute in Washington. Using interest on reserves for setting policy “can change the tenor of the discussions, and I don’t know how they get around it.”

[Jan 28, 2010] Taxing Wall Street down to size  by David Stockman

mydigitalfc.com

While supply-side catechism insists that lower taxes are a growth tonic, the theory also argues that if you want less of something, tax it more. The economy desperately needs less of our bloated, unproductive and increasingly parasitic banking system. In this respect, the White House appears to have gone over to the supply side with its proposed tax on big banks, as it scores populist points against banksters, too.

Not surprisingly, the bankers are already whining, even though the tax would amount to a financial pinprick — a levy of only 0.15 per cent on the debts (other than deposits) of the big financial conglomerates. Their objections are evidence that the administration is on the right track.

The banking system has become an agent of destruction for the gross domestic product and of impoverishment for the middle class. To be sure, it was lured into these unsavoury missions by a truly insane monetary policy under which, most recently, the Federal Reserve purchased $1.5 trillion of longer-dated treasury bonds and housing agency securities in less than a year.

It was an unprecedented exercise in market-rigging with printing-press money, and it gave a sharp boost to the price of bonds and other securities held by banks, permitting them to book huge revenues from trading and bookkeeping gains.

Meanwhile, by fixing short-term interest rates at near zero, the Fed planted its heavy boot squarely in the face of depositors, as it shrank the banks’ cost of production to the vanishing point. The resulting ultrasteep yield curve for banks is heralded, by a certain breed of Wall Street tout, as a financial miracle cure. Soon, it is claimed, a prodigious upwelling of profitability will repair bank balance sheets and bury toxic waste from the last bubble’s collapse. But will it?

In supplying the banks with free deposit money (effectively, zero-interest loans), the savers of America are taking a $250 billion annual haircut in lost interest income. And the banks, after reaping this ill-deserved windfall, are pleased to pronounce themselves solvent, ignoring the bad loans still on their books. This kind of Robin Hood redistribution in reverse is not sustainable. It requires permanently flooding world markets with cheap dollars — a recipe for the next bubble and financial crisis.

Moreover, rescuing banks yet again, this time with a steeply sloped yield curve (that is, cheap short-term money and more expensive long-term rates), is not even a proper monetary policy action.

National economic policy has come to this absurd pass because for decades the Fed has juiced the banking system with excessive reserves. With this monetary fuel, the banks manufactured, aggressively at first and then recklessly, a tide of new loans and deposits. When Wall Street’s “heart attack” struck in September 2008, bank liabilities had reached 100 percent of gross domestic product — double the ratio of a few decades earlier.

This was a measurement of the perilous extent to which bad investments, financed by debt, had come to distort the warp and woof of the economy. Behind the worthless loans stands a vast assemblage of redundant housing units, shopping malls, office buildings, warehouses, tanning salons and fast food restaurants. These superfluous fixed assets had, over the past decade, given rise to a hothouse economy of jobs that have now vanished. Obviously, the legions of brokers, developers, appraisers, contractors, tradesmen and decorators who created the bad investments are long gone. But now the waitresses, yoga instructors, gardeners, repairmen, sales clerks, inventory managers, office workers and lift-truck drivers once thought needed to work at these places are disappearing into the unemployment statistics, as well.

The baleful reality is that the big banks, the freakish offspring of the Fed’s easy money, are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed. This is why the Obama tax is welcome: its underlying policy message is that big banking must get smaller because it does too little that is useful.

To argue, as some conservatives surely will, that a policy-directed shrinking of big banking is an inappropriate interference in the marketplace is to miss a crucial point: the big Wall Street banks are wards of the state, not private enterprises. During recent quarters, for instance, the preponderant share of Goldman Sachs’ revenues came from trading in bonds, currencies and commodities.

But these profits were not evidence of Mr Market doing God’s work, greasing the wheels of commerce and trade by facilitating productive financial transactions. In fact, they represented the fruits of hyperactive gambling in the Fed’s monetary casino — a place where the inside players obtain their chips at no cost from the Fed-controlled money markets, and are warned well in advance, by obscure wording changes in the Fed’s policy statements, about any pending shift in the gambling odds.

To be sure, the most direct way to cure the banking system’s ills would be to return to a rational monetary policy based on sensible interest rates, an end to frantic monetisation of federal debt and a stable exchange value for the dollar. But Ben Bernanke, the Fed chairman, and his posse are not likely to go there, believing as they do that central banking is about micromanaging aggregate demand — asset bubbles and a flagging dollar be damned. Still, there can be no doubt that taxing big bank liabilities will cause there to be less of them. And that’s a start.

International Herald Tribune — David Stockman is a former director of the office of management and budget under president Ronald Reagan.

[Jan 27, 2010] Greed & Fear and David Stockman on where it all went wrong by Gwen Robinson

Jan 26, 2010 | FT Alphaville
CLSA’s Christopher Wood in an extra edition of his weekly Greed & Fear newsletter highlights a timely criticism of the US approach to fixing the financial system by David Stockman, Ronald Reagan’s former director of the Office of Management and Budget.

In a harsh comment article originally published in the International Herald Tribune last week, Stockman lashes out at bankers, regulators – particularly the Fed – and just about everyone outside of the Reagan administration.

To be sure, says Stockman, “the most direct way to cure the banking system’s ills would be to return to a rational monetary policy based on sensible interest rates, an end to frantic monetisation of federal debt and a stable exchange value for the dollar”. He concludes:

But Ben Bernanke, the Fed chairman, and his posse are not likely to go there, believing as they do that central banking is about micromanaging aggregate demand — asset bubbles and a flagging dollar be damned. Still, there can be no doubt that taxing big bank liabilities will cause there to be less of them. And that’s a start.

Wood agrees with Stockman’s every word but quotes just two sentences.

“The US economy desperately needs less of our bloated, unproductive and increasingly parasitic banking system … The banking system has become an agent of destruction for the gross domestic product and of impoverishment for the middle class.”

As for the market consequences of Obama’s new policy initiative to curb banks’ size and activities:

“It has clearly increased the risk that the Wall Street correction begins before the S&P500 reaches the 1200 level”, notes Wood. Still, investors who want to hedge their long Asian and emerging market exposure should continue to remain underweight or short the large Western financial stocks, he adds.

While noting that some famous investors are long these stocks because of the easy profits now being generated by the significant steepening of yield curves, Wood remains bearish on these stocks in the medium term. He explains:

This is, first, because the yield curve is likely to flatten in due course when investors realise the recovery in the West is not normal and government bond yields, as a consequence, decline.

Second, he says, bulls on big bank stocks in America and Europe have been underestimating the regulatory reaction which is coming – “which at a very minimum is likely to mean structurally lower returns on equity. This is because they are experts on finance, not politics”.

Finally, just to show he is in crackingly cynical form, Wood concludes:

Remember that if something is too big to fail it is too big to exist. That is something Joe Sixpack can understand even it remains a point hard to grasp for the sophisticates in New York and Washington and the rest of the Davos Crowd.

Related links:
The background to the Volcker rule
– FT Alphaville
‘Volcker rule’ takes bankers by surprise – FT
Obama and Wall Street in depth – FT

This entry was posted by Gwen Robinson on Tuesday, January 26th, 2010 at 10:30 and is filed under Capital markets, People. Tagged with , , . Edit this entry.

An eye-catching quote… by Paul Murphy

Jan 26

…from the eye-catching-quote machine that is Mr Bill Gross.

The UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerine.

In fact, the Pimco man is in fine form with his February letter to investors,  in which he mulls his status as an aging (65) financial rock star, thanks people for the privilege of being a “steward of the capital markets” and then gets stuck in:

Having survived due to a steady two-trillion-dollar-plus dose of government “Red Bull,” Adderall, or simply strong black coffee, the global private sector is now expected by some to detox and resume a normal cyclical schedule where animal spirits and the willingness to take risk move front and centre. But there is a problem. While corporations may be heading in that direction due to steep yield curves and government check writing that have partially repaired their balance sheets, their consumer customers remain fully levered and undercapitalised with little hope of escaping rehab as long as unemployment and underemployment remain at 10-20% levels worldwide…

Like a regular investment sage, he’s scornful of the New Normal and any notion that This Time It’s Different, tipping his hat to the Reinhart/Rogoff tome of the same name and drawing three iron conclusions:

1. The true legacy of banking crises is greater public indebtedness, far beyond the direct headline costs of bailout packages. On average a country’s outstanding debt nearly doubles within three years following the crisis.

2. The aftermath of banking crises is associated with an average increase of seven percentage points in the unemployment rate, which remains elevated for five years.

3. Once a country’s public debt exceeds 90% of GDP, its economic growth rate slows by 1%.

And then he presents us with this marvelous chart:

Leading Gross to observe:

Of all of the developed countries, three broad fixed-income observations stand out: 1) given enough liquidity and current yields I would prefer to invest money in Canada. Its conservative banks never did participate in the housing crisis and it moved toward and stayed closer to fiscal balance than any other country, 2) Germany is the safest, most liquid sovereign alternative, although its leadership and the EU’s potential stance toward bailouts of Greece and Ireland must be watched. Think AIG and GMAC and you have a similar comparative predicament, and 3) the UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2 % and lower.

But what’s this? UK interest rates “artificially influenced by accounting standards”?

We must confess to being less than 100 per cent sure what Gross is eluding to here.  It’s easy to lob Enron-esque insults at the way the UK’s balance sheet has been manipulated under the Labour government, but that’s surely not the Pimco point here.

Marc Ostwald of Monument Securities helps us out:

He could have been a lot more explicit in his rationale. I think what he is trying to say is that the whole QE process, i.e. the BoE indirectly buying £200 Bn of this fiscal year’s £228Bln of Gilt issuance is a rather dodgy bit of accounting (i.e. it is not far from the under-funding of the budget that occurred in the 1970s) , and on top of the regulatory (actuarial) pressure on pension funds to buy long-dated Index-linked Gilts has created very artificially priced Gilt and Index Gilt yield curves…

Whatever.

Gross tells us to “Beware the ring of fire!”

We’d extend the cautionary advice to investment managers selling their wares…

For corporate bonds, a week is an eternity by Gwen Robinson

Jan 25 | FT Alphaville

"Corporate markets head for indigestion”. Oops, did we – and many others – say that, only last week?
After the busiest start to any year for sovereign emerging-market debt, it’s corporate bond investors around the world who now seem to be heading for a massive case of indigestion, More…

“Corporate markets head for indigestion”. Oops, did we – and many others – say that, only last week?

After the busiest start to any year for sovereign emerging-market debt, it’s corporate bond investors around the world who now seem to be heading for a massive case of indigestion, as ShortView noted last week.

But – well, what do you know, here’s the FT on Monday, warning that corporates will have to start offering investors price concessions and/or higher yields to get their bond issues away:

The rougher ride for last week’s deals suggests investor appetite is cooling, in stark contrast to the first two weeks of the year, when many companies borrowed at their lowest rates since before the financial crisis.

The poorer conditions have come amid broader market weakness, during which equity markets have tumbled.

What’s more even big companies such as BMW, Vodafone and other household names weakened in secondary trading while others, including the sterling-denominated bonds offered by Premier League football champions Manchester United priced with interest rates at the high end of the expected range.

One US company, Energy Transfer Equity, the owner of Energy Transfer Partners, a Texas-based energy pipeline operator, even pulled a $1.75bn sale, citing market conditions. And on Thursday, Morgan Stanley had to pay 10 basis points more than it had expected on rates on a $4bn bond deal, although that clearly had something to do with Barack Obama declaring war on Wall Street.

At the same time, investors are stepping up demands in the low-grade junk bond market by seeking higher interest payments or improved covenants that protect bondholders.

So what’s going on? Investors “just started the year a little ahead of themselves and now they’re looking at Greece and what’s going on with the US banks, and that feeling has gone,” one bond syndicate banker told the FT.

png so fresh, investors need a little cushion.” But what a difference a week can make to the size of that cushion.

Quelle Surprise! Proposed Restrictions on Proprietary Trading are a Joke

naked capitalism

The press reports have been suitably vague, but two ideas appear to be central, and they were confirmed by a press background briefing that a kind correspondent sent me. They serve to neuter this supposed reform (I am beginning to think we need to ban the use of the word “reform”; Team Obama has absconded with it. For them “reform” = “anything we do here that sounds important enough that a Cabinet member could talk about it for five minutes”. If they keep this up long enough, which they seem determined to do, the term will be utterly useless.)

You can drive a supertanker though the loopholes in this proposal, which are:

1. If a firm does not own a bank, it can do proprietary trading

2. Trades with customers are not proprietary trades

These are so silly that I’m astonished anyone is treating this proposal seriously.

attempter:

Yup, after it taking literally hours for “size limits reform” to be revealed as a fraud, it only took a day or two to debunk the “prop trading reform” fraud (though the utter vagueness of the thing, too vague to even be called a proposal, gave it away as well).

There’s no reason prop trading should be allowed to legally exist at all. Let the derelicts gamble in sleazy back rooms in broken-down dives where they used to. That’s the only real reform for this.

I agree on the troubled terminology of reform. My practice is to call anything like this “reform” in the quotation marks to signify its fraudulence and the Orwellian use of the term.

Meanwhile I have to use terms like real reform or real reformers to signify what would be real reform if enacted. (Usually the term “revolution” sounds too melodramatic for now, but real reform is really a synonym by now, since we’ll definitely not get real reform for as long as the system can stay zombified.)

DownSouth:

Yves asks: “Does anyone with an operating brain cell believe that if BofA divested Merrill and Merrill hit the wall again that it would be allowed to collapse?”

The libertarians and their Austrian-Neoliberal clones do. Of course libertarians don’t live in the world that is, but in the world that ought to be, or as Reinhold Niebuhr put it, in their “paradise of innocence.”

Rihard Kline:

“Whoever thinks that proprietary trading is just swell as long as the firm does not own a bank (meaning the kind that takes deposits) must have slept through the entire credit crisis.” The architects of this scam-reg proposal—Emanuel and Summers we may be sure—don’t have the slightest interest in substantive reform, so the actual connection of prop trading to the ‘bank panic’ is immaterial to their machinations. The function of this proposal is to pat Dick and Jane Prole on their gray and pointy little steaming heads and say, “Rest assured, folks, them bankers won’t be allowed to speculate with yeeerrrrrr savings—as long as you keep voting for us.” The thing is just ‘for show;’ they probably had this tawdry, deceptive farce of a proposal up their sleeves just against the possibility the poll numbers went bad. And boy, did they. Think back; we’ve had a whole series of fake reform proposals and phony government ‘interventions’: that is the M.O of Barack’s Boys. If you’ve paid any attention to Emanuel, you know this is his approach, the guy knows he’s too smart for the schmucks whose votes he’s hustling so he continually insults their intelligence, not believing that said quantity exists—and he’s failed with his electioneering time and time again just for that reason. Summers definitely thinks he’s twice as smart as the next person on the planet so no worry that anyone will catch him marking cards, writing the wrong score on his golf chits, and pocketing invoices as he walks right past the cash register out the door.

Folks, Emanuel and Summers run this policy shop; don’t think Obama thinks for himself. I hope we can get past notions that Paul Volcker will be allowed to get within shadow-casting distance of actual policy direction. Never happen with those two giant egos around, Paul’s in the ‘photo op’ just for the political capital they can pick from his pockets, during the election campaign, during the first head fakes to Congress, now with the hustings going black and tarry. Oh, I don’t expect that Emanuel, Summers, Geithner, and their like will hang around to the bitter end. Somewhere in the back half of 2011 some or all of them will ‘leave to pursue other opportunities,’ jumping the sinking ship having destroyed any chance for reform before the position of their nominal faction of the One Party Uber Alles craters. I doubt that they’ll be fired in time for it to do any good, or fired at all; that would imply that their tenure had been one of failure and hence that their appointment had been a mistake. Obama is clinging to the rotting fish head which is Ben Bernanke exactly for that reason, so as not to admit to having made a mistake in backing him. The mistake matters far less in political calculation than to the admission of failure—which is why failure speads like oil on water in this Administration and the last one; denial is like an exponentiator for any problem to which it is applied.

This kind of crapola is all we are _ever_ going to see out of Bo Prez and his henchmen during the three years we have left before he drags his sorry ass out of the District with ‘exit polls’ near the numbers of his predecessor; domestic polls, he’ll hold up internationally just for not being George Idjit. But at that point, both of faces of the one-party system will have amply demonstrated their inability to govern honestly or competently, no enviable position for the country. The Repubs are despicible; the Demoblicans are contemptible; the Greens are invisible; the rest are risable. What’s a body to do? Get to work on change ones own self, with ones neighbors and friends and like-minded others. Trusting bought-and-paid-for factions to do it for us is what got us where we are today: looking up at a toilet seat vanishing to the other end of a tube in the ground.

DownSouth:

Yves says: “So let us be clear: the ‘bankers are too clever’ meme is a very convenient cover for the fact that the government is in bed with the plutocrats.”

So what’s new? Isn’t this just the latest volley against the common man to be offered up under the larger umbrella of classical economic mythology?

As Herbert Ginins et al write in Moral Sentiments and Material Interests:

Neoclassical economic theory and non-cooperative game theory have usually assumed that rational egoists are the only type of player that scholars need to assume in order to generate useful and validated predictions about behavior.

And, as they go on to explain, this has resulted in

A considerable body of contemporary policy analysis [being]…based on the earlier widely accepted presumption that all individuals are strictly rational egoists motivated entirely by external payoffs.

The end result of embracing the religion of greed and selfishness is that our politicians can telegraph to the citizens, as Gintis et al put it, “two rather devastating messages in regard to the long-term development and sustenance of a democratic society”:

1) ….only short-term selfish actions are expected from “the common people,” and

2) …citizens do not have the knowledge or skills needed to design appropriate institutions to overcome collective-action problems.

And as they go on to explain:

The two implicit messages contained in much of contemporary public policy analysis are not only inefficient and ineffective, they are dangerous for the long-term sustainability of democratic systems of governance. The first message undermines the normative foundations of a free society. It basically says that it is okay to be narrowly self-interested and to wait for externally imposed inducements or sanctions before voluntarily contributing to collective action. The second message undermines the positive foundations of a free society by destroying the capacity of citizens to experiment with diverse ways of coping with multiple problems and to learn from this experimentation over time. This message basically says that there is one best way of solving all collective-action problems and it is only knowable by experts. Citizens are viewed as having little to contribute to the design of public policies.

RueTheDay:

With regard to he distinction between client trades and proprietary trades –

This is why we need to actually re-instate Glass-Steagall rather than trying to build walls within existing financial conglomerates to restrict where depositor-sourced funds may be used.

Under Glass-Steagall, commercial banks accept deposits and make loans (and hold government securities) but that’s it. There’s no “trading”, for clients or otherwise.

Granted, this will only work if the shadow banking system is brought out of the shadows, and any firm that creates anything that looks like a bank deposit gets regulated as a bank.

 

[Jan 23, 2010] Two Cents about the Squid, Banks, Gold and Monetary Criminals by Andy Dufresne

01/23/2010 | www.zerohedge.com

It is sad that so many people that have skills take up ZH and then just disappear. I may have to disappear too, for political reasons, not for lack of desire or enjoyment… But, h/t to Marla and Tyler, and Robo, and all the non-spamming contributors >The balance sheets of banks and consumers are a disaster. The administration’s efforts are comical. We got to asset prices by extending too much credit that should not have been extended. This amount of credit is no longer available. How do you expect to keep asset prices up? By printing? If anyone had any sense, Bernanke should be fired—tomorrow. I am watching the confirmation process with great interest, and yes, give the job back to Paul Volcker. I wish he never left.

Is this bear market rally over? The bears—this one included—wish so. I was all for a bear market rally back in the spring when the banks begun to outperform the market, even before that. That 666 on the S&P came as a surprise as credit spreads were improving at the time, and yes, credit is smarter—note how it collapsed in 2007 before the stock guys figured it out. There is only one John Paulson (actually Pellegrini, but that would be another topic)…

All I could come up at the time is short CFC, FRE and a subprime mortgage lender in 2006 (before it hit an all-time high, which was no fun), all almost into Chapter 11. Not quite being long CDSs on AAA subprime CDOs…

[Jan 23, 2010] Does Anyone Detect A Hint Of Complacency?

January 13, 2010 | immobilienblasen

Chilled markets FT Alphaville

Markets move on the interaction of news with flows of greed and fear among investors. When fear is lowest, the danger of a fall is greatest.
 

Especially when other sentiment indicators are considered:

Another great contrarian indicator is the survey of sentiment by the American Association of Individual Investors. Last week, this showed the lowest proportion of self-described “bears” since February 2007when volatility first started to spike as investors at last began to grasp the severity of the subprime mortgage crisis in the US.
 

Bearishness in this survey hit an all-time high in March last year when the current rally first started, showing how much money can be made by betting against extremes of sentiment.

But it’s not just the retail punter who’s bullish.

The Pros are too.
 

Jesse's Café Américain

To put a little summation sign around this section of commentary, the chart below breaks down the timing of Fed purchasing of MBS since June of last year. Yes, 86% of all Fed purchases of MBS since that time occurred directly in equity options expirations weeks. Another 7.8% of total MBS purchases occurred in final weeks of each month. And an overwhelming 5.8% of total Fed purchases of MBS occurred at other times.

In following the money, this is the only thing we can prove in terms of actual Fed actions relative to the equity market itself. A mere coincidence? Not a chance. As we see it, the Fed printing of dough to buy back MBS has had a dual purpose. The ultimate new age definition of cross-marketing? Yeah, something like that.

Now that we have covered this data, the question of "what happens when the Fed stops printing money in March?" takes on much broader meaning and significance. Of course the Fed has not directly been buying equities with their clever and clearly very selective timing of MBS purchases, but they sure as heck were providing the immediate and sizable liquidity for "some one else" to do so during equity periods where they could achieve "maximum effect".

Wildly enough, at least as of last week's option-ex, the Fed was still purchasing $60B in MBS. So, as we stand here today, there are now two more options expirations weeks prior to us theoretically reaching the end of the game for Fed printing and MBS buying. You already know we'll be watching, errr.. following the money that is.

When/if the Fed stops printing to buy MBS, do we also lose an options expiration week and month end equity liquidity sponsor? Something we suggest you think about as we move forward. See why we suggest following the money is a key theme?

Mish's Global Economic Trend Analysis

Inquiring minds are asking "Why Is California Broke?" It's a good question. Please consider ... So where's the money going? The above lists reformatted and reordered from a list compiled by Richard Rider, Chairman, San Diego Tax Fighters.

[Jan 22, 2010] Goldman Sachs ends poverty!

January 21, 2010 | scatterplot

Or at least they could end poverty in America’s largest city… with their bonus pool. It was reported today that Goldman made $13.2 billion this year; that’s after it set aside $16.2 billion for bonuses. 18.5% of NYC lives below the federal poverty line — that’s 1.5 million people. This means that a family of three would live on under $18,310 (for a single person it would be $10,830). If the Goldman bonuses were distributed to every person living below the poverty line, they would give $10,470 to each of these 1.5 million people — ending poverty in America’s largest city. Of course our mayor, the richest man in the city, could do the same by distributing his wealth; he’d still have several billion to spare. (But Goldman is more sustainable — their bonuses reappear every year!).

What’s funny about my mentioning of this is that this isn’t the first time someone has noted this exact same thing. The year was 2006. And the pro-capitalist, free market paper, The Daily News, editorialized,

The merry moneymakers at Goldman Sachs will end the year with $9.5 billion in profits, and they’ll divide $16 billion in bonuses – about $622,000 for each employee. We do not begrudge these conquerors of capitalism, but [...] Goldman’s numbers offer a vivid example of the growing gap between the rich and everyone else in America. In the city, 1.5 million people live below the poverty line of $16,000 a year for a single parent with two kids. Goldman’s bonus pool could raise each of their incomes by more than $10,000. Something is wrong when one firm’s bonus pool is big enough to end poverty in America’s largest city.

I thought something had changed since the irresponsible heyday of 2006. Funny. Wait… “funny” isn’t the word for it. What’s the word I’m looking for?

Selected Comments

anotherjess:

Reminds me of a favorite press release:

The outgoing CEO of the Bear Stearns investment firm announced today that the firm had performed so poorly that it was returning all government subsidies that it had received, including $37 million in tax breaks and other incentives given by the City in 1991 and the $75 million benefits package also given to them by the City in 1997.

http://www.nyccah.org/node/311

ksiler:

Maybe if they’re feeling particularly magnanimous, they could also restore some funding to the SUNY/CUNY/NY Community College Systems, and the pending cuts to financial aid for students who require tuition assistance.

http://www.stargazette.com/article/20100121/NEWS10/100121028/SUNY+loses+funding++students

[Jan 22, 2010] Is Goldman Materially Misrepresenting Its Prop Trading Exposure? by Tyler Durden

Jan 22, 2010  | zero hedge
Recently Goldman Sachs has been attempting to downplay the impact of prop trading on its operations, with various executives, among them both Lloyd Blankfein and David Viniar, claiming that proprietary trading accounts for a mere 10% of total revenue. This is likely a major misrepresentation and a substantial underestimation of the true impact of prop trading to the firm if an earlier analysis by third party credit analysis firm CreditSights is correct. According to CS analysts, Goldman's true prop exposure is at least 30% and probably in between 30% and 40%. This would imply that the proposed ban will have a truly material impact on Goldman, much more so than Goldman's executives claim.

Anonymous :

CNBC said it was "10% of revenue" yesterday but correct me if I'm wrong but is cost of funding is near zero, doesn't that mean this is close to a 100% margin product? You don't have revenue in prop trading, you have profit and loss.

[Jan 22, 2010] Observations On Inside Information Leakage By The Federal Reserve

An interesting letter posted today by a reader on Jesse's Cafe Americain caught our attention. As the reader proposes, on many occasions during the UST period of Q.E. between March and November, the Fed may have well been front-run by one or more "players" casting serious doubt on not only the integrity and propriety of the Q.E. process, but on just how much potential "leakage" may be occurring from the 33 Liberty office on a daily basis.

If this occurs in Treasuries, one can be confident that it is also prevalent in equities, MBS and all other asset classes. Is it hightime for the SEC to take a long, hard look at the primary source of market manipulation- the Federal Reserve Board Of New York?

[Jan 22, 2010] Weekly Initial Unemployment Claims Increase

1/21/2010 | Calculated Risk

The DOL reports on weekly unemployment insurance claims:

In the week ending Jan. 16, the advance figure for seasonally adjusted initial claims was 482,000, an increase of 36,000 from the previous week's revised figure of 446,000. The 4-week moving average was 448,250, an increase of 7,000 from the previous week's revised average of 441,250.
...
The advance number for seasonally adjusted insured unemployment during the week ending Jan. 9 was 4,599,000, a decrease of 18,000 from the preceding week's revised level of 4,617,000.
 
Weekly Unemployment Claims Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims increased this week by 7,000 to 448,250.

This is just one week - and the weekly data is noisy - but the level is still relatively high and suggests continued job losses in January.

Selected Comments

crazyv:

The key question in the whole employment picture is:

"did employers try and get ahead of the curve and lay off more people early in the year than would have been justified by the underlying economic conditions and thus the "improvement" in the labor market is nothing more than averaging out and the current labor market is actually stronger than the underlying economic conditions or was the early layoffs justified and the improvement is reflective of better conditions"

I lean towards the former- since early in the year with the credit crunch employers were trying to survive and easiest way to improve cash flow was to cut payroll.

black dog:

Bloodletting from retail will take a while. I'm sure Geithner knows this and was why he pushed his +jobs from 'first of the year, first quarter' to 'spring'.

crazyv:

The big problem was and has been the shadow banking system. Assets were created sold for securitization then those securities made their way back onto bank books disguised as AAA. The actual underlying assets was not subject to examination either by the banks internal controls, outside auditors or the regulators.

The key aspect of reform as to include a requirement that if an ABS security makes its way onto the books of a depository institution or ERISA subject pension fund - some part of the underlying assets must be on the books of some depository institution.

anonymoustoo:

The economy in Florida is certainly headed for a bigger nose dive. Having had breakfast with my girlfriends the other day, no one had great things to say about the economy. One GF's husband is heavy into real estate and has been for more than a decade. Small condo office/retail and and one huge industrial warehouse in Port St Lucie built at the top. These are sharp conservative people barely hanging on. Another GF has worked for the same high end childrens clothing company for 20 years. She dose not think they will make it through the spring. Our neighbors Architecture Firm laid of two. My husband works for a high profile Florida Utility who just lost a huge controversial rate increase. . Stock has tanked, capital markets are threatening their bond rating. They have lashed their capital budget and will be laying off many

I vote for a double dip.

Nanoo-Nanoo:

http://www.npr.org/templates/story/story.php?storyId=122779932&ft=1&f=1006&sc=YahooNews

Personal bankruptcies rose more than 30 percent last year, with more than 1.4 million protection filings. Many middle-class Americans sought relief after losing jobs, seeing their businesses fail or facing foreclosure.

In 2005, Congress overhauled the nation's bankruptcy laws with the intention of limiting the ability of many individuals to get rid of their debt — especially through the use of Chapter 7 of the bankruptcy code. But in this faltering economy, the law's impact has been limited.

In fact, far more people are now using Chapter 7 — in which assets are sold to pay off debts and what can't be paid is absolved — instead of Chapter 13. In a Chapter 13 bankruptcy filing, an individual signs up for a time-limited repayment plan and, in return, gets to keep certain assets. Creditors often get more money in Chapter 13 filings.

Cinco-X :

Scott Cohen spent 28 profitable years in the mortgage business, eventually starting his own firm just as the Southern California housing bubble was beginning to inflate in 2001. By 2007, the small company employed 15 people and provided enough income for Cohen, his wife, Merced, and their two kids to enjoy an affluent life in a tony Los Angeles suburb. But when the housing bubble burst, Cohen sold his business at a fire-sale price and watched in panic as the only industry he had ever worked in collapsed. His wife worked at the firm, too, and her job disappeared. As the family income plummeted, the Cohens traded in their two cars for cheaper ones, cut all the expenses they could, and ran up their credit cards. Finally, they had no choice but to sell their home for a loss. For the first time in 19 years, the former real estate executive became a renter.

(snip)

Many Americans feel they're going in a different direction these days—but too often, it's reverse. As the Great Recession of 2007–2009 finally winds down, millions of Americans face diminished lifestyles, with no obvious way to regain the wealth and prospects they enjoyed just a few years ago. It's natural to hope for a return to the familiar trappings of middle-class life: plentiful jobs, regular raises, predictable careers, and a steady improvement in living standards. Some may still find that. But a large number of Americans face lasting dislocations, even as the economy recovers. (More)

 

[Jan 21, 2010] Buffett predicts slow, uncertain economic recovery - By Josh Funk

January 20, 2010 | Yahoo! Finance (AP)

Billionaire investor Warren Buffett said Wednesday he's still not sure when the economy will recover, but he expects the rebound to be slow because American consumers remain uneasy.

The Chairman and CEO of Berkshire Hathaway said before the economy will recover, Americans will have to feel more comfortable about spending money.

"We need to get money in people's pockets. The first stimulus plan did not do that very well," Buffett said.

Buffett spoke to The Associated Press Wednesday before Berkshire shareholders met to approve a 50-for-1 split of the company's Class B shares as part of the company's planned acquisition of Burlington Northern Santa Fe Corp.

Buffett said the slow economic recovery the nation is experiencing now is related to the financial excesses of previous years, when many people and companies spent beyond their means.

"I thought it would be slow to come back and it has," Buffett said. "The hangover is sort of proportional to the binge."

Buffett said he thinks government should be more focused on the economy than health care reform right now, but he again praised government efforts to stabilize the economy during the financial crisis even if they haven't been perfect.

"The government came through. Overall, I give them high marks for what they did," Buffett said.

[Jan 21, 2010] Wells Fargo on Interest Rate Risk

"So they are keeping their "powder dry", expecting an increase in rates."
Jan 20, 2010 | CalculatedRisk

Here is a discussion of interest rate risk on the Wells Fargo conference call today (ht Brian):

Analyst: just a follow-up question on rates. I just wanted to understand, Howard, how you are thinking about the impact of the Fed exit on the fixed-income market and how you are planning on managing the balance sheet for that?

Howard Atkins, Wells CFO: Well, that is a good question, Betsy, and the Fed obviously is active in buying MBS. And despite the fact that the yield curve is as positively sloped as it is right now, their active purchases is a factor that is, in some senses, artificially keeping long MBS yields lower than they might otherwise be. At some point presumably, they will either gradually or more quickly reverse course and that could lead to an increase in mortgage interest rates. And as I mentioned a couple of times in my remarks, in possible preparation for that, we have been keeping our powder dry, in effect underinvesting this large base of core deposits that we have for the possibility that that reverses course.

Analyst: So you might get some OCI hit near term, but dry powder leads you to a better outlook for earnings, is that the way to think about it?

Atkins: Yes, again, while the mortgage business is showing good results right now, in effect, on the portfolio side, the investment portfolio, we, in effect, are giving up some current income. We don't believe in the carry trade and we do want to preserve some powder in case rates do go up and we'll have the powder at that point, we will invest the powder at that point to offset some -- whatever is going on in the mortgage business.

John Stumpf, CEO: I see this as the classic short-term view of the business and long-term view of the business. 400 basis points or something like that, which you make in the carry trade today is very attractive. But we think it is the wrong decision long term because we think the bias is for higher rates, not for lower rates and we are willing to wait for that to happen. We think that is the better trade.

Atkins: we are effectively giving up 400 basis points today for possibly a year or so, maybe plus or minus, to avoid the potential risk of a larger number of basis points for 30 years. So the last thing we want to do is get stuck with securities at these low levels of interest rates.

Stumpf: Because I think when rates move, they are probably going to move at some speed and I don't think it's going to be maybe a quarter. It could be more than that and it could happen relatively quickly.

Atkins: this is the same thing that we did back in 2002, 2003 when interest rates were also at cyclical low points just before they went up a lot. What we are doing now is not very different from the way the Company has always managed itself.

So they are keeping their "powder dry", expecting an increase in rates. Many other banks are getting healthy on the carry trade ...

EvilHenryPaulson:

so.... how come Wells Fargo is special in not having to declare any extraordinary charge-offs?

and does this interview mean Bernanke would be pushing for the government increasing alternative lending channels.... or is this just a happy story for shortsighted investors who haven't noticed the lack of loan demand, realistic growth projections going forward, that Wells Fargo is free to lend at adjustable rates, or if their happy-story-for-investors does come into play that inflation would take off

Duke:

Let me paraphrase - "Once the agencies stop buying MBS, and since securitization will then effectively be dead, we will use our cash to lend long just so long as we can get more than the 4% current carry trade." I think that would mean something like 10% mortagges in the near term?

Umm, if the rates jumped like that I think the Fed would jump back in. . . Otherwise price destruction, negative equity, and ruthless walk-a-ways will jump way up.

broward:

crazyv wrote:

is it not possible that Japan's lost 2 decades is nothing more than a reversion to the mean?

Reversion to mean is another model of equilibrium.

http://realmeme.com/roller/images/TheCrash/LongTermCreditCycleBalanced.png

Credit Cycle on the upside - investors demand more in return than the economy can deliver.
Credit Cycle on the downside - defaults and lower returns that balance the over-payments in the upcycle.

Mr Slippery:

Wells Fargo expects rates to rise this year.

Based on Dr. Bernanke's refi, it appears that he expects rates to rise, and he is the one holding the interest rate knob.

I'll go with with the gentleman holding the interest rate knob.

Cinco-X:

http://www.bloomberg.com/apps/news?pid=20601039&sid=aKQk6SUcSr3A

Commentary by Orin S. Kramer

Jan. 20 (Bloomberg) -- Everyone seems to know the current path of federal fiscal policy is a deathtrap over the long term. What’s peculiar is the relative inattention to the balance sheets of state and local governments.

Hidden behind accounting fictions, the politically unspeakable reality is that public employee pension systems are under-funded by more than $2 trillion. Add more than $1 trillion in unfunded health-care benefits for retired public employees, and state governments face protracted structural deficits ranging from challenging to insurmountable.

Unfunded promises are the equivalent of government debt. The burden of promises made by state governments to their employees -- effectively an invisible wealth transfer from future taxpayers to current and prospective public-sector employees -- amounts to about one quarter of U.S. gross domestic product. The strength and durability of the current economic recovery are unknowable; that state and local governments, which employ one in nine workers, will be a drag on that recovery is certain.

[Jan 21, 2010]  2010 Investment Strategies Six Areas To Buy, 11 Areas To Sell by Gary Shilling

One year too early
The Big Picture

Sell Junk Bonds.

During the dark days of the financial crisis, the yields on junk bonds leaped to 19.3 percentage points over Treasurys as investors worried about complete financial collapse and widespread defaults among low-grade issues. Triple-C rated bonds, the lowest junk tier, sold at 42.6 cents on the dollar at the beginning of last year.

But the bailout of the big banks and easing of the financial crisis allayed investor fears and junk spreads narrowed. Institutional investors piled in, followed by individual investors, many of whom sought alternatives to low returns on bank deposits and money market funds. So the spread has dropped to 4.6 percentage points, much closer to where it was before the crisis began. Last year, junk bonds returned over 50%, much more than the 25% gain on the S&P 500 index.

Nevertheless, we believe this rally is way overdone. Default rates on junk bonds normally peak late in recessions or in the year after it ends. Also, the default rate may reach or exceed the previous peak in 2002 if the economy remains weak, suggesting major declines in junk bond prices. Furthermore, the value of bonds after default is likely to go lower if the recession drags on, as we forecast. Slow revenue and cash flow growth will make it difficult if not impossible for a number of financially weak and weakening firms to service their bonds and other debts.

Sell Most Commodities.

Commodity prices rebounded last year and benefited from cheap and available money. Some live in their own worlds. Petroleum is not only influenced by fundamental supply-demand conditions, but also by OPEC decisions. Natural gas prices in the U.S. weakened last year with the recession, but also because of new production technology that unlocked abundant shale gas. The prices of agriculture commodities, including honey, are highly dependent on weather.

In any event, we believe that economic supply and demand will rule most industrial commodity prices this year and result in weakness due to sluggish global business conditions. Also, investors put a record $50 billion into commodities in 2008 but then retreated last year after prices nosedived. They learned the hard way that commodities aren’t an asset class but speculations, and may be cautious this year. And the strengthening dollar should depress the prices of the many commodities traded worldwide in dollar terms. We look for falling commodity prices this year. Also, we believe that many commodity-producing companies and their suppliers of equipment and supplies will be unattractive investments as weak demand, excess capacity and soft prices persist. The same is true for economies such as Persian Gulf sheikdoms that depend heavily on petroleum, as witnessed by the financial collapse of Dubai.

Sell Developing Country Stocks and Bonds.

As late as the end of 2007, most forecasters believed in decoupling. Even if the U.S. economy suffers a setback, they said, the rest of the world, especially developing countries like China and India, would continue to flourish. Indeed, the strength of those economies could even aid the U.S. as they bought more American exports.

We disagreed. We did a study two years ago that found that China was not yet developed sufficiently to have enough people with discretionary spending to support the economy domestically. She remained export-led, with most of those exports going directly or indirectly to U.S. consumers. So, with our forecast of a major retrenchment by U.S. consumers, we predicted big trouble for China. Our analysis revealed that in China, it takes about $5,000 per capita to have meaningful discretionary spending power. About 110 million Chinese had that much or more, but they constituted only 8% of the population. In India, that class was a mere 5% of the population. In contrast, it takes $26,000 per capita in the U.S. to have discretionary spending power and 80% of Americans have at least that much.

Well, as they say, the rest is history. The Chinese and most other developing Asian countries nosedived as U.S. consumers retrenched. But in the wake of China’s huge $585 billion stimulus program last year, massive imports of industrial materials like iron ore and copper, jumps in construction of cement, steel and power plants and other industrial capacity, and a pick up in economic growth, many forecasters again believe in decoupling.

We continue to disagree. Sure, some countries such as Brazil were not hurt too severely by the global recession, at least so far. Still, most developing economies depend on exports for growth, and the U.S. consumer has been the biggest buyer of those exports and far and away the globe’s biggest spenders. As the American consumer saving spree continues to shrink the U.S. trade and current account deficits (Chart 9), those developing economies will be subdued.

Selected Comments

VangelV:

It seems to me that people that do the opposite of what is being recommended will do much better than those who are naive enough to buy what Shilling is selling. How exactly do long bonds boom when the country that is issuing them is bankrupt and has to resort to printing money to buy mortgage backed paper and treasuries that have no other buyers? How exactly does the dollar gain purchasing power when the states are also bankrupt and in need of bailouts? How do oil or gold fall in price over a one year period if there are serious supply issues and plenty of willing buyers hoping to hedge their USD exposure?

Machiavelli999:

VangelV,

Look at Japan for an example of how. Japan has a debt to GDP ratio of close to 200%. And yet it borrows at rates lower than America. How? Well if you think a step beyond your typical right wing nut job economic logic, you’ll see that Japan’s government debt is largely financed domestically by its citizens. To spell it out a little more clearer for you: Japan’s citizens save a lot of money. They keep in their bank accounts. The banks don’t lend it out into the private sector, but just place into Japanese debt.

The same thing will happen in the US. The US consumer will continue saving cash. But saving cash in a checking account means buying government debt. Because that’s what banks do with most of their reserves.

So, if you agree that the economy will continue to suck, you have to buy government debt. I agree it is a little bit of a paradox. But it is what it is.

The cash has to go somewhere. The only way inflation will happen is if you think all that cash that was created will go into consumer goods (i.e. consumption). It won’t, because consumers need to save and pay off their debts. So, all that cash will go into checking accounts which consequently go into Treasuries.

It’s really not that hard to understand as long as u take off your right wing nut job colored glasses.

How the Common Man Sees It:

Buy Income-Producing Securities.

I’d say go for low debt dividend paying multinationals. That way you get natural diversification with currency protection built in.

I’d have to agree with posters that say buying the bond and dollar are risky. They aren’t the riskiest but they have risk. With the world deleveraging (especially Americans) the entire borrowing pool is going to be limited by supply demand factors. With America borrowing so much money they are not going to find the elephant buyers that we able to eat this recklessness in the past. Last year alone, the Fed was buying a good portion of the debt. That is an ominous sign. Sure, going forward the Fed could buy it all but then they would be pumping dollars into the system.

That leads to the second risk point. The dollar is a credit dollar. Not only is it a credit dollar but it is the biggest credit dollar in the world, it is bloated and it has not fixed the problems that got it here. That is why I call it risky. There is even concern that the US and UK will lose their triple A status. That is huge risk for a currency that is supposed to be the most stable in the world.

[Jan 19, 2010] The currency quarrel with China is a dangerous distraction

The opening sentence begins by pointing out that “it is a cliche that the United States has no more important bilateral relationship than that with China.” Is that true? Steve Dunaway, adjunct senior fellow for international economics at the Council for Foreign Relations says:

“Only roughly 15 percent of U.S. imports come from China. Moreover, all of the basic types of manufactured consumer goods that China exports to the United States (clothing, textiles, footwear, toys, small appliances, etc.) can be imported from other countries or could be produced domestically. The prices for goods that could substitute for products from China would be higher, but the difference in costs would be relatively small.” [2]

It's Canada – NOT China - that is the U.S.'s largest trading partner. It has been for some considerable time. [3]

...In actual fact, it is clear that the US Government created the conditions under which America consumes more than it produces at home. Successive American Governments have deliberately pursued a policy entailing the embedding of its domestic corporations or their subsidiaries in foreign nations. “Investment abroad is investment in America” has been the slogan of American corporations at least since the late 1960s.

Nowadays the world economy is quite literally dominated by giant transnational global corporations, most of which are owned and controlled by American citizens. In 2002 it was written:

“9 of the top ten companies in the world, 72% of the top 25 global corporations, 70% of the top 50 global corporations. 5 of the top global banks, six of the top 10 pharmaceutical/biotech companies, 4 of the top ten telecommunications, 7 of the top IT corporations, 4 of the top gas and oil corps, 9 of the top ten software companies, 4 of the top ten insurance companies, 9 of the top ten general retail companies.” All call the USA their home. [4]
and these firms tended to enjoy extraordinary levels of dominance in world markets:
“By the early 1990s, five firms controlled more than 50 percent of global market share in consumer durables, steel, aerospace, electronic components, airline, and auto industries. In oil, personal computers, and media, five firms controlled more than 40 percent of the market. In American markets ranging from commercial airlines and aerospace to computer hardware and software to household appliances, three or four firms control up to 90 percent of the market, and market share concentration continues to increase through mergers and targeted growth strategies.” [5]
China’s domestic firms, on the other hand, simply can’t compete with these global giants.

“At the start of the 21st century, not one of China’s leading enterprises had become a globally competitive giant corporation, with a global market, global brand, and a global procurement system…The brutal reality is that after two decade of reform, China’s large firms mostly are still far from being able to compete with the global giants. ” [6]

It seems odd under these conditions that the Washington Post article complains about China’s attempts to protect its export industries by linking its currency to the plunging US dollar. Why is the dollar plunging in value in the first instance?

The American government has pursued economic and military policies whose net effect tended to consistently devalue its domestic currency. Actions such as engaging in decades of avoidable military aggression against a long list of nations, refusing to enforce viable fuel standards for vehicles, failing to use the decades of opportunity since the ‘70s oil crisis to foster and protect an sustainable alternative energy industry, deregulation of financial and commodity markets that have consequently bred inflationary speculative activities on a disastrous scale. And so forth. The list of US government failure is a long one.“U.S. exports are not growing as much as they would otherwise, and neither are those of other countries in Asia.” Says the Washington Post.

Well, the United states is still, by every measure, the world’s largest economy but even the citizens of this wealthy nation are struggling to find the financial resources to sustain the huge markets that the global TNCs would like to see continued indefinitely. Neoliberalism has bred massive inequality:

“Between the mid-1970s and 2006 the Gross Domestic Product of the United States trebled; the level of labour productivity almost doubled; the Dow Jones Index rose from 1000 to 13,000. Yet astonishingly enough, during that entire period, according to several studies, the income of the average American worker and family essentially remained stagnant [whilst] …. from 1980 to 2006, … the wealthiest 10 per cent of Americans increased their share of national income from 35 per cent to 49 per cent.” “By 2006 the wealthiest 1 per cent earned 20 per cent of national income.” [7]

[Jan 19, 2009] Bill Gross's $200 Billion Fund Flees U.S. Bonds Into Foreign Assets

It feels like Spring of 2007

As shown in the table below, taken from the latest fourth quarter Pimco report, 'Non U.S. Developed' debt has jumped to 16% of the portfolio vs. just 3% the quarter before. That's an enormous shift in exposure given that it happend over just three months for this $200 billion fund.

[Jan 18, 2008] Sakakibara Says Slower U.S. Recovery May Hurt Dollar

Bloomberg.com

Sakakibara, formerly Japan’s top currency official, said the global economic recovery may slow in the second quarter, pushing Japan into a double-dip recession and weakening the dollar to 85 yen.

“Should the U.S. experience a relatively weak rebound from spring to summer there’s a high possibility the dollar will drop,” said Sakakibara in a Jan. 15 interview in Tokyo.

Japanese Finance Minister Naoto Kan and U.S. Treasury Secretary Timothy F. Geithner probably have an unwritten agreement to let the market set the dollar’s level, said Sakakibara, who became known as “Mr. Yen” during his 1997-1999 tenure at the Ministry of Finance for his efforts to influence the currency’s level through verbal and actual intervention in the markets. Kan and Geithner might change their approach should the dollar approach 80 yen, he said.

Nowadays the world economy is quite literally dominated by giant transnational global corporations, most of which are owned and controlled by American citizens. In 2002 it was written:
 

“9 of the top ten companies in the world, 72% of the top 25 global corporations, 70% of the top 50 global corporations. 5 of the top global banks, six of the top 10 pharmaceutical/biotech companies, 4 of the top ten telecommunications, 7 of the top IT corporations, 4 of the top gas and oil corps, 9 of the top ten software companies, 4 of the top ten insurance companies, 9 of the top ten general retail companies.” All call the USA their home. [4]
and these firms tended to enjoy extraordinary levels of dominance in world markets:
“By the early 1990s, five firms controlled more than 50 percent of global market share in consumer durables, steel, aerospace, electronic components, airline, and auto industries. In oil, personal computers, and media, five firms controlled more than 40 percent of the market. In American markets ranging from commercial airlines and aerospace to computer hardware and software to household appliances, three or four firms control up to 90 percent of the market, and market share concentration continues to increase through mergers and targeted growth strategies.” [5]
China’s domestic firms, on the other hand, simply can’t compete with these global giants.
“At the start of the 21st century, not one of China’s leading enterprises had become a globally competitive giant corporation, with a global market, global brand, and a global procurement system…The brutal reality is that after two decade of reform, China’s large firms mostly are still far from being able to compete with the global giants. ” [6]
It seems odd under these conditions that the Washington Post article complains about China’s attempts to protect its export industries by linking its currency to the plunging US dollar. Why is the dollar plunging in value in the first instance?

The American government has pursued economic and military policies whose net effect tended to consistently devalue its domestic currency. Actions such as engaging in decades of avoidable military aggression against a long list of nations, refusing to enforce viable fuel standards for vehicles, failing to use the decades of opportunity since the ‘70s oil crisis to foster and protect an sustainable alternative energy industry, deregulation of financial and commodity markets that have consequently bred inflationary speculative activities on a disastrous scale. And so forth. The list of US government failure is a long one.“U.S. exports are not growing as much as they would otherwise, and neither are those of other countries in Asia.” Says the Washington Post.

Well, the United states is still, by every measure, the world’s largest economy but even the citizens of this wealthy nation are struggling to find the financial resources to sustain the huge markets that the global TNCs would like to see continued indefinitely. Neoliberalism has bred massive inequality:

“Between the mid-1970s and 2006 the Gross Domestic Product of the United States trebled; the level of labour productivity almost doubled; the Dow Jones Index rose from 1000 to 13,000. Yet astonishingly enough, during that entire period, according to several studies, the income of the average American worker and family essentially remained stagnant [whilst] …. from 1980 to 2006, … the wealthiest 10 per cent of Americans increased their share of national income from 35 per cent to 49 per cent.” “By 2006 the wealthiest 1 per cent earned 20 per cent of national income.” [7]

[Jan 16, 2010] Obama’s “Get Tough on Banks” Again Tries to Play the Public for Fools

January 15, 2010 | naked capitalism

Jim in MN:

I have noted this before but not for a while. In the 1930s it took government about three years to come to grips with the fact that their initial policies didn’t work. They beefed up the new Reconstruction Finance Corporation and among other things inserted Federal agent into bank management positions, in order to begin to get credit and lending back in order.

The private sector banking industry is completely rational in simply going on strike. This is a defensive response to the coming series of meteor strikes likely to impact their balance sheets on top of those already there.

This lending strike, seen especially from the perspective of small business, is like the failure of thousands of smaller banks in the 1930s. This characterizes the ‘Slump’ phase of the Great Depression and takes a couple of years to really collapse the economy and social systems/expectations. Our cadre of so-called economists and policy wonks clearly have never bothered to study this history, instead obsessing with the perceived glory and power of the Depression-era stimulus programs. Basically obvious and only semi-relevant stuff compared to a bankers’ strike.

The bankers’ strike needs to be seen as a clear and present danger to our national security, on a par with a railroad strike. It simply must be broken by force. It would be no more trouble than a large drug raid.

The fact that there is no analysis, and that options that were critical policy choices in the 1933-34 period are seemingly unheard of, shows clearly that we are only one year into a several year process of screwing the pooch. As a direct result, the crisis will be much more severe and protracted. The quarter million in fresh debt placed on my young children is barely a start, and for what?

May God have mercy upon our Nation. I only hope we can maintain the Republic when this unfolds to its full extent.

jdmckay:

Thanks for FDR quote… it was appropriate for his time, and for ours now.

I spoke loud and clear for just that to everyone I knew beginning before election, after BO nominated Geithner etc etc…. mostly fell on deaf ears. I was regular on EW’s blog, pretty much got run out of there for my comments thusly.

Whatever BO’s lack of courage/wisdom/???, worse problem IMO is utter lack of understanding, ahead of the curve, buy large body of electorate. As long as public is willing to be lead by the nose, they will be led by the nose.

BO had enormous opportunity to really effect “change”, given US’ utter disenchantment w/everything Bush.

He’s blown that opportunity completely. I share your disgust/frustration, and really don’t have any “hope” of solution from him.

In past, I never considered voting 3rd party as it seemed like only a protest vote that would only serve to swing things Bush’s way. At this point, I’ve changed my mind: if a 3rd party emerged, built on what’s really needed (or as Howard Dean said: the “Democratic wing of the Democratic party”), I’d run w/it.

And honestly, if Dean went his own way and tried to start 3rd party, I’d put profession on hold and bust my butt to work w/him.

sherparick1:

Ah the internet! It allows me to discover so many folks who have obtained the ability to read minds.

Yves and so many here claim that Obama has “betrayed” the platform he ran on. Again, go back and read that platform. He was the right on to Clinton and the other Democrats on health care and economic policy, as Paul Krugman points out. He comes from Hyde Park and is an adjunct law professor on the same faculty and Law and Economics gurus, Judges Richard Posner and Frank Easterbrook. Yes, he at time used some populist rhetoric, but nothing about Obama was populist, in fact anti-populist. He won because used his anti-Iraq war from the beginning stance as his creed with the long time anti-war wing of the Democratic party which was anti-Clinton; he captured the New Democratic/Neoliberal faction of upper middle and upper class Democrats who, while very pro-choice and socially liberal, had internalized neo-classical economics (market good/government bad aka as New Deal bad & archaic/tax cuts and deregulation good) a faction that had been pioneered as reliable core vote by Gary Hart, Paul Tsongas, and Phil Bradley in earlier Democratic primary contests, and added to that the alleigance of Black voters intoxicated at the idea of a Black nominee, or mirable dictu, a Black American President. And it is and was a miracle that I for one will always regard as one of the great achievements in American history, no matter his other failures.

Is Obama still captured by the Rubin clique? Yes, but of course so would almost any Democrat. Even Paul Krugman was speaking highly of the achievements of Bill Clinton’s economic team as late as December 2007. Also, Obama in a sense has took over at a earlier stage than FDR did. Again, I would recommend reading Schlesinger’s “The Crisis of the Old Order,” the first volume of his “The Age of Roosevelt” to see how FDR’s views changed from 1930 through 1933 as the Depression deepened. The FDR who came to power in March 1933 held very different views than the man had in March of 1931. Further, the great reforms, such as the SEC and Glass-Stegall, did not occur until 1934 and 1935.

Finally, you all seem to have an idea of Presidential omnipotence on domestic policy that does not exist. One needs 218 votes to pass a law in the House and with the way Senate is currently run, at least for liberal proposals, 60 votes in the Senate. 41 senators from states representing just 12% of the population can block legislation. Please tell me gentle souls how you would get your 218 House votes and 60 Senate votes for all your reform proposals.

Geithner, Summers, and Bernanke are not so much corrupt as they are prisoners of the groupthink of the last 30 years. As the young graduate student who signs himself “Thorstein Veblen” and runs the FireLarrySummersNow.com, Larry, probably because of family dynamics (uncles Ken Arrow and Paul Samuelson being the greatest liberal, Keynsian economists of the post WWII prosperity), essentially shares the same views as Greg Mankiw, as taught to them both by Martin Feldstein. Feldstein was Chairman of Reagan’s counsel of economic advisors and Mankiw held the same position for George Bush (and was followed by Ben Bernanke after he left – I think we have a theme here). I once had hopes that Summers had discovered the errors of his way back in 2008, but that hope is now crushed.

Why did Obama choose them? Well, because he himself is a Harvard man and a member of the elite, he shares a lot of the groupthink of the last 30 years. He has not (”yet”) disenthralled himself from the tired dogmas of the past, particularly the dogmas of “freshwater” economics. If his Presidency is still going to succeed, he will have to disenthrall himself. Ultimately, I think he is a smart enough politician that he will.

Testimony the FCIC should really be hearing…

 FT Alphaville

Optimist

“Dear, what did you expect, she is just a dog !” is probably the maxim that reflects the behaviors of people in large financial organizations better then one might think from the first sight.  Organization induced idiocy might be another term.

And the problem is not only with rules. Probably overcomplexity dooms the current financial industry: no matter what set of rules is imposed on the players, the game just switches to finding a loopholes. Entities must became much smaller, lines of business less diverse and complex and accounting more transparent for any set of rules to be marginally effective. I think the New Deal creators understood this issue at least implicitly. Size really matters ;-)

May be the charter should be revoked automatically from any financial organization which reached certain size and/or certain age. This way top management would have more difficulties to instill imperial thinking when expansion via acquisitions becomes the mode of existence and with the complacent board blessing create "after me deluge" situation like happened with Citi. Fish rot from the head down as do organizations… Investment banks might benefit from being limited to partnerships.

Contrary to what Harley Bassman preaches "Too big to jail" entities are rules averse by definition and that rules aversion start at the very top. Quantity turns into quality. They also are more susceptible to "strong ruler" trap. I think this is a situation somewhat similar to totalitarian states dynamics. The society is simply captured until the crash of the regime occurs. Dictators can be very efficient at the beginning and solve problems quicker and more comprehensively then democratic states, but the problems always arise as the regime ages and the crash, not reform is the usual outcome.

[Jan 14, 2010] Testimony the FCIC should really be hearing…

Jan 13, 2010 | FT Alphaville

Harley Bassman, a veteran strategist on the US rates trading desk at BoA Merrill Lynch, is hanging up his boots after more than 25 years on Wall Street. Or at least his widely read RateLab strategy note is going on “indefinite hiatus.”

Here is his final dispatch:

A number of years ago I left a yummy freshly made sandwich on the kitchen table. As I turned my back to take a drink from the refrigerator, the dog jumped up and grabbed the sandwich. Enraged, I turned to chase down the beast (with my sandwich in her teeth) and teach her a painful lesson. My wife grabbed my arm and stopped me in my tracks by sternly telling me: “Dear, what did you expect, she is just a dog !”

So looking back at the financial Tsunami that almost collapsed Western Civilization, how can we honestly say that we were surprised by these events ?

When Credit Rating Agencies are paid by the issuing firms, what did we expect ?

When Companies with a bifurcated business structure had the gains go to private shareholders while the losses would be shared with the Government, what did we expect ?

When the average person (not a “Prime” borrower) was offered the opportunity to buy a private home for their family at a low interest rate with no requirement to provide financial documentation, what did we expect ?

When the Directors of Public Companies are hired by and serve at the pleasure of the Senior Managers they are supposed to be supervising, what did we expect ?

When Senior Financial Managers are compensated relative to short-term financial performance, what did we expect ?

Let me be perfectly clear, I am not calling anybody a dog, nor am I passing judgment upon any of those mentioned above. What I am saying is that given a carrot and stick situation, most people will reach for the carrot. When presented with a particular set of rules, people will act in the manner that optimizes their personal circumstances. So the answer to the question of how to avoid a repeat of the recent past is not to ask people to act against their nature but rather to create a set of rules where the participants improve their lot by reaching for the proper carrot.

A corollary to the above is the notion that everybody acts rationally from their own point of view. Let’s take a truly outlandish example to make the point. The serial killer is finally captured and is taken to the police station. The disturbed detectives ask him why he did it? The psychotic killer calmly replies: “The voices told me to do it, what would you have done ?”

When professional investors were liquidating Senior bank loans, short-maturity High Grade Credits and Convertible bonds at silly prices, it was never a vote on the credit worthiness of the issuer; it was a panic driven effort to keep their jobs.

Similarly, when the FED cut rates to zero, the subsequent rally in stocks and bonds was not driven by a massive revision of the credit and economic outlook, but rather a necessity to keep their jobs. After all, who is going to pay a money manager to earn the T-Bill rate of Zero ? These actions are both rational and reasonable under the circumstances and I can assure you I have done the same many times. [This is one reason I have survived so long.] Just do not confuse selling at the bottom as a comment on value; it is often just a career enhancing strategy if done in a limited manner.

Greenspan’s error in judgment, conceived from his Ayn Rand based view of the World, was not that people would act in their own self-interest (they do), but rather that removing all the rules was a required pre-condition for this to occur. It is not a mutually exclusive situation where you can only have personal freedom/responsibility with no rules. On the contrary, real freedom is the ability to act on your own within the confines of the rules. Without a set of rules, there cannot be a game, only chaos. Hopefully, the new Financial regulations being discussed will focus upon creating rules that motivate behavior that benefits the public good as opposed to focusing on micro-managing the actions of the individual. This concept is certainly the basis for the old saying: “Good fences make good neighbors”.

I have frequently noted that: “It is never different this time”. This idea seems to have provoked much consternation among some RateLab readers. Judging from the general tone and flavor of these comments, it seems likely that these respondents have not yet reached “geezer-hood”.

The core reason we had a Tulip craze preceding a Dot-Com panic followed by a Housing boom is that they all involve markets made up of transactions created by humans. These are not events driven by computers or other inert beings making dispassionate decisions. It is precisely the emotions unique to mankind that create these obviously, ex post, disastrous situations. And because the general range of human emotion does not change much over time, the vicious swings from greed to fear, in the end, is as consistent as the movement of the tides. Unfortunately, because the length of this emotional wave is longer than the average Wall Street career, most people are not around long enough to notice.

While we may not be “doing God’s work”, we are also not Moneychangers at the Gate. We are the grease that allows the real production of commerce to function efficiently. Despite the actions of the few who harmed the system, we should be proud of our careers in Finance. Making money for your clients, and yourselves, is nothing to be ashamed of as long as it is done with honor and character. As my bosses declared at the start of my career: “Do not take actions that you would be ashamed to have posted on the front page of the New York Times.”

So what is our final trade idea ? Not much has changed. The next few years will be broadly similar in nature our last Real Estate induced financial crisis from 1989 to 1994. The massive liquidity the FED and the US Government has injected into the system will need to be removed. Only the timing will be uncertain. They removed it too quickly in 1994 and too slowly in 2004. The trick to outperforming your peers will be in choosing which way they execute “The Drain” this time.

A careful reading of the speech Bernanke gave in Japan (May 31, 2003) indicates that he will probably choose the slower path to ensure that the US does not have another lost decade. As such, short the market via long-dated payer spreads and ladders should be a winner. And while MBS can remain rich well past the end date of the FED’s Quantitative Easing program, there are many other ways to create a superior risk/return profile. As such, MBS will underperform other asset classes.

Although RateLab will cease publication, I shall still be sending out comments and recommendations via email. I will also continue to “eat my own cooking” via my proprietary trading book. I am open to receive your calls (both internal and external) and I expect to be on the road for some number of weeks per year.

This will be a great year for Interest Rate trading; Full speed ahead.

Pdf copy in the usual place.

[Jan 14, 2010] Surely he can’t still be bearish by Neil Hume

Jan 13, 2010 |  FT Alphaville

So began the presentation of Albert Edwards at SocGen’s ‘Alternative Strategy’ event at London’s Marriott Hotel Grosvenor Square on Tuesday.

In front of a packed Westminster Ballroom — we reckon around at least 400 people turned up — Edwards revealed, much to the surprise of no one, that ‘yes’ he was still bearish.

The bank’s self-styled ‘Stratégiste Global’ told delegates not to be fooled by the cyclical economic recovery because it was impossible the secular bear market had ended.

To back up that claim he produced a series of slides including ‘Can the secular bear market really be over with the current Shiller PE at 19x’ and ‘De-leveraging lasted well past the 1991 recession end’.

The key conclusions from Edwards’ presentation were as follows:

But Edwards was not finished.

He  went on blame Greenspan and Bernanke for “this bust” — they failed to raise interests rates quickly enough after the dot.com bubble and caused another bubble in the housing market — and said for them to place the blame on an Asia savings glut was shameful. He leveled the same charges at Bank of England governor Mervyn King.

Due to deadline pressure we were unable to stay and hear the presentations from SocGen’s Andrew Lapthorne and Dylan Grice or guest speaker James Montier (Edwards’ former colleague who now works for GMO).

However, we did pick up a copy of Montier’s presentation: ‘Was it all just a bad dream, Or, Six Lessons Not Learnt’. And there are:

  1. Markets aren’t efficient.
  2. This time is never different.
  3. Valuations Matters (in the long run).
  4. Wait for the “fat pitch”.
  5. Sentiment matters.
  6. Benefits of cheap insurance.

We also picked up a 30 per cent off voucher for Montier’s book, “The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enenemy’

According to Edwards it was probably the voucher that accounted for Tuesday’s impressive turnout. Either that or there are a lot of investors who still harbour serious concerns about the sustainability of the current recovery.

===

Putting on my soothsayer hat I predict something in China after Chanos' talk in Oxford later in the month. That should kick start the (excuse the pun) Chinese whispers. This combined with short selling and margin trading now being legal locally starts a terrifying doom loop in March which goes global but peters out as the World Cup starts . The Tories will be in, England wins World Cup, inflation begins, Merry Christmas Mr. Lawrence.
I reckon.
As long as the US doesn't start mucking about in Iran or Yemen too much and scares the horses.

===

@vp

If we are seeing Chinese tightening now, the the immediate outlook is likely a fall in equity markets etc. followed by extended QE and low rates ine US,Europe including the UK followed by a rally in equities with the full blown Chinese bust still some way off and still plenty of opportunities to trade on the bear and then on the bull tack.

===

I'm confused by what appear to by contradictions in the 1st and 3rd key conclusion: (1) economies are vulnerable to any pause in stimulus, but (3) QE has had a limited effect.

===

I hope the audience enjoyed the presentation - Amazon's already quoting 30% off on the book!

===

I very much agree with Edwards, This market is long overdue a correction and it will happen when nobody expects it. Bulls v Bears ratio is 3 to 1 and the VIX is at long term lows so could happen soon.

I think we need one more big freakout then get back to business as usual (buying stuff, waiting for it to go up, taking a cut).

===

Don't disagree hedgehog; if anything, I think his timing may be wrong - could be many, many months before the (IMO inevitable) reality starts setting in.

Also, for me, it'll be based on a China bust.

===

beware confirmation bias - it's such a human trait and so difficult to avoid because it makes you feel good. I think Buffett used the " fat pitch" analogy a few times

===

The "fat pitch" strategy is rather like Geoff Boycott's batting style of old I assume: block or leave it alone until you get a loose one. Boring as hell to watch though.

Excellent, thanks - this is proving a long, long hibernation for us bears, but when we finally get to come back we're going to feast on bulls like never before.

Edwards talents are wasted at SocGen-he should go out on his own to keep telling it as it really is.

Very interesting -- massive volaitlity is not a bear market though, just an exciting one?

[Jan 14, 2010] Obama to Announce $120 Billion TARP Fee «

Looks like Barack "Chump Change" Obama miscalculated big way. The first day of reckoning is coming. But 401K investors will also pay for his transgressions and unconditional support of bankers. 
January 13, 2010  | naked capitalism

attempter:

They really are in an impossible position, since the absolute goal in all of this has to be to keep pretending that all this worthless toxic paper has any value whatsoever. That’s been the great project of Wall St and the government since summer of 07.

The overriding concern always is to prevent price discovery. To prevent the market from actually finding out what this crap is worth, the way it so ardently wants to.

Since every bank knows the garbage is worthless, none of them are willing to buy or further compromise their balance sheets by lending.

So it’s up to the taxpayers to shoulder the entire burden. That’s why this criminal government will continue to buy MBS. How can it stop at $1.25 trillion? The purchases are the only thing keeping the pretense going at all. The moment they stop the crash recommences. That’s why they lifted the bailout limit on Fannie and Freddie to infinity.

If they can’t figure out a way to directly buy the toxic junk from the banks they can at least do it through the GSEs.

The bailout is permanent, for as long as they can keep it propped up. This is Bailout America.

Since Obama was lying all along when he promised himself as a reformer, since he never had any intention of doing anything but trying to prop up the status quo, he found himself in this self-imposed bottleneck where he has no choice but to do what he’s doing.

Though his own political ineptitude and the fact that he’s a contemptible twerp the banksters can’t bring themselves to even pretend to respect has made it look alot worse cosmetically than it had to.

Like for example the fact that he clings to Geithner. That he’s gratuitously relinquished one of history’s oldest, easiest political tricks, sacrificing an unpopular subordinate to take the heat off yourself and buy time. That could work – look around and you’ll see how many delusional people still cling to the “if only the czar knew” myth.

But wingnut welfare seems completely wired into the system (it’s not just Obama, of course). Nobody can ever longer be fired or even minimally be held accountable for any level of incompetence or crime.

DoctoRx:

IMO taking strong action against Big Finance at the outset of the administration would have been just as popular as Reagan’s actions against PATCO and the postal workers were. Mostly the only whiners would have been the stakeholders of the companies affected.

A new broom should sweep clean.

Robespierre

I don’t trust any thing that comes out of Obama’s administration. As long as bankers’ incomes (individuals) are not directly targeted there will be no change. This will never happen. I’ve seen this before, the issue is not greed, insolvency, liquidity etc. The issue is government corruption. I know we like to think that the USA government is better than most and to enforce this illusion by changing the names of corruption. For instance, we call bribes “campaign contributions”, we punish corporations with fines and taxes yet we leave the real perpetrators unpunished. As long as we pretend that all is well with the system there will be no progress.

DownSouth:

Yves said: “…the administration hitched its wagon to the plutocrats.”

Is it conceivable that Obama could have been any more mind-numbingly stupid than he has been?

He had the ordinary people solidly behind him. And he tossed them to the wind. And for what?

The man who becomes prince through the help of the nobles will find it more difficult to remain in power than the man who becomes prince through the help of the people, for the former will be surrounded by men who will presume to be his equal. As a consequence, he will not be able to command them or control them as he would like.

But the prince who comes to power through the support of the people will stand alone, and there will be few or none at all near him who will not be disposed to obey him. Besides, it is impossible to satisfy the nobles fairly without injuring others, whereas it is indeed possible to do so with respect to the people, for their wishes have more right, since they seek to avoid oppression while the nobles seed to oppress. It should also be noted that a prince can never be secure against a hostile populace because it is numerous, whereas he can be secure against the nobles because they are few. The worst he can fear from a hostile people is to be abandoned by them, but from a hostile nobility he must fear not only being abandoned but also being attacked. Being possessed of more foresight and shrewdness, the nobles will not let slip any change to protect their interests, and they will seek to gain favor with any potential winner. Moreover, a prince must of necessity accept the common people as he finds them, but he can very well do without any particular group of nobles, since he can make them and unmake them at any time by withdrawing or bestowing authority as he pleases.
–Niccolo Machiavelli, The Prince

It is obvious that Obama has convinced himself that he is the quintessential Machiavellian. He got the dishonesty part right. He got the treachery part right. He got the betrayal part right. But there is one part he got horrifically wrong, and that is the part about political calculation.

Siggy:

Didn’t vote for President Obama. Did want him to succeed, so far he’s failing.

The $120 billion TARP fee is an interesting breech of contract, it appears to have some currency with the public. In some ways it has the appearance of being moral and ethical; yet, it is what it is, a retroactive tax. There’s a bit of a Constitutional problem there.

Everybody seems to see this TARP Fee as a PR exercise. In that vision there is the circumstance of a failing coverup. The Fed and the Treasury failed in their regulatory obligations. The Congress failed in its obligation for oversight of the agencies. This announcement comes on the opening of the hearings that are intended to divine causes and a course of corrective action. Does this announcement put a pall over the impending hearings?

A lot of theater going on and very little substance. What’s that line in Macbeth; “. . . sound and fury signifying nothing!”.

Our government has failed us. In large part the occurrence is the result of our inattention. I sense that all those student loans have been a great waste. Does the public understand that it does matter whether they vote. It does matter what policies that it asks for and receives. Isn’t it self evident that what the government doles out must be funded with either taxes or a devaluation of the money supply.

If you were around for WWII, you may recall rationing and stamps for meat and sugar and gasoline. You may recall the paucity of consumer goods and the forced savings that that experience engendered. You may recall that we were then a creditor nation. If you were around for that event you will probably agree that WWII marked the onset of our recovery from the Great depression.

It was savings, albeit forced that boot strapped us out of the Great Depression. A very important lesson has been trashed. If you think that government stimulus is going to save our bacon this time, consider the fact that you cannot, in recorded history, find a nation that borrowed its way to a sustainable prosperity.

“We’ve Never Seen this Before – Such a Huge Rally, and the Little Guy Is Out”

Joseph Stiglitz says that Wall Street is hyping up the economy to sell more stock.

Has it worked?

Well, the stock market certainly has rocketed up from its March lows.

But many investors are still avoiding equities.

As Vincent Deluard – a strategist for TrimTabs Investment Research (25% of the top 50 hedge funds in the world use TrimTabs’ research for market timing) – says:

We’ve never seen this before – such a huge rally, and the little guy is out.

In other words, the stock market rally is due almost entirely to hedgies, pension funds, banks and other institutional investors, and not every day investors.

It is even possible that the government itself has been propping up the stock market. And Bill Gross and Nouriel Roubini say that we have a Ponzi style economy.

TrimTabs notes that small investors pulled out $14 billion net from stock mutual funds from the beginning of last year through mid-December, on top of a net $245 billion withdrawn in 2008.

Individuals hold the lion’s share of stocks.  For example, the Fed reports that individuals held 80% of the $19 trillion in stock in U.S. companies (both private and public) at the end of September.  So the recovery will not happen so long as the little guys are sitting on the sidelines.

TrimTabs notes that most of $592 billion taken out of money market mutual funds last year has gone into bond and bond-hybrid funds instead.

No wonder David Rosenberg is saying:

[Jan 12, 2010] Charles Biderman on CNBC

TrimTabs famous argument in favor of massive stock manipulation by the Fed...

Late yesterday, Charles Biderman of TrimTabs appeared on CNBC to talk about what factors could have caused stock prices to rise last year, given that the usual ones were absent.


Since the case for government intervention in equity markets as suggested by Biderman is circumstantial, many will dismiss out-of-hand the idea that the Fed was a big, regular buyer in after-hours futures markets last year to the tune of hundreds of billions of dollars (after leverage), an effort that would surely make any market go in the desired direction.

That certainly would be a much easier approach to take for long-time investment professionals who would undoubtedly rather go on believing that stocks remain about the only "untainted" and "free" market after more than two years of Wall Street turmoil where shattered confidence and tumbling stock prices were a major factor, resulting in massive government intervention nearly everywhere else.

[Jan 12, 2010] Economist- Bubble Warning

January 11, 2010 | The Big Picture

Great cover — and cover story — this week in the Economist:

“The effect of free money is remarkable. A year ago investors were panicking and there was talk of another Depression. Now the MSCI world index of global share prices is more than 70% higher than its low in March 2009. That’s largely thanks to interest rates of 1% or less in America, Japan, Britain and the euro zone, which have persuaded investors to take their money out of cash and to buy risky assets.

For all the panic last year, asset values never quite reached the lows that marked other bear-market bottoms, and now the rally has made several markets look pricey again. In the American housing market, where the crisis started, homes are priced at around fair value on the basis of rental yields, but they are overvalued by almost 30% in Britain and by 50% in Australia, Hong Kong and Spain.

Stockmarkets are still shy of their record peaks in most countries. The American market is around 25% below the level it reached in 2007. But it is still nearly 50% overvalued on the best long-term measure, which adjusts profits to allow for the economic cycle, and is on a par with two of the four great valuation peaks in the 20th century, in 1901 and 1966.”

km4:

Without bubbles Wall St cannot get their bonuses
http://motherjones.com/politics/2010/01/unjust-wall-street-bonus

The game is rigged and nobody seems to notice….nobody seems to care. That’s what the owners count on. The fact that Americans will probably remain willfully ignorant of the big red, white and blue dick that’s being jammed up their ass everyday, because the owners of this country know the truth. It’s called the American Dream, ’cause you have to be asleep to believe it . . .,George Carlin

[Jan 10, 2010] Bill Moyers Journal

Slightly naive, but an interesting read.  There is no countervailing power, so the crash is the only natural outcome.
PBS

The ancient Romans had a proverb: "Money is like sea water. The more you drink, the thirstier you become." That adage finds particular meaning today on Wall Street, which began this New Year riding a tidal wave of bonuses in a surging ocean of greed.

Thanks to taxpayers like you who generously bailed banking from the financial shipwreck it created for itself and for us, by the end of 2009 the industry's compensation pool reached nearly $200 billion. And despite windfall profits, the banks will claim almost $80 billion in tax deductions. And nearly $20 billion of those deductions will go to just three institutions — Morgan Stanley, JP Morgan Chase, and Goldman Sachs.

Ah, yes — Goldman Sachs, that paragon of profit and probity — which bet big on the housing bubble and when it popped — presto! — converted itself from an investment firm into a bank so it could get your bailout money. Now consider this: in 2008, Goldman Sachs paid an effective tax rate of just one percent. I'm not making that up — one percent! — while their CEO Lloyd Blankfein pulled down over $40 million. That's God's work, if you can get it. And, believe me, Wall Street bankers know how to get it.

What's their secret? How do the bankers pick our pockets so thoroughly with barely a pang of guilt or punishment? You will find some answers in this current edition of "Mother Jones" magazine, one of the best sources of investigative journalism around today. Most of this issue is devoted to what the editors call "Wall Street's accountability deficit."

In it, the Nobel Prize economist Joseph Stiglitz writes of the "moral bankruptcy" by which bankers knowingly trashed our economy and tore up the social contract.

The magazine's David Corn examines why there's no mass movement demanding fundamental change.

And blogger Kevin Drum tours Washington's heart of darkness from down Pennsylvania Avenue, over to K Street where the lobbyists cluster like vultures, then past the local branch of Goldman Sachs — also known as the U.S. Treasury — and up to Capitol Hill, where key members kneel in supplication to receive their morning tithes from the holy church of the almighty dollar. As Kevin Drum writes, a year after the biggest bailouts in U.S. History, Wall Street owns Washington lock, stock and debit card.

Kevin Drum, formerly with "Washington Monthly," is now the political blogger at "Mother Jones." He's here to talk about his report, along with David Corn, who's been covering Washington for 23 years and is now "Mother Jones'" Washington Bureau Chief. Welcome to you both.

BILL MOYERS: Welcome to both of you.

DAVID CORN: Good to be with you, Bill.

KEVIN DRUM: Good to be with you, Bill.

BILL MOYERS: Let me read you a letter that was posted on our website a few days ago from a faithful viewer. His name is Mike Demmer. I don't know him personally, but I like to hear from him. He says, dear Bill, I watch your program all the time. What I don't understand is how a bunch of greedy bankers could bring the world to the edge of catastrophe and then in less than a year, already move back to their old ways. How do they do it?

KEVIN DRUM: Well, that's the $64 million question. Or maybe it's the $64 billion question these days. Yeah, how they do it? They've got all the money. And they use all the money. And they use it in Congress to get rules passed and get laws passed that they want. They use it to lobby the Fed, they use it to lobby the S.E.C. They use it to lobby the executive branch. And they get rules passed that allow them to make a lot of money. Just like any of us would. It's not that American bankers are greedier than anybody else's bankers. It's that our rules, our laws, allow them to do things that they can't do everywhere else. We let them take advantage of the system.

BILL MOYERS: But how do you measure their power? Lobbying doesn't happen in the public, in the open. We can't sit in the bleachers and watch the game being played. How do you know they have this power?

DAVID CORN: You can read the lobbying reports. You know that there are scores if not hundreds of lobbyists. And where do they come from? They come from the committees that they're lobbying. People used to work on the committee, whether they were members, Congressmen or Senators, or staffers. And they spent a lot of time — because, ultimately, Bill, this is about knowledge. This is about information. This stuff is really complicated and convoluted. And, you know, you try reading any of one of these bills and figuring out what's actually being said. It's mystifying. And so, these guys who know the rules, they know the language, and they have the access, and they're giving contributions to the people writing the rules, have all the advantages.

BILL MOYERS: But Barney Frank would disagree with both of you. I don't know that he's read your piece yet, but I'm sure he will.

DAVID CORN: Yeah, I'm sure he would.

BILL MOYERS: Barney Frank, Chairman of the House Committee on Financial Services, and a liberal Democrat, said the other day, look, it's not — I'm not affected by campaign contributions. The members of my committee are not affected by campaign contributions. The problem is democracy. He says everybody sitting on this committee represents somebody back home, a local bank, a car dealer, an insurance company. And they come to the committee and they press, as you do in a democracy, for their interests as you just said.

DAVID CORN: But wait a second. I mean when you look at something like derivatives — derivatives, which were used to enable the subprime lending mess that led to the near collapse of the U.S. and global economy- I'm not sure there are bankers back home who are lobbying, you know, the committee. There aren't local derivative dealers that you meat in Main Street, when you go back to town hall meetings. It's a very small group of people who understand this. And we have seen-- the "Wall Street Journal" is reporting this week that there's no real action on regulating derivatives.

BILL MOYERS: I brought that story, because I wanted to read it. Quote, "Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place. Derivatives take blame for some of the worst debacles of the financial crisis. But a year after regulators and critics began calling for an overhaul in the way they're traded, some efforts have been shelved, and others have been watered down." What does it say when "Mother Jones" and the "Wall Street Journal" reach the same conclusion? That our government cannot stand up to the lobby even on an issue like derivatives, which were at the root of much of our problem over the last few years?

KEVIN DRUM: Well, it doesn't say anything good. And derivatives are a good example of how this stuff works. I mean, take a look at what happened. Derivatives were at the center of the financial meltdown in 2008. And at first everybody was all ready to regulate derivatives. And the big idea was to put them on an exchange, like a stock exchange, where they're all traded publicly and transparently. What happened was there were corporations — you know, if you're an airline, and you're worried about the price of jet fuel, you might want to buy a hedge. Hedge the price of jet fuel. And so, the airlines and some other companies went to Congress and said, look, those are derivatives, but they shouldn't be traded on the exchange, because that's not the financial stuff that blew up the world. No problem. Everybody pretty much agreed they ought to be exempted from that. But then it's all in how you write the rules. So, the rules got written. And as they slowly got changed, it turns out you've got to define who is an end user. Who is a corporation, as opposed to a bank? And the rules got written and they got written a little more broadly and a little more broadly until eventually if you read the rules right, it looked as though pretty much anybody was an end user. Goldman Sachs would end up being an end user. And 80 percent of the derivatives would have been exempt.

BILL MOYERS: And what does that say to us?

KEVIN DRUM: It says that the banks are in charge. And they're in charge, they get people, you know, right now, banks are in, you know, nobody wants to be around Goldman Sachs, right? So, what they do is what you were talking about. They get the car dealers and they get the local banks and the credit unions and so forth to basically front for them. And these corporations go in and they say, "We want an end user exception." And they get it. And then all it takes is a few congressional aides here and there to change the wording a little bit--

DAVID CORN: Now, the interesting thing is at this point having a conversation like this, we've already lost. Because now we're arguing about how the technical side of things are handled. And we- what the Wall Street collapse didn't really lead in Washington or anyplace else was sort of a reevaluation of what finance is supposed to be about. And what government's role might be in advancing a financial system that benefits citizens at large. Wall Street has become a place- and the banking industry, where you don't lend money to improve local businesses and industry. You basically, you know, create new- they call them instruments, devices- to make money yourself. It's really turned into nothing except a casino, in which they lend money and then they make bets and side bets and bets on the side bets about what's going to go up and down. So, a lot of the action is really, at the end of the day, not about providing credit and keeping capital flowing. It's about what- how they think they can make more money through more trades.

BILL MOYERS: Yeah, I was struck by the — by that paragraph in your story, where it said the financial industry has persuaded us, convinced us over the last 30 years that the purpose of the financial industry is not to serve companies needing capital or consumers needing credit, but to make money for themselves. And you go on to say that in a very fundamental way, this financial lobby has changed America. What do you mean by that? That goes deeper than campaign contributions and money and even influence in Washington. You say they've changed our framework.

KEVIN DRUM: Yeah, yeah. It goes a lot deeper. It's what Simon Johnson the chief- former chief economist for the I.M.F., it's what he calls Intellectual Capture. And-

BILL MOYERS: Intellectual Capture.

KEVIN DRUM: Right. It goes beyond regulatory capture, where, say the banks control the S.E.C. That's one thing. Intellectual Capture means that essentially the financial industry has convinced us, you know, in the '50s what was good for General Motors was good for America. Now it's what's good for Wall Street is good for America. And they've somehow convinced us that we shouldn't ask about what's right or what works or what's good for America. We should ask what's productive, what's efficient, what helps grow the economy.

DAVID CORN: This is the Stockholm Syndrome. Where you're hostage starts identifying with the people holding them captive. Americans have been, you know, have been talk- said- told over and over again that if the Dow's going up, if Wall Street's making money, it's good for you.

BILL MOYERS: Often when workers are being laid off. That's-

DAVID CORN: Yeah, but other measurements of the economy aren't taken to- aren't held in such high esteem. And so, when I was talking to members of Congress and pollsters about why there was not more popular, you know, revulsion against Wall Street that was leading to action in Washington, Congressman Brad Sherman — he's a Democrat from California. He led during the whole TARP argument- what he called the skeptics caucus. They were kind of opposed, but they were just raising questions. And he says the problem is that people are told that if you don't serve Wall Street, Americans will be out on the streets fighting for rat meat. That basically the whole-

BILL MOYERS: Rat meat?

DAVID CORN: Rat meat. Those- that's his- those are his words, not mine. I never- think I never would come up with that. With that image. But that- basically, we'd all be out fighting for grub on our own. And that so- what happens is people are — while they're angry at Wall Street, particularly on the, you know, on the corporate compensation front, which is very easy to get angry about. They also are fearful of taking Wall Street on, because they've been taught that if, you know, if the DOW falls, if you take on the big banks, it's going to be bad for all of us. So, it really is this Stockholm Syndrome, where we're forced to identify with people who are holding us hostage without our interest in mind.

BILL MOYERS: So, your conclusion from all of this is, and I'm quoting you, "Б─╕the simplest, most striking proposals for reigning in bank behavior aren't even getting a serious hearing."

KEVIN DRUM: Back in March of last year Congress was considering a bill to deal with bankruptcy and home foreclosures. And the Obama Administration thought this goal was a shoe in. They really didn't think they were going to have any problem passing it. And it failed. And--

BILL MOYERS: Fail? You mean it was beaten?

KEVIN DRUM: It was beaten by the banks. They got the bill rewritten. And in fact, not only did they get the bill rewritten the way they liked it. They actually got several billion dollars of extra bailout money put in at the same time.

BILL MOYERS: This was the cram- so called cram down proposal that was designed to help homeowners who were in trouble get through the hard times?

KEVIN DRUM: That's right. And I think what happened was the Obama Administration saw what happened with a bill that they thought would pass easily, and they realized what they were up against. And so, even their original proposals, I think they were watered down even before they went to Congress. And then once they're in Congress, they get watered down some more. And once it gets to the Senate, it's going to get watered down even more.

BILL MOYERS: So, if we get financial reform at all, it will be financial reform riddled with loopholes to benefit the very people who got us in this mess in the first place?

KEVIN DRUM: It's going to be financial reform on the margins. You know, complexity is the friend of the financial industry. If you really want to control them, you need simple rules. So, for example, Paul Volcker, former Fed Chairman. He thinks that we ought to simply prevent banks from being in the securities business. They should make loans. They should underwrite bonds. They should give advice on mergers and acquisitions. The sort of things they've done for years. But they shouldn't be trading securities. We should leave that to hedge funds. We should leave that to other people for--

BILL MOYERS: Take the- let them take the big risks. Don't take the big risks with the money you and I deposit.

KEVIN DRUM: Don't take risks inside the banking system, where you can blow up the world.

DAVID CORN: Where you're also federally insured.

KEVIN DRUM: Right.

DAVID CORN: Right? With our money.

BILL MOYERS: It's government-backed money that they're taking the risk with, right? And so, they tried to eliminate that.

KEVIN DRUM: And that- but that was never on the table. That sort of simple regulation was never on the table.

BILL MOYERS: Why?

DAVID CORN: That's what I mean. They're — for all the talk of what goes on in Washington. And, you know, there's reams of newspaper stories. There are hearings every other week. I mean, there's a lot of activity on this front. But it's on the edges, and it's not about any paradigm shifts. It's about just trying to keep things going as they are. You know, so the airplane, you know, has a few holes in the wings. Let's patch it up and keep flying the same way. And this is where, you know, I think Kevin's right. You need someone to step in whether it's the President or some other voice and say, "Wait a second. There's something cockamamie about the entire system. There's something rotten at its core. We want to look at it deep down."

BILL MOYERS: But don't you think people sense that? That there's something rotten at the core?

DAVID CORN: Yes! But I think they don't know where to turn to. I think a lot of people would follow the President if he did this. He made an early decision in his presidency. And it happened even before he was elected. It was, you know, September 2008, when the market tanked that day and John McCain was flailing and not knowing whether he was going to listen to Newt Gingrich or somebody else. And Obama came out with press conferences, surrounded by Robert Rubin, Larry Summers, and all the guys who had a hand in what went wrong. And saying, hey, I'm with the adults. What he was saying, really, was, I'm with the conventional thinkers.

KEVIN DRUM: There's also tremendous pressure on presidents. I mean, when Bill Clinton came into office, there were things he wanted to do. And he learned very quickly that he had to do what the bond market wanted him to do. And he famously said what? "I have to do what the bond market says?"

BILL MOYERS: What does that mean? To do what the bond market wants?

KEVIN DRUM: It basically means doing what Wall Street wants. It means that if you run a big deficit, if you raise taxes, the interest rates will go up. The economy will tank. And that's what he was told. And eventually he caved in.

BILL MOYERS: In the magazine you have a story about how there was a hearing before Barney Frank's House Financial Services Committee. This was on the derivatives reform. Called seven witnesses for the banking industry and only one critic of the banking industry. And he'd only gone six and a half minutes before the Chairman cut him off. Now, what does that tell you?

KEVIN DRUM: It tells you that the banking industry has convinced us that only the banking industry has the expertise to deal with these very, very complex issues. And we bought it. We all believe that. These guys are the experts. And it is very complicated. This stuff is very, very complex. And that is exactly the reason why you need simple rules to rein it in. Because the more complexity you have, the more loopholes there are. The more you can take advantage. The banks-

BILL MOYERS: But you said a moment ago that you have to save the bad guy to serve the good guy. The airline industry needed the quote derivatives in order to get that, they had to go and give the banking the very- almost the same power they had prior to the meltdown.

DAVID CORN: Well, they don't have to

KEVIN DRUM: They didn't have to, but they did.

DAVID CORN: Yes.

KEVIN DRUM: It probably was-

BILL MOYERS: And they did because?

KEVIN DRUM: It probably was a good idea to try to exempt ordinary corporations who were just trying to hedge uncertainty. But then they took that and expanded it. They didn't have to do that. They did that because the banks were in there lobbying. And it looked like they could get away with it. I mean, the wording was very, very tricky. I mean, you would never notice it unless you were a real expert and looked at the legislative language and realized that a word here and a word there and a word here changed the whole thing.

DAVID CORN: It's like money in politics, which we're talking about a little bit, too. You try to set up these convoluted rules to deal with campaign cash and deal with constitutional issues and it's almost, you know, it's- I won't say it's impossible — but it's tremendously difficult to do it in a way so that you don't leave openings for others to take advantage of, particularly when they have access to the people writing the laws. I mean- Mark Mellman, a Democratic pollster told me, listen, if 99 percent of Americans can't understand derivatives, you can't regulate derivatives in our Democratic process. And I think there's a lot of truth to that. I mean, people have to understand it. If only the people who benefit from them understand what's going on, they have the leg up. And there's no way for average citizens to even enter the process.

BILL MOYERS: Well, yeah, the one guy who goes into the House Financial Services Committee and raises questions about derivatives, he's given six minutes and shown the door, right?

DAVID CORN: Right.

BILL MOYERS: What does this say to you from your many years in watching Washington? Barney Frank's committee, The House Committee on Financial Services received more than $8 million from the industry last year, 2009. Might that explain why seven witnesses for the industry got a hearing?

DAVID CORN: Well, the House Banking Committee is called a money committee. And Congress on the House and Senate side, there are couple committees that they refer to as money committees. Not because they necessarily deal with money. It's because if you serve on that committee, you have access to a lot of money. Campaign cash. Because you deal with industries that are wealthy. As Kevin said, the banks have all the money, literally. And they will give money to people on the committee, if not to vote their way, at least to hear them out. So, their witnesses get perhaps more attention at some of these hearings. And also what the Democrats do, and it's common practice, is you take vulnerable freshman and you put them on the House Banking Committee so they can raise a ton of cash and maybe scare away Republican opponents.

KEVIN DRUM: This is why Barney Frank can tell you he's not affected by campaign contributions. Well, maybe he's not. His seat is safe. But, you know, there's a lot of people on his committee, the freshmen, the second term congressman, who are affected by money, because they do need to get reelected.

BILL MOYERS: Did you see the posting on TalkingPointsMemo.com this week? While Congress was trying to write these new rules to clamp down on the risky derivative trading that we were talking about, several of these New Democrats were in New York meeting privately with executives from Goldman Sachs and J.P. Morgan. And they also managed, while they were here, to sandwich in a fundraiser. I mean, does this raise your eyebrow just a tiny bit?

DAVID CORN: Well it does, and I mean, this stuff happens all the time. It's not new. And, of course, you know, we're talking about the Democrats, because they control Congress. Now, look, Republicans do it when they don't control it. And when they had control, they had lobbyists actually in writing legislation, as well, on financial and other industry matters.

Why do these people feel they can do this without any risk to them? Well, that's because I don't think their voters or voters in general are saying, "Wait a second. This really ticks me off. Why are you meeting with Goldman Sachs and J.P. Morgan? These guys who nearly, you know, brought down our economy. Why talk to them at all outside of a hearing room? You know, outside of grilling? You know, let alone, why take cash?" I mean, our whole system where the guys in charge of regulating or writing the laws would take cash from the people who want favors, you know, it's kind of, you know, bizarre to begin with.

BILL MOYERS: It's a little bit like going to the umpire behind the plate before a game, isn't it? And saying, you know, "Here's $1,000 bucks for whatever purpose. I'll lend it to you."

DAVID CORN: Exactly. So, but there's not the popular revulsion against this S.O.P., the standard operating procedure that happens all the time. And even after what we've seen with Wall Street and even after people who are indeed mad at least in a general way with big banks, these guys still feel they can, you know, fly up or train up to New York City and hang out with them. Take their money. And then go back to Washington and do the people's work?

BILL MOYERS: Look at this. This is a list of all the contributions over the last 20 years to Members of finance-related Congressional Committees. Let's just take the first eight. Out of the first eight, six of them are Democrats. And those six Democrats have received from the financial industry some $68 million. What does it mean to take that much money? And it's Democrats at the top of this.

KEVIN DRUM: It's Democrats and Republicans. But, yes. Look, there's no way you can take that money. I mean, if you talk to Chuck Schumer, you talk to Barney Frank, you talk to these guys. They'll tell you that they take the money, but then they're going to do the right thing anyway. Well, that's just not possible. You know, Chuck Schumer to take an example, he raised so much money up through I think 2004-2005. He actually stopped taking personal contributions.

He had so much money, he stopped taking contributions and headed up the Democratic fundraising Senate Committee. The overall Senate Fundraising Committee. Raised a couple hundred million dollars, a lot of it from the financial industry. And that went to all Democrats. Not just Schumer. It went to all Democrats who were running for the Senate. Well, there's no way you can take that money and not at least be leaning in their direction, one way or another.

BILL MOYERS: Well, let's one example that you report in your story in "Mother Jones." This is the carried interest rule. The one that declares that compensation from capital gains will be treated as ordinary income. So that the tax rate for hedge fund managers will be 15 percent instead of 35 percent.

They're paying a lower tax rate than secretaries, janitors, nurses, school teachers, members of our team here. What happened when reformers tried to eliminate that loophole?

KEVIN DRUM: If you're running a hedge fund, you are using other people's money and investing it. Now, by any ordinary definition, that's just ordinary income. If I make ten percent or 20 percent, I'm paid basically a commission, that's ordinary income. But the law right now says it's capital gains.

There no excuse for that. There's no excuse for it to be taxed at the lower capital gains rate. It should be taxed at the higher rate. In 2007, after Democrats took over Congress, there was a movement to change that. To tax it as ordinary income, which is how it should be taxed.

And what happened was that the hedge funds who had not really had a big lobbying presence on the Hill before. Because they weren't regulated, so they didn't really need to. They suddenly got religion. And the private equity contributions to Members of Congress suddenly skyrocketed. And eventually Chuck Schumer decided that he would only support a change to the law if it also affected some other industries. And that was just enough to get opposition from other quarters and the bill failed.

DAVID CORN: He basically found a poison pill way to kill it. And Chuck Schumer could say, "Hey, you know, this is a New York issue. Hedge funds are based in New York."

BILL MOYERS: My constituents.

DAVID CORN: "For my constituents." But you know, but really. I mean, you look at all his constituents out in Staten Island and Brooklyn and upstate New York. And you say, "Does this really serve them? So that the guys who play with money, the hedge fund managers, you know, personally, are taxed at 15 percent rather than 35 percent. Is that really a good deal for everybody writ large? The answer, of course, is no.

BILL MOYERS: You know, I've been around a lot longer than the two of you. And I'm still amazed, though, at how brazen this is. I mean, capital gains are, as you said, the profits you make on investing your own money. But these guys, as you also said, were investing other people's money and getting a piece of the action. Under what Webster definition can you call that ordinary income?

KEVIN DRUM: You can't. That is what makes this so brazen. They're not just lobbying for things, "Well, you could argue one way or the other. Maybe one side is right." This is something where there's simply no excuse. And yet, they get away with it anyway.

BILL MOYERS: How do they get away with it? Because, the tea party was about taxes, right? The — one of the causes of the American Revolution was unfair taxation. And yet--

DAVID CORN: We've been talking a lot about politicians and money. There's something they care about more than money, ultimately. And that is votes. That is their job, you know, protection. People in Congress generally want to win their next reelection.

BILL MOYERS: Well, 96 percent of the incumbents usually do.

DAVID CORN: And they usually do. So, they would care to a certain degree about popular anger if it was pointed enough and directed at them sharply enough. But, you know, people don't raise a fuss about this, if there's an angry editorial in the "New York Times" or we rail about it at "Mother Jones" or you do a commentary. You know, they can survive that.

Believe you me, they may not like it. Maybe next time, you know, you run into Chuck Schumer somewhere. He'll point his finger at you. But they can survive that. What they can't survive is people realizing, "Hey, you're not looking out for me. You're looking out for those rich other guys. Because they're giving you money."

And until people get, you know, demonstrate in big enough numbers, that this is a direct concern to them. And every once in awhile, you know, there's an eruption. There's a bubble of activity along those lines. They don't have to worry about it. They live in their own Washington bubble. And they see, you know, they have decades of empirical evidence to base their actions on. They can say, "Yeah, I can get away with this. I can get away with that. I can get away with this. Guess what? I can get away with most anything I try."

BILL MOYERS: Your article confirms for me, reinforces for me what David is talking about. That there are two parallel universes in America today. And that Washington is, as you said a moment ago, a bubble in which they know, the people who write the rules, the beltway press, the people in power, know that they can get away with this, because there's no significant way that the popular angst can penetrate that bubble.

DAVID CORN: Well, I wouldn't say--

BILL MOYERS: We live in two different worlds.

KEVIN DRUM: One thing we haven't talked about yet. And one place where I think you lay some of the-- we should lay some of the blame is the media. And the financial media. I mean, you talk about the carried interest rule that we were just talking about. That's complex. It's sort of down in the weeds. And it gets no attention. People don't see it enough to get angry about it. You can't get angry about something unless you're told about it.

And if you go out and talk to people, there isn't one person in 100, who even knows the carried interest rule was ever up before Congress. Let alone what it means, why it's outrageous, and why they should care about it. And they can't care about it until they know about it.

BILL MOYERS: Where is the countervailing power in Washington? If the press is falling down. If the executive branch is compromised, as you said earlier, by Obama's approach to conventional wisdom. If the bankers are in charge of Congress, and you described there. You also make the very strong case in your article that the Fed is involved in this, as well. The bankers really know how to work the Fed. Where is the countervailing power?

DAVID CORN: There isn't any countervailing power.

BILL MOYERS: You mean I have cancer and there's nothing I can do about it? I'm serious.

DAVID CORN: Well, there could be.

BILL MOYERS: This discourages a lot of people when you give this depressing analysis.

DAVID CORN: I understand that. And I wish I could be more hopeful. And we had a President who ran on a hope platform. You have just described all the major actors in Washington. And, you know, they are, to some degree, responsive to what happens outside of Washington. But if there's no pressure coming into Washington on this stuff, particularly given, as we've talked about, its tremendously profound complication. Then things just sort of, the status quo wins out.

BILL MOYERS: I mean, in Washington, if you are a critic, if you're a journalist in Washington, who reports the kind of-- on Washington the way you do, you get marginalized right?

KEVIN DRUM: Yes. Yes. I think you do. You're not part of Wall Street. You don't really understand what's going on. That's how they feel about it. I think that the Obama Administration — all the people in there — I think they have become convinced, like a lot of people, that if they don't do what Wall Street says, terrible things are going to happen. I mean, if they try to reign in Wall Street, all of our financial business will move to the Bahamas. And we'll lose trillions of dollars. And they believe that. And that's what the banks are--

BILL MOYERS: But as you say so astutely in this article, that happened for 20 years. Washington-- 30 years. Washington did what Wall Street wanted. And we had a debacle anyway.

KEVIN DRUM: Right.

BILL MOYERS: Have we learned nothing?

KEVIN DRUM: The Stockholm Syndrome, as David puts it, is so strong that they still believe it. And, you know, one of the things that happened here is that the bailout last year succeeded in a way, too well. I mean, it worked. TARP worked. All the actions that Ben Bernanke--

BILL MOYERS: Kept us from going over.

KEVIN DRUM: Took us-- yeah, kept us from getting into a second Great Depression. And so, now, what we've got is to a lot of people, just a big recession. There's a lot of unemployment. But it seems familiar. It's a recession. The crisis is over. And now we can go back to business as usual. Because maybe it wasn't as bad as we thought. Memories, memories fade. But, you know, the same thing is going to happen again if we don't reign in the banks.

BILL MOYERS: Yeah, you make that point is that they've actually set up a situation in which we can repeat what happened 18 months ago, right?

KEVIN DRUM: You know, the key thing, I mean, the key thing that drove the housing bubble of the last decade was debt. Was leverage. Banks weren't just making investments, they were borrowing huge sums of money to make investments. That's what makes a bubble bad. Is huge amounts of leverage. Huge amounts of debt.

DAVID CORN: And betting on those--

KEVIN DRUM: Right. Betting with borrowed money. That's the key. You know, the dotcom bubble, when it burst, it was not that bad. There was a recession that followed, but no banks failed. The financial system didn't meltdown. The reason is because it was a bubble, but it wasn't debt-fueled. The housing bubble was debt-fueled. The--

DAVID CORN: 'Cause when we've had housing bubbles in the past that have failed, without, you know, the daisy chain effect.

KEVIN DRUM: We had one in Southern California, where I live. Back in the late '80s and early '90s. And it was bad for Southern California, because again, it was debt-fueled. Now, the regulations that are being pushed through Congress right now, they do almost nothing about that. I mean, they talk about derivatives. They have a consumer finance protection agency. Those are good things.

But the key thing they ought to be getting at is debt. They need to restrict the amount of debt, the amount of leverage that the financial system can use. You don't get rid of it. Credit is the oxygen of the financial system. But you've got to limit it. And they've done almost nothing about that.

BILL MOYERS: And this is-- why?

KEVIN DRUM: Because debt and leverage are the keys to making money. The one thing that Wall Street needs to make money is lots of leverage. They have to have that to make money. So, that's the one thing they will fight for harder than almost anything. And they fought for it so hard that, in fact, the regulations hardly do anything at all.

BILL MOYERS: Well, as you say in the piece, the overdraft fees that they can now charge can equal something like 10,000 percent? I mean, the mafia would like that, right?

KEVIN DRUM: That's right. It's, you know, it's a small part of the picture, but it shows how much power they've got. What happened was overdraft fees on your debit card. The average overdraft is $17. And it's not hundreds or thousands of dollars. The average overdraft is $17. And it gets paid off in five days. And the average overdraft charge is $39. Now, do the math on that, and that's a 10,000 percent rate of interest.

And the only reason banks can do that is because in 2004, the Fed, after being lobbied by the credit card industry, being lobbied by the banks, ruled that even though overdraft protection was marketed as a loan, was marketed as a line of credit, consumers all thought of it that way. It wasn't, in fact, a loan. And so, since it's not a loan, they can charge any interest rate they want.

DAVID CORN: Well, you know, one of the small debates in Washington has been what type of consumer financial protection agency there should be that would look at things like this.

Elizabeth Warren, it was her idea, initially, to even have such an agency, which she proposed a couple years ago. And she wants it, you know, have the power to regulate, you know, banks and credit card companies and others that provide financial services and financial products. And she wants there to be some very simple rules.

For instance, like you have to-- every credit card company would have to provide what they call vanilla products. Whereby, "Here's your credit card. You have, I don't know, 12 percent interest. It doesn't change. No other fees. Until we let you know in a letter with bold print that it's going to change. And we give you the right to keep the card or not keep the card." Something very simple.

And the agency would also have the right to, you know, write these rules and then regulate the companies. So, it goes into, you know, the Washington hopper. And now, you know, it starts getting watered down. They take out the vanilla product stuff. So, the things that would make things easy for consumers to avoid getting caught in scams like the one that Kevin just described, you know, is removed from the bill.

And they say, "Well, you know, maybe we'll have this little agency write its little rules. But we'll let the banking regulators enforce them." The groups that, to date, have really been held hostage by the people they're supposed to regulate. We have a lot of debate in Washington over this. You know, compared to the big picture that Kevin and others have described, this is really a minor reform. But even this minor reform gets sliced and diced until yeah, something might pass.

KEVIN DRUM: People are more afraid of big government than they are of big banks, despite what happened over the last couple of years. And they shouldn't be. They should be-- what they should be is demanding a better government. A government that regulates without being captured by all the special interests. A government that puts in place regulations that are simple and clear. So, David, what you're saying. The vanilla products option, for example, in the CFPA was a nice-- the reason the banks hated it was because it was so simple.

A nice simple regulation. There's no way to get around it. If the rule says you have to offer as an option, this is not the only thing. You have to offer if you're going to do a home loan one option has to be a standard, 30-year, fixed rate mortgage. And you can have all your other options, but you've got to at least tell people they can have that. That's a very simple regulation. There's no way to get around it. And that's why banks hate it.

DAVID CORN: Bill, you keep coming back to the same question. How can they get away with it? I mean, that's really what it all boils down to.

BILL MOYERS: And it's a serious question for this reason. You know, we don't always have popular representation in the government. But from time to time, Civil Rights movement, Suffragette movement, the Gilded Age, the first time-- people do get heard. And men and women in power begin to speak for them. The worry is have we become so big and things become so complex. Have people been so politically abused as a psychologist recently said, that the will to fight for democracy, the political will has been dissipated?

DAVID CORN: Well, I think there may be something to that. It's also-- you know, it takes time and energy to do that. You know, people who are stressed out over, you know, losing jobs or maintaining their jobs, you know, may not, you know, sometimes that leads people to fight. Sometimes it leads people to resignation. Sometimes it leads people just to focus on getting by.

Think about what's happened to our economy. For the aughts, the last decade, there was no net job growth, at all, from 2000 to 2009. For every other decade prior to that, whether it was Republican or Democratic President in charge, the growth was between 20 percent and 38 percent in jobs. So, we've gone from-- that's pretty healthy. Even though at times there have been recessions and wages may not have gone up as much as the number of jobs created. But in the aughts, nothing. This represents, I think, a fundamental turning point for our economy. And that has people--

BILL MOYERS: For our country.

DAVID CORN: Our country. Wigged out. They don't know the future. They don't know who to turn to. They saw what happened with the economic collapse last year. And, you know, it's hard to know, you know, if you can be angry, who to march on. Or whether you're going to hunker down, and try to just get by on your own. They look at rising powers, economic powers overseas. And how we're going to compete with them. It may be a form of abuse, but they certainly look to the Washington system. And this gets to the point that, you know, that Kevin raised. You know, in poll after poll for decades now, if you asked people who are you more scared of in terms of America's future, is it big government or big corporations? Big government always wins by a landslide.

KEVIN DRUM: And remember one thing is that over the last 20-30 years, people have been told over and over and over again that the economy is doing well. The economy's doing great. The Dow is up. And yet, they themselves, most of them, aren't actually making more money. Median wages have hardly gone up at all in the last 30 years. So, you've got all these people who aren't really making any more money. They're treading water. And yet, everywhere they turn, they're being told the economy's doing well. And they start, I think, a lot of people start to blame themselves. They wonder, "If the economy's doing so well, how come I'm not doing better? It must be me." And what they don't see is, no, it's not them. It's the way the system works.

BILL MOYERS: The Republican Congressman from Wisconsin, Paul Ryan, wrote an essay in the December issue of "Forbes" magazine, the title of which was "Down with Big Business." What do you make of that?

DAVID CORN: Well, the Democrats have to worry. Because there is an opening here for the Republicans. If the Republicans looked at what the, you know, see any anger out there about the economy. And they, you know, start attacking the Democrats and say one reason that this is going on is because of Democrat ties to business and show that chart. And yes, we've had our own problems as well. You know, it could be sort of you know a major shift. I don't think they're going to do that. I don't think they're smart enough to do that, quite frankly. Or have the courage to do that. But that is one opening to have a major strategic change in the face of American politics.

KEVIN DRUM: You know, one thing that certainly the Democrats need, I think the country needs is, you know, President Obama really needs to take the lead on this. And he hasn't. He has been in favor of financial reform, but he hasn't really spoken out about it. He hasn't really pushed the banks. He has made a strategic decision that he needs to cooperate with the banks. Cooperate with Wall Street so as not to cause more panic.

And, you know, it this is not this is not something like health care or climate change, where you can see a lot of moving parts that go together. And you can sort of understand why there's a lot of compromise in those things. With financial reform, he could go out there and start pushing on bits and pieces of it. And even if he loses, even if he loses, it doesn't wreck all the rest of it. He doesn't wreck the chances of financial reform in general if he pushes on one pieces and loses.

DAVID CORN: But better yet, that would mobilize people. I mean, sometimes in politics-- I mean, you know this. Sometimes a clear loss is actually a win politically. Because you draw the lines. You show people who's on what side. And you show them what you're fighting for.

BILL MOYERS: Someone said to me the other day, "Obama has not had his Reagan moment. His defining moment." Remember in the early '80s, when Reagan came to the White House. The one of the first things he did was to fire the air control workers. And it was the moment that for conservatives and a lot of independents, who wanted a tough President to stand up to something, I'm not saying Obama should fire anybody. But he hasn't defined himself by his stand.

KEVIN DRUM: Obama wasn't even willing to fire Ben Bernanke. The head of the--

DAVID CORN: Who's now "Time" man of the year.

KEVIN DRUM: The head of the Federal Reserve. And, you know, Ben Bernanke did, I think, a good job after the crisis hit. He didn't recognize the crisis before it hit. After the crisis hit, he did a good job. But that doesn't mean-- you don't deserve to get reappointed to the Federal Reserve. He did a good job managing the crisis. What we need now, though, is somebody who is going to manage the aftermath of the crisis. Somebody who is genuinely dedicated to re-regulating the financial sector.

BILL MOYERS: Let me show you something that Ben Bernanke said to the annual meeting of economists earlier this week, last Sunday, I think it was.

BEN BERNANKE: The best response to the housing bubble would have been regulatory, not monetary. Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach for constraining the housing bubble than a general increase in interest rates.

DAVID CORN: Whoops.

Selected Comments

(The Big Picture)

digistar:

The predicament that Bill and his guests describe, and that most of us are having to endure, is very frustrating and demoralizing.

While Bush was still in office, I thought that the only way we would ever get rid of him and his Republican enablers would be for him to screw up big time. Really let the country go to pieces. Really let rich people and corporations run wild.

He, and they, did all that. Obama and the Democrats were handed the the opening they needed.

I voted for Obama, taking him at his word that he was going to bring change and hope. As President, he is the only individual who could bring this mess into focus for the voters and champion real reform. No other single individual can do it.

Unfortunately, it turns out that Obama is just another politician.

And the Democrats are no better than the Republicans. OK, they are preferable to Republicans, at the margins, but there is no fundamental difference. They are all politicians.

So, we are well and truly screwed.

Now, I’m back to thinking that only a much bigger screw up will make an opening for change. And next time, it won’t be any of the current crop of politicians that benefit. Next time could be very nasty as we will see a bigger financial crisis and much more economic hardship for the population.

The person that leads us out of that coming disaster will have grass roots backing. That person could be a savior or a tyrant.

Maybe I’m wrong and we will just become a pure banana republic. All the little people will live in cardboard boxes while the politicians, lobbyists, super rich and corporate officers live in gated communities with armed guards.

At least, with the help of Bill Moyers and people like him, we have been allowed to see how America really works. Its not what we were taught in school. Rather, its like Paul Simon sings in Kodachrome:

“When I think back
On all the crap I learned in high school
It’s a wonder
I can think at all
And though my lack of education
Hasn’t hurt me none
I can read the writing on the wall”

number2son:

And here I am, one of the sheep, opening up the most recent statement for my son’s college tuition. I see that, yet again, this well-known private university has increased his fees so that now, 2 and one-half years into this thing, we are now paying about 30% more than when he started. And of course, in that same time frame his scholarship has gone up by 0%, I have had a single salary increase of less than 2% and my wife’s pay has had her public school teacher salary reduced.

So, yes, to answer David Corn, those of us not connected to Washington, are preoccupied with the struggle if day-to-day problems. And in the meantime, those we have elected continue to betray the public trust.

I will write my senators and congresswoman yet again and refer them specifically to the Moyer interview and the Mother Jones article. I will also tell them that I will not vote for them again unless they take direct action to correct the problem.

No doubt this sort of thing makes characters like Mark E. Hoffer chortle and snort. But who cares what the swine believe or what stake they have in this impossibly corrupt system that makes them so. As Corn says, people need to start acting in ever larger numbers to effect change.

THE PRAGMATIC CAPITALIST » » JIM ROGERS A CURRENCY CRISIS IS COMING, ECONOMY IS GETTING WORSE

THE PRAGMATIC CAPITALIST » » THE ULTIMATE GUIDE TO 2010 INVESTMENT PREDICTIONS AND OUTLOOKS

Wall Street Banks

Hedge Funds & Investment Gurus

Actionable Ideas, Alternative Assets & Potential Potholes

The Outlook Abroad

[January 8, 2010] Simon Johnson: “The Worst is Yet To Come”

I must say, it’s quite amusing to watch Simon Johnson. He has an unabashedly bearish message…for 2010! And he delivers it in a sunny, enthusiastic tone. His hosts are not too keen about it, but the fact that he is so bloody upbeat about his gloomsterism leave them a bit flummoxed.

Ina Pickle:

One has to imagine that he said he would be happy to come on the show in that tone of voice, and they thought that his message would match his tone! They repeatedly seem to bash him for having a negative message that somehow slipped onto their airwaves.

But I agree with him: the clouds are definitely not parting, they are building. They didn’t just push the problem down the road, but like a snow plow, they built it up into a higher pile that effectively blocks off other paths for the purpose of clearing one main one. That path is an exit for the banksters, and the ones left without an exit, digging franticly, are we the people.

JKH<:>

“His hosts are not too keen about it, but the fact that he is so bloody upbeat about his gloomsterism leave them a bit flummoxed.”

Flummoxed in my view more because of the superficiality of his commentary.

On a comparative basis, the CNBC analysts were uncharacteristically insightful. Comparatively, it wasn’t hard.

DownSouth:

JKH,

Do you have any information whatsoever to share with us to justify your smug dismissal of Johnson?

Here’s what Johnson said: “We’re looking at emerging markets, and I think this is the next frontier for the crisis.”

And granted, Johnson talks mostly about China, which I know nothing about. But since I live in Mexico, which I believe qualifies as an “emerging market,” I do try to keep tabs of what is going on here.

And the Ponzi scheme the banks ran in the US with residential lending looks like Sunday school class in comparison to the Ponzi schemes the banks they are running in Mexico. Take this one for instance:

It used to be very difficult to obtain a credit card in Mexico. Then, like street hustlers hawking passes to strip shows, young “promoters” working for the banks appeared on the streets virtually handing out credit cards. From 2001 to 2008, the number of credit cards circulating in Mexico soared from 6.1 million to 26.1 million, according to Condusef. Maintaining offices in Los Angeles and New York, Banamex USA even offered a cross-border credit card program aimed at clients with friends or relatives in Mexico.

(In 2008, Banamex inaugurated a branch in Calexico, California.)

Eligible income levels were dropped to unheard of lows of about $300 monthly, only slightly above official definitions of “poverty wages,” and certainly not enough to establish any stability or cushion.

[…]

Javier Taja, president of the Guerrero state branch of the El Barzon organization, a national debtors’ advocacy group, estimates that of 200,000 credit card holders in Acapulco alone, some 85,000 people are in arrears. Taja says he knows people who earn less than $800 a month but have credit card balances exceeding $23,000.

http://www.corpwatch.org/article.php?id=15356

Citi owns Banamex, and claims to have invested $30 billion usd in Mexico. Now if the credit card situation implodes (and if you read the article I cited there is mounting evidence to this possibility), and Citi can’t get the Mexican government to bail it out, what do you believe Citi’s $30 billion investment in Mexico is going to be worth?

Of course maybe your smug and cavalier dismissal of Johnson from the fact that you are looking at the situation from the perspective of the banks:

In response to criticism that bad credit card accounts and other bad debts will precipitate a new financial crisis in Mexico, the banks and their government allies were not publicly worried in the days before the H1N1 (swine) flu epidemic hit. New lines of credit available from the International Monetary Fund and the U.S. Federal Reserve totaling $77 billion shored up Mexico’s potential foreign reserves to more than $150 billion this month, permitting the Calderon administration to announce it will support new economic investments. Oddly enough, the possible infusion of cash – which could prop up the shaky peso and serve as an emergency, hog-sized piggy bank for the financial institutions – was announced on April Fool’s Day in the United States.

Cullpepper:

Well, be a little fair, a well researched & presented argument would require extensive sourcing, a thick ream of technical data and reciting long strings of numbers.

A show like that is built around snappy soundbites that fit between commercials, not analysis.

I liked him anyways.

DownSouth:

Simon Johnson, in talking of the massive risk US banks are now taking on with their “get out of jail free card” from the US government, says:

Where would you take the risk? Well, it could be commodities. It could be crazy things in the United States. I think that mostly it’s going to be where everyone is sure prices can only go up. And that’s China, that’s other emerging markets.

This ties in with an article in today’s NY Times about James Canos, who has become very bearish on China:

As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.

Warrant Buffet, Wilbur Ross and Jim Rogers pooh-pooh the idea:

“I find it interesting that people who couldn’t spell China 10 years ago are now experts on China,” said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”
http://www.nytimes.com/2010/01/08/business/global/08chanos.html?hpw

But here’s the situation Johnson is lamenting. If Rogers is correct and China continues to grow, the US banks win big. On the other hand, if Chanos is correct and China implodes, the banks don’t lose. Instead, they just pass their losses on to the American taxpayer.

Oh well, it sounds like great work if you can get it.

BDBlue:

My favorite part was one of the hosts lamenting that so many people come on there with bad news. Well, gee, why do you think that is? Although I’m sure they’ll very quickly go find a bankster to tell them everything is wonderful again.

SB:

The CNBC commentator that questioned Johnson on bank balance sheets (of the 6 majors) was correct. Except for MS, everyone else has shrunk (primarily due to loan runoff, and absence of new lending). What Johnson MAY have referred to is off-balance sheet vehicles, but I’m not so sure about that. What I think Johnson is talking about is the major banks are deep diving into purchasing financial securities, not hard loans,while letting loans run off. That’s a very dangerous game.

Cullpepper:

“What I think Johnson is talking about is the major banks are deep diving into purchasing financial securities,”

I wasn’t clear on that bit either. Was he suggesting the big 6 are getting wrapped up in currency trading? Or something more obscure? (Can you purchase Brazilian drug-smuggling derivatives or whatnot?)

Anyone have any expertise in this? What do big banks invest in when they do it overseas?

MD:

@SB

Why loan money to chumps like us when you can make 1000x as much by investing in derivatives.

I often wonder why places like BOA bother to have bank branches and deal with the hoi polloi.

CNBC is full of a**clowns. Full stop.

JamesD:

In a world with more bubbles than a Lawrence Welk show there is plenty to be very concerned about. For instance the liquidity driven carry trade. (Not to mention sovereign debt traps, corporate and government cooked books, private & government pension fund meltdown, US state and city bankruptcy, sudden major war outbreak, growing civil unrest, the dubious trajectory of the EU; hey – nominate your favorite bubble)

Nouriel Roubini: Mother of All Carry Trades faces inevitable bust

http://www.youtube.com/watch?v=xIEoa3F5o0M

Or take Andy Xie a real expert on, among other things, China:

http://seekingalpha.com/article/176124-andy-xie-s-china-outlook

JamesD:

I would like to add, if I may, that both the CNBC interview and some of the comments here show what is a ubiquitous tendency now-a-days, that rather than deal with the message, people shoot the messenger.

[Jan 8, 2010] Interest Rate Observations From Morgan Stanley by Tyler Durden

01/07/2010 | zero hedge

Morgan Stanley, which recently made the daring call for a 5.5% yield on the 10 year by the end of 2010, and which has recently caught the attention of many finance pundits, provides some more projections for 10 year rates not only in the US but globally. Curiously, out of all countries, Morgan Stanley only sees Japan lower by the end of 2010, with all developed countries higher, but none moving as much as the US. Furthermore, by the end of 2010, only Australia will sport a 10 year rate wider than the US, predicts MS.

[Jan 8, 2010] Bankers and Athletes

The Baseline Scenario

“So yes, bankers are like athletes. Their individual contributions are overrated relative to their supporting environments; they are overpaid; they are paid based on where they randomly fall in the probability distribution in a given year; and paying a lot for bankers is no guarantee that your bank will be successful in the future.”

Min

"Professional athletes make money by providing a service for which ordinary people willingly pay. Financial sector workers, by contrast, earn their money from people who have no choice. We can either “invest” with them, or we can watch our wealth slowly get inflated away. They also prey on human weakness; specifically, the inability to resist an offer to receive something for doing nothing (This is why state-run lotteries work, and also why they are evil.)"

[Jan 7, 2010] FOMC Minutes: Expect Slow Economic Recovery

1/06/2010 | CalculatedRisk

Here are the December FOMC minutes. Economic outlook:

In their discussion of the economic situation and outlook, meeting participants agreed that the incoming data and information received from business contacts suggested that economic growth was strengthening in the fourth quarter, that firms were reducing payrolls at a less rapid pace, and that downside risks to the outlook for economic growth had diminished a bit further. Although some of the recent data had been better than anticipated, most participants saw the incoming information as broadly in line with the projections for moderate growth and subdued inflation in 2010 that they had submitted just before the Committee's November 3-4 meeting; accordingly, their views on the economic outlook had not changed appreciably. Participants expected the economic recovery to continue, but, consistent with experience following previous financial crises, most anticipated that the pickup in output and employment growth would be rather slow relative to past recoveries from deep recessions. A moderate pace of expansion would imply slow improvement in the labor market next year, with unemployment declining only gradually. Participants agreed that underlying inflation currently was subdued and was likely to remain so for some time. Some noted the risk that, over the next couple of years, inflation could edge further below the rates they judged most consistent with the Federal Reserve's dual mandate for maximum employment and price stability; others saw inflation risks as tilted toward the upside in the medium term.

A number of factors were expected to support near-term expansion in economic activity. Consumer spending appeared to be on a moderately rising trend, reflecting gains in after-tax income and wealth this year. Recent upward revisions to official estimates of the level of household income in recent quarters gave participants somewhat greater confidence that consumer spending would continue to expand. The housing sector showed continuing signs of improvement, though housing starts had leveled out after increasing earlier in the year and activity remained quite low. Businesses seemed to be reducing the pace of inventory reductions. The outlook for growth abroad had improved since earlier in the year, auguring well for U.S. exports. In addition, financial market conditions generally had become more supportive of economic growth. While these developments were positive, participants noted several factors that likely would continue to restrain the expansion in economic activity. Business contacts again emphasized they would be cautious in adding to payrolls and capital spending, even as demand for their products increases. Conditions in the commercial real estate (CRE) sector were still deteriorating. Bank credit had contracted further, and with many banks facing continuing loan losses, tight bank credit could continue to weigh on the spending of some households and businesses. Some participants remained concerned about the economy's ability to generate a self-sustaining recovery without government support. In particular, they noted the risk that improvements in the housing sector might be undercut next year as the Federal Reserve's purchases of MBS wind down, the homebuyer tax credits expire, and foreclosures and distress sales continue. Though the near-term outlook remains uncertain, participants generally thought the most likely outcome was that economic growth would gradually strengthen over the next two years as financial conditions improved further, leading to more-substantial increases in resource utilization.
emphasis added

And on real estate:
CRE activity continued to fall markedly in most parts of the country as a result of deteriorating fundamentals, including declining occupancy and rental rates, and very tight credit conditions. Prospects for nonresidential construction remained weak.

In the residential real estate sector, home sales and construction had risen relative to the very low levels reported in the spring; moreover, house prices appeared to be stabilizing and in some areas had reportedly moved higher. Generally, the outlook was for gains in housing activity to continue. However, some participants still viewed the improved outlook as quite tentative and again pointed to potential sources of softness, including the termination next year of the temporary tax credits for homebuyers and the downward pressure that further increases in foreclosures could put on house prices. Moreover, mortgage markets could come under pressure as the Federal Reserve's agency MBS purchases wind down.

That last paragraph is important. It appears residential investment will disappoint in Q1, and prices might already be falling again - and that is before the massive government support programs will be wound down over the next 6 months. Of course CRE is getting crushed, but residential investment is usually a key to a recovery - and residential investment will remain sluggish.

[Jan 7, 2010] More on State Budget Woes

2010-01-06 | CalculatedRisk

From Jennifer Steinhauer at the NY Times: New Year but No Relief for Strapped States

[A]t least 36 states struggle to close budget shortfalls and also begin confronting the next fiscal year’s woes.

For many of the states, the new year spells the end to accounting maneuvers, one-off solutions, tax increases and service cuts that were as deep as lawmakers thought they could bear. ...

“A budget gap of 5 percent or 10 percent in any given year is a tough problem,” said Corina Eckl, fiscal director at the National Conference of State Legislatures. “But we’re talking about gaps in excess of 20 percent over multiple years. The size of these gaps is staggering.”

... states averted deeper cuts than anticipated last year because of the federal stimulus package. But those dollars will shrink over the next fiscal year, and unless jobs return and tax revenues rise, or Congress sends them more aid, states will most likely continue to be overextended.

These "staggering" gaps mean more budget cuts, or more tax increases, or another stimulus package ... unless the state economies improve quickly, and that seems unlikely.

[Jan 6, 2010] How jobs growth forecast was done

Dec 22, 2009  | USATODAY.com

Economic consulting firm Moody's Economy.com has forecasted U.S. job growth by geographic region and by industry. This interactive was updated Dec. 22, 2009. We will update it each month.

This graphic shows actual job growth through third-quarter 2009 and Moody's Economy.com's forecasted job growth for fourth-quarter 2009 through third-quarter 2013. It covers every state, the District of Columbia and 384 metro areas, broken down by fourteen industry sectors. The data are seasonally adjusted.

[Jan 6, 2010] TrimTabs on that ‘US government-rigged stock market’ by Tracy Alloway

The first HFT-induced rally ?
FT Alphaville loves a good conspiracy theory, so here’s one to kick off Wednesday morning.

It’s the TrimTabs report referenced in this morning’s 6am Cut, questioning whether the US government is secretly propping up stock markets. FT Alphaville loves a good conspiracy theory, so here’s one to kick off Wednesday morning.

It’s the TrimTabs report referenced in this morning’s 6am Cut, questioning whether the US government is secretly propping up stock markets.

And here it is, in full, with our emphasis:

TrimTabs Investment Research Asks Whether Federal Reserve and U.S. Government Rigged Stock Market, Pushing Market Cap up $6+Trillion since Mid-March

Only Logical Conclusion as to Why Market Soared, While Economy Faltered and Traditional Sources of Capital Remained Neutral

Sausalito, Ca, Jan. 5 – TrimTabs Investment Research CEO Charles Biderman in a special report said today that it wasn’t traditional sources of capital that pushed the U.S. markets up more than $6 trillion since March, and wondered whether it was the Federal Reserve and the U.S. government pulling the levers behind the sharp rise.

“We have no way of proving this,” said Biderman, “but what we do know is that it was neither the economy nor traditional sources of capital that created the boom in equities.”

Biderman warned that if government has been behind the sharp stock rise, it could trigger a major equities meltdown when the government stops buying and even worse, starts selling.

The special report follows below:

The most positive economic development in 2009 was the stock market rally. Since the middle of March, the market cap of all U.S. stocks has soared more than $6 trillion. The wealth effect of rising stock prices soothed the nerves and boosted the net worth of the half of Americans who own stock.

We cannot identify the source of the new money that pushed stock prices up so far so fast. Historically, the market cap has risen about 10 times the amount of net new cash invested in equities. For the most part, the roughly $600 billion of net new cash since March needed to boost the market cap $6 trillion did not come from the traditional players that provided money in the past:

  • Companies. Corporate America has bee have hardly bought any U.S. equities through funds. U.S. equity funds and ETFs have received only $20 billion since the start of April. Meanwhile, bond funds and ETFs have received a record $355 billion.
  • Retail investors through direct investments. We doubt retail investors have been big direct purchasers of equities. Market volatility in the past decade was the highest since the 1930s, and retail investor sentiment has been mostly neutral since the rally began, although it brightened in the past week.
  • Foreign investors. Foreign investors have provided some buying power, purchasing $109 billion in U.S. stocks from April through October. But foreign purchases may have slowed in November and December because the U.S. dollar was weakening last fall.
  • Hedge funds. We have no way to track in real time what hedge funds do, and they may well have shifted some assets into U.S. equities. But we doubt their buying power was enormous because they posted an outflow of $9 billion from April through November.
  • Pension funds. All the anecdotal evidence we have indicates that pension funds have not been making a huge asset allocation shift and have not moved more than about $100 billion from bonds and cash into U.S. equities since the rally began.

If the money to boost stock prices did not come from the traditional players, it must have come from somewhere else. We know that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?

Related links:
This bank-engineered equity rally – FT Alphaville
Whitney: “I call this the great government momentum trade” – FT Alphaville
The (QE)uropean equity rally and yields – FT Alphaville

As far as we know, it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P 500 futures. Moreover, several officials have suggested the government and major banks could support stock prices. For example, former Fed board member Robert Heller opined in the Wall Street Journal in 1989, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.” In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equities directly, not just futures. The official mentioned that the Fed could “theoretically buy anything to pump money into the system.” In an article in the Daily Telegraph in 2006, former Clinton administration official George Stephanopoulos mentioned the existence of “an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem.”

Think back to mid-March 2009. Nothing positive was happening, and investor sentiment was horrible. The Fed, the Treasury, and Wall Street were all trying to figure out how to prevent the financial system from collapsing. What if Ben Bernanke, Tim Geithner, and the head of one or more Wall Street firms decided that creating a stock market rally was the only way to rescue the economy? After all, after-tax income was down more than 10% y-o-y in Q1 2009, and the trillions the government committed or spent to prop up various entities was not working.

One way to manipulate the stock market would be for the Fed or the Treasury to buy a nominal $60 to $70 billion of S&P 500 stock futures each month for as long as necessary. Depending on margin levels, as little as $5 billion to $15 billion per month was all that was necessary to lift the S&P 500 by 67%. Even $15 billion per month would have been peanuts compared to what was being doled out elsewhere.

Since the stock market was extremely oversold in early March, not only would a new $60 to $70 billion per month of buying power have stopped stock prices from plunging, but it would have encouraged huge amounts of sideline cash to flow into equities to absorb the $295 billion in newly printed shares that have been sold since the start of April.

This type of intervention could explain some of the unusual market action in recent months, with stock prices grinding higher on low volume even as companies sold huge amounts of new shares and retail investors stayed on the sidelines. Some market watchers have charted that virtually all of the market’s upside since mid-September has come from after-hours futures activity.

Much more over at the conspiratorially-inclined Zero Hedge.

Growler

Sorry; was it a secret then?

How else did the frequent "Stick-saves" pushing the day's close $50 higher in the last five minutes happen? Did 90% of buyers that day think: "I'll wait until the last five minutes and then buy at a much higher price..." Look at the ludicrous volume figures on those days.

With HFT agents backed by nearly-free FED Queasing money - the Plunge Protection Team could push a low-volume market anywhere they wanted to.

Psychology is just one of the tools used to fight a recession.

I am the Walras

"You can not have capitalism without allowing people who made bad bets to fail."

Nice sentiment, but in the real world letting the lot fail would have been far worse. Also, again in the real world, capitalism has always been crony capitalism. What's the point of accumulating all that wealth if there's no power and influence to go with it?

pegnu

@Harry Tuttle:

exactly right. We now live in a kleptocracy with a system of crony capitalism. Our political and financial leaders have shown themselves to be crooks willing to bail out the well-connected at any cost and give the bill to the tax payer. There has obviously been a huge amount of fraud over the past 10-20 years - it is time the fraudsters went to prison.

You can not have capitalism without allowing people who made bad bets to fail.

Harry Tuttle:

The fact that people consider this plausible shows what is, in my opinion, the real cost of this crisis. The credibility of American capitalism has been lost and it will not be easily repaired. The consequences will be worse than many expect.

pegnu:

given how desperate the situation was/is and the astonishing level of support already in place and how mad/corrupt our political/financial elite have become, I wouldn't find it surprising one bit.

praxis22:

I posted this in the long room last week! Possibly even last year :) That said it was on Zero Hedge at the time, but if the president can have a "working group on markets" I don't see why they can't actually be given so work to do once in a while. It is not now, nor has it ever been a "free market" regardless of what the market zealots tell you :P

Zero:

S&P futures bids looked extremely suspicious; between Aug and November on days when ES moved over 10 points over a short time (eg in an hour or less) during Asian and European hours, there would be less than 20 bids with over 400 offers on the queue, and the ES keeps going up, not saying that is not possible, but if it happens day after day, then it's rather scary. Like Biderman said, nothing wrong with the US govt supporting the stock market, they are already doing it in the bond and currency markets, so why fight the government? Just go long, like HK in 1999, might be cheaper way than bail out Frandie.

[Jan 6, 2009] Recent Lehman MD Reviews “The Murder of Lehman Brothers”

Jan 5, 2009 | naked capitalism

My real objection to Mr. Tibman’s line of thinking—and this applies equally to the thinking of Lawrence McDonald, whose book, A Colossal Failure of Common Sense, I reviewed several months agois that the idea that Lehman was made up of a great collection of businesses but was ruined by a few stupid actors is nonsense. You cannot separate one part from the whole. Without Lehman’s highly leveraged, hugely risk-taking trading operation, Mr. Tibman’s investment banking business could never have existed—certainly not on the scale it grew to in its last several years of existence. Leaving aside the fact that Lehman’s costly distribution (trading) and research operations was a primary reason Tibman and his friends were able to win so much business, there’s also the fact that without the profits from the trading business (well over $4 billion per year in LEH’s last several years, more than 5x the profits of the investment banking business), the company couldn’t have gone on the spending spree which enabled it to poach top bankers from its competition.

And where did the trading operation’s huge profits come from? Was it from brokerage commissions on stock and bond trades executed on behalf of customers? Ha. Principal transactions (aka “proprietary trading”), that is, trading for the firm’s own account, accounted for nearly 75% of the trading division’s revenues during the firm’s last three full years of operation. Brokerage commissions accounted for just over 12%, while net interest margin accounted for the rest.

So Lehman Brothers, with a $691 billion balance sheet, sitting atop a $22.5 billion capital base (both figures from the 2007 10-K) was essentially running a giant proprietary trading operation with a decent-sized investment banking operation attached. I’ll resist the easy comparison to the Soprano family’s use of Satrialli’s Pork Store to distract attention from where the real action was, but you get the point. You could call Lehman a $22.5 billion hedge fund, except that very few hedge funds of that size (or any size) operate at a leverage ratio of greater than 30-1—and certainly not hedge funds whose balance sheets were loaded with massive, risky and illiquid assets.

So, yes, it is unfortunate that Mssrs. Fuld & Gregory, who were the primary managers of the Lehman hedge fund, made so many bets that turned sour in 2008. But those bets weren’t some afterthought that ruined an otherwise great firm. By 2008 (actually, by several years earlier than 2008), those bets essentially WERE the firm. They were the life blood that generated the revenue for the $9 billion of annual compensation that Lehman paid out to its professionals. And, like any hedge fund, the managers took their cut (49.3% of revenue went toward compensation, typical for Wall Street) every year—but never had to pay any back in years when returns when negative. At least traditional hedge funds have high water marks (provisions that require managers to earn back any losses from prior years for limited partners before paying incentive fees to themselves). On Wall Street, after a bad year, the firm starts fresh. In fact, it pays out billions in bonuses even in a losing year, so as not to “lose talent to the competition.”

It has now been over a year since the Lehman implosion. In the intervening period, the capital markets have come roaring back. Meanwhile, the real economy, though it is getting worse at a slower pace, is still in its worst shape in a generation. The economic and psychic toll on the country from the crisis has been vast. The recapitalization of the financial system, whose costs are being overwhelmingly borne by the public through bailouts as well as by the steepest yield curve in decades, will take years and extract a continued price from consumers and businesses throughout the economy. Despite this, it appears increasingly unlikely as time goes on that any meaningful reform will be instituted to protect the public from what Simon Johnson so aptly refers to as the “rent-seeking behavior of the financial sector.”

Mr. Tibman’s book, like so many of the books written about the crisis in 2009, bears its share of responsibility for this state of affairs. By spinning narratives that deflect attention from the activities and circumstances most responsible for the crisis, and by indulging the human instinct to blame the failure of complex systems on individual bad actors rather than on the rottenness of the whole, we increase the likelihood that similar crises will return sooner and with greater severity than would otherwise be the case.

attempter:

January 5, 2010 at 4:27 am

What I did expect to find in Mr. Tibman’s narrative was a human drama, an account of how it felt to work at Lehman as the unthinkable happened…

Unfortunately, except for a few brief glimpses, that is not the story we get. Tibman, with the innate caution of a veteran I-banker, feels that “maintaining his viability for future employment” requires him to use a pseudonym. It also requires him to omit most of the personal details of the people with whom he worked and what, if anything, he witnessed personally of the events related to Lehman’s fall

IOW, these guys are such inveterate and worthless non-value creating parasites that they’re con men even as authors.

Not surprising.

Speaking to those of us who think of investment bankers as “a hoard of spoiled, greedy assholes,” he asks us to suspend all predispositions and “think only of what it means to be marginalized, a laughed-about underdog…then you experience something of great magnitude, like 9/11…and from that experience a bond develops that propels you with purpose. You (then) succeed beyond all expectation. Once maligned, you are now…surpassing all goals that you have set for yourselves. And then a very few make some very poor decisions, and the glorious landscape that…you have worked at for a very many years simply falls like light timber through a backyard chipper.”

So they’re like 9/11 victims. If this cockroach were more prominent we could put that up there with Blankfein’s “we’re doing God’s work.”

And that’s how these criminals really think. Even most mafioso or Columbian cartel members don’t really think of themselves as heroes.

Although, those gangsters aren’t generally celebrated and fellated by the MSM the way these far worse Wall Street gangsters have been and to some extent still are.

My real objection to Mr. Tibman’s line of thinking—and this applies equally to the thinking of Lawrence McDonald, whose book, A Colossal Failure of Common Sense, I reviewed several months ago—is that the idea that Lehman was made up of a great collection of businesses but was ruined by a few stupid actors is nonsense.

That’s correct. The great-or-stupid man theory of history is rarely more than a small piece of the puzzle.

No otherwise sound large structure can be brought down by the stupidity and/or criminality of a few bad apples.

So it follows that no one who understands all this thinks “reform” can ever work so long as these criminal structures remain intact. We know that by definition when politicians seek “reform” here they really want to change nothing.

The only solution is to break up the structures completely and forever.

Anarchus says:

January 5, 2010 at 7:37 am

This commentary is wonderfully insightful:

“And where did the trading operation’s huge profits come from? . . . trading for the firm’s own account, accounted for nearly 75% of the trading division’s revenues during the firm’s last three full years of operation . . . So Lehman Brothers, with a $691 billion balance sheet, sitting atop a $22.5 billion capital base (both figures from the 2007 10-K) was essentially running a giant proprietary trading operation . . . . You could call Lehman a $22.5 billion hedge fund, except that very few hedge funds of that size (or any size) operate at a leverage ratio of greater than 30-1—and certainly not hedge funds whose balance sheets were loaded with massive, risky and illiquid assets . . . . like any hedge fund, the managers took their cut (49.3% of revenue went toward compensation, typical for Wall Street) every year—but never had to pay any back in years when returns when negative. At least traditional hedge funds have high water marks (provisions that require managers to earn back any losses from prior years for limited partners before paying incentive fees to themselves). On Wall Street, after a bad year, the firm starts fresh. In fact, it pays out billions in bonuses even in a losing year, so as not to ‘lose talent to the competition’.”

The one other critical point I’d add is that Lehman (and all other Wall Street firms) grossly abused overnight funding of their highly leveraged operations in order to reduce capital costs. It’s one of those incredibly intelligent and rational financing tactics that works fabulously well in normal times but in regularly-occurring abnormal times (credit crunches cycle through the system about once per decade) raises the “risk of ruin” to a fairly high level, pretty much guaranteeing that if you run the gauntlet often enough, eventually you won’t make it through \

[Jan 5, 2009] “Robert Rubin’s absurd economic recommendations”

January 4, 2010 | naked capitalism

Fortunately, society was spared their advice for several months – but now they are back, akin to the bad aftertaste of greasy pizza that one belches out after a particularly gruesome serving. I’m just waiting for the day when Bernie Madoff will be writing an article for Newsweek, expounding on how we can improve financial regulation.

Advocatus Diaboli:

This country gives con-men and sociopaths many “second” chances, so don’t be surprised.

“I’m just waiting for the day when Bernie Madoff will be writing an article for Newsweek, expounding on how we can improve financial regulation.”

[Jan 5, 2009] Change we can believe in

Special Foodstamps-For-Bankers program might help to solve the problem of banking sector much better then TARP, althouth free orange suits would be even better: the USA recently had a Treasury Secretary who in his previous job used to sell fraudulently rated securities. What's next for  "change we can believe in"?  I would dare to suggest that would be: "Bernard Madoff for Secretary of the Treasury"...

...the folks who run the major banks today — the senior executives, directors, managers, etc. — are essentially the same exact folks who ran them (into the ground) 5 and 10 years ago:

“The prospects for a robust prudently guided financial sector have been substantially clouded by the fact that the both the corporate governance structure and the executive leadership of the financial sector remain largely unchanged—92% of the management and directors of the top 17 recipients of TARP funds are still in office.”

You read that correctly — 92% of the TARP recipients’ senior management remains essentially unchanged post-crisis . . .

[Jan 4, 2010] The Economy’s Lost Decade By Barry Ritholtz

January 3, 2010 | The Big Picture

To hell with Japan, we have already had our lost decade — or at least so says the Washington Post. And, it was more than just the stock market that lost ground over the past 10 years:

Source:

The lost decade for the economy

NEIL IRWIN, CRISTINA RIVERO AND TODD LINDEMAN

Washington Post, January 1, 2010

http://www.washingtonpost.com/wp-dyn/content/graphic/2010/01/01/GR2010010101478.html

Selected Comments

Steve Barry:

Given the debt we still face, declining demographics and disadvantages competing globally, 2010-2019 will make the 2000’s look like the good old days.

willid3:

I am thinking this goes with this
http://www.businessinsider.com/best-economic-chart-of-the-decade-2009-12

km4 :

> Steve Barry Says: Given the debt we still face, declining demographics and disadvantages competing globally, 2010-2019 will make the 2000’s look like the good old days.

Yup. I think more Americans sense further erosion of their standard of living in 2010 so what is poltroon Ben Bernanke going to do ? Take zero responsibility for being a _______ and print more dollars to try and keep the ‘extend and pretend’ ruse going for Obama.

Pathetic !

Blurtman:

Bush/Cheney rock! Trickle down finally vindicated.


CTX:

2010 probably will be more of the same, more injections of cash, liqudity galore…Unless sovergn debt and bond maket gets smacked hard

BR- what is your guess for 2010? in one short sentence

Tarkus:

We’ve got a longer period to scuttle into the “lost” bin coming. Why? Because none of the big names that committed this massive fraud have been jailed. They corrupted the ratings system, making sure the CDO’s were mis-priced at inception. Without purging the system of those guilty of stealing the wealth of the country, no one will participate and the market will languish. China has wised-up and will never allow their destiny to be controlled by Wall St. They are not fulfilling on derivative contracts now, telling their counterparties to kiss-off. They will pull all levers to transfer the world’s wealth to themselves (or at least their ruling elite) now.

Does Hank Paulson visit China with the frequency he once did to try and convince them to make their economy more like the U.S.?

Wall Street could have just kept collecting golden eggs, but in the last decade the “smartest guys in the room” decided they wanted goose for dinner. “Smarmiest guys in the room” whose actions resemble terrorism on the country more than anything else.

km4:

Good post Tarkus

Case in point…..Citi’s Creator, Alone With His Regrets
http://www.nytimes.com/2010/01/03/business/economy/03weill.html
Mr. Weill built his wealth, status and power by creating what was once the world’s largest bank. Now, as Citi struggles to regain its footing, Mr. Weill’s legacy has taken on a darker hue. Though he was once viewed as a brilliant dealmaker, some critics now cast him as the architect of a shoddily constructed, unmanageable financial supermarket whose troubles have sideswiped investors, employees and average citizens nationwide.

Net Net: The rats are now leaving the stage since systemic damage has already been inflicted -- Paul Volcker weighs in
http://www.businessweek.com/magazine/content/10_02/b4162011026995.htm?chan=magazine+channel_the+week+in+business

The American political process is about as broken as the financial system. Therefore, one has to be a bit skeptical. Just to give you one little example, one unrelated to the financial crisis. Here we are on Dec. 29, almost a year after the Inauguration, and there is no Under Secretary of the Treasury. That should be an important position. How can we run a government in the middle of a financial crisis without doing the ordinary, garden-variety administrative work of filling the relevant agencies? The Treasury is an outstanding example of a broken system, but it’s not the only one…..

25 yrs ( since 1980’s ) of deficits don’t matter, asset bubbles, faux GDP growth, ponzi schemes, increasing debt that’s becoming enormous ( over next decade US publicly held debt is forecast to more than double to 85 per cent of gross domestic product – the highest rate since the second world war ) and people think this past decade of some pain was a lost decade ?

Stay tuned….

km4:

CTX…..Obama ‘the messiah’ could have done the “right” thing in the first place but he and his administration elected to keep crony capitalism and the gigantic ponzi scheme of US economy going rather than investing $12 Trillion in infrastructure, education, health care, manufacturing and REAL wealth creating endeavors for Main St economic recovery !

http://www.calculatedriskblog.com/2009/09/stiglitz-banking-problems-worse-than-in.html

“The question then is who is going to finance the U.S. government,” Stiglitz said.

Yikes !

Blurtman:

@Tarkus:
Right on! The USA had a Treasury Secretary recently who sold fraudulently rated securities. He should be in jail.

Good for China to tell Wall Street to kiss off on the on derivative contracts. Oddly enough, this is not causing the end of the world as not bailing out AIG was promised to cause. How can that be???? Were we lied to by our current Treasury Secretary?

franklin411:

Interesting…so as political conservatism has gained strength, the average American has seen progressively anemic economic growth.

  • The 1940s and the 1960s were the heyday of New Deal and Great Society Liberalism. Americans prospered.
  • The 1950s and the 1970s were the heyday of Modern Republicanism, which accepted New Deal and Great Society liberal programs as valuable but poorly administered. Americans prospered.
  • The 1980s and 1990s were the decades of Reaganism and Clinton’s New Democrats, which accepted the idea that the people should not work together through their government to achieve progress. Americans suffered.
  • The 2000s were the decade of Conservatism, which rejected the idea that government should govern at all. America was nearly destroyed.

Tarkus:

Let’s face it – A crooked “bank’s” highest aspiration is to become a loan shark operation, being predatory and leeching usury fees from it’s client/victims.

A hedge fund/bank’s highest aspiration is to gamble big, pass the losses as OPM, but pocket the winnings.

There is talk of investors not doing enough due diligence on the (ratings-fee corrupted) CDO’s they purchased, but what about the lack of due diligence of firms AIG owed money to? By the same logic, those firms didn’t do the due diligence to verify that their insurer (AIG), who would potentially be liable for huge sums, had enough money to pay off. Funny how the argument is usually used only one-way.

wunsacon:

franklin411,

I, too, would like to read into that history the way you do. However, consider what I (unfortunately) think to be better explanations.

Up through the mid-70’s:
- The rest of the world’s factories were destroyed in the 1940’s. The US’s wasn’t. We sold the rest of the world goods. Sometimes on long credit terms.
- The US enjoyed increasing oil production until the early 1970’s. Peak oil occurred in the bottom 48. (Another peak occurred later that decade, when Prudhoe maxxed out.) Cheap energy = luxury.
- Up until the early 1970’s, the US continued expanding its use of other available natural resources as well.

Starting in the 1980’s:
- Cheap oil ran out. We turned to imports. We import 75% of it now.
- The balance of payments started shifting. Instead of people paying us, we now pay them.
- Reversion to mean accelerated: the rest of the world rebuilt their factories. Not only were they supplying their own markets. Now they started invading our domestic markets.

(Of course, in the past 20 years, we get into familiar territory about “free” trade vs “fair” trade, offshoring, computer automation and the like. I’m sure we agree there about a lot.)

Life and premature death of Pax Obamicana By Spengler

Dec 24, 2009 | Asia Times

History speaks of a Pax Romana, a Pax Britannica, and a Pax Americana - but no other namable eras of sustained peace, for the simple reason cited by Henry Kissinger: nothing maintains peace except hegemony and the balance of power.

The balancing act always fails, though, as it did in Europe in 1914, and as it will in Central and South Asia precisely a century later.

The result will be suppurating instability in the region during the next two years and a slow but deadly drift toward great-power animosity.

[Jan 5, 2009]  Online A hell of a decade - to come By Peter Schiff

Jan 5, 2009 | Asia Times

Yes, we had spectacular problems like September 11, 2001, and the invasion of Iraq in 2003 - which were horrific for those who were directly affected - but for most Americans, it was a time of unexpected wealth and unearned prosperity. Up to the days of the stock market crash, the economics of the decade will be remembered for cash-out refinancing for millions of homeowners, no-doc liar loans, no-money-down car purchases, eight-figure Wall Street bonuses, cheap Chinese imports, and trample-to-death holiday sales. In other words, the decade now closing gave us the biggest and most irresponsible spending orgy in US history. The past decade was the party; the one ahead will be the hangover.

The fact that Time completely ignored these issues shows how poorly the mainstream media understand the forces bearing down on our economy. Yes, they were able to identify some of the adverse consequences we experienced this decade. That's the easy part. But as far as seeing the causes behind the effects, they haven't a clue. As a result, Time has no ability to see the underlying pattern and will happily encourage our leaders to repeat the mistakes of the past on a grander scale.

For now, Congress and the president remain as clueless as Time. To show its resolve to "get to the bottom of things", the Barack Obama administration has impaneled a commission to investigate the causes of the financial crisis. Do not expect the proceedings, which are just getting underway, to come up with anything but the most politically useful explanations.

Blame will be laid at the feet of "ineffective regulators" who failed to "get tough" with industry, banks, and corporate leaders who held the "public good" hostage to their "personal greed." There is no hope that anyone who actually saw the crisis coming will actually be asked to testify. If they called me, I would be happy to give them an earful. Unfortunately, the only way my views will ever be heard by the powers-that-be is if I am elected to the Senate - which is exactly what I plan to do next fall in my home state of Connecticut.

My sincere hope for the coming decade is that I can help our leaders see what Time cannot: we need to stop committing the economic sins that are leading us to hell, so that our stay down there will be as brief as possible. We need everyone to stop spending more than they earn. That is true not just for individuals, but for our government as well. Just this week, the Treasury Department removed its internal caps on bailout funds to Fannie Mae and Freddie Mac. Meanwhile, another bailout was proffered to ailing GMAC. If we continue the same bad behavior, it might not just be one decade from hell, but several.

However, if we can confess our sins, and vow to reform our ways, perhaps this will merely be a decade in purgatory. Perhaps we can turn it into the decade of hope, hard work, individual liberty, savings, production, investment, sound money, de-regulation, exports, budget surpluses, capitalism, limited government, and respect for the Constitution. These traits will harden us to withstand the fallout from our reckless past.

As of yet, our troubles continue to snowball - and I don't like a snowball's chances if we have a real decade from hell.

[Jan 04, 2010] Economist's View Paul Krugman That 1937 Feeling

Jan 04, 2010 | Economist's View

There's a pretty good chance that the next few economic reports will make it appear that the economy is improving, but those reports may not be as positive as they seem on the surface...

That 1937 Feeling, by Paul Krugman, Commentary, NY Times: Here’s what’s coming in economic news: The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.

Selected Comments

Bruce Wilder:

History repeating?

Bernanke had the interesting destiny of being able to study an historical episode of failed policy, and then to try a different policy, in a similar circumstance.

I wonder how certain Bernanke is, that he succeeded in bringing about a different, and better outcome.

Krugman mis-frames the parallels, I think, and, even though he has repeatedly stressed the powerlessness of the zer0-bound, he fails to properly appreciate the reality, here.

The Fed is no longer the master of its fate. And, the U.S. economy remains in a weak, and possibly fragile state. That's the proximate danger, here; not that officials, who have studied on doing too little, will withdraw the paltry effort, but that they will have neither will of their own, or the confidence of others, when some external shock renews the crisis.

The global economy exhibits many points of potential chaotic failure. The U.S. housing market has another 15% to fall, and no inflation to make the fall graceful. Europe -- especially Eastern Europe -- waits for the great unraveling; China races toward a cliff; oil climbs toward, then past?, $80/barrel.

We are in the midst of the weakest recovery imaginable from the worst Recession in 70 years. And, Krugman fears our leaders will declare jubilant victory? Not exactly a vote of confidence. Reports on the late Xmas shopping season, and the wave of retail and commercial real estate bankruptcies to follow, or renewal of the discouraging tussle over health care (which calls into question whether the U.S. is even capable of self-government), or just faltering growth, may well undermine confidence further.

But, what if some external event, over which our leaders have little control -- the collapse of some Vienna bank (always a classic scenario), or some new-fangled Chinese debacle, or some disruption in the Mideast, Russia or Brazil? -- jars assessments of risk. What resources does either the Fed or the Obama Administration have left? What reserves of political confidence and trust, let alone reserves of currency?

Bernanke and Obama have backed into a corner, where they have little room, monetary or political, to respond to a major crisis. The fiscal stimulus was very mildly ameliorative on unemployment, but it was completely inadequate with regard to restoring monetary policy to a range of potency. In that sense, in size and design, it was a failure.

The U.S. must re-structure, re-calculate, whatever you wish to call it, and we procrastinate. Recovery to the status quo ante is simply not an option -- the status quo ante simply failed to work! -- yet our leaders appear unable to conceive of any alternative.

I seriously doubt that this will end well, any time soon.

[Jan 1, 2010] Ghosts of 1987

December 30, 2009  | Jesse's Café Américain

I am a 'fan' of very few people in the money business. One of my favorite pundits is a frequent guest on Bloomberg Television, which I tend to watch off and on during the day on my computer screen: Joe Saluzzi. Another person for whom I always turn up the volume is Howard Davidowitz, the savvy and no-nonsense retail analyst.

Here is Joe Saluzzi's excellent explanation for the 'odd' market behavior which many traders have noted to me in the past few weeks.

But it was not until today that it 'clicked' in my mind that this is setting up like the market crash of 1987, for purely technical reasons. The volumes are so hugely dominated by 'high frequency systems trading' that if and when a dislocation occurs, and it may only take something trivial to set it off when the time comes, the market will gain a momentum to the downside that the government may not view so favorably and dismissively.

And in response to such a meltdown, one of the first things the Poseur-in-Chief might consider doing is replacing the current head of the SEC, Mary Schapiro, who has managed to become almost as useless as Christopher Cox, the SEC head under Bush. Granted, the SEC is an awful place to work, rubbing shoulders with the wealthy on a meager government salary while every swinging Congressman cuts your funding when not making personal calls to protect their campaign contributors. But really, the people of the US deserve much better from their government than franchised looting and organized mispricing of risk. It really is becoming that blatant.

 

[Jan 1, 2010] In 2009 I Learned That… The Reformed Broker

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Groupthink : Two Party System as Polyarchy : Corruption of Regulators : Bureaucracies : Understanding Micromanagers and Control Freaks : Toxic Managers :   Harvard Mafia : Diplomatic Communication : Surviving a Bad Performance Review : Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime : PseudoScience : Who Rules America : Neoliberalism  : The Iron Law of Oligarchy : Libertarian Philosophy

Quotes

War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda  : SE quotes : Language Design and Programming Quotes : Random IT-related quotesSomerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose BierceBernard Shaw : Mark Twain Quotes

Bulletin:

Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 :  Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method  : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law

History:

Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds  : Larry Wall  : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOSProgramming Languages History : PL/1 : Simula 67 : C : History of GCC developmentScripting Languages : Perl history   : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history

Classic books:

The Peter Principle : Parkinson Law : 1984 : The Mythical Man-MonthHow to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite

Most popular humor pages:

Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor

The Last but not Least


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Last modified: October 02, 2017