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Financial Skeptic Bulletin, February 2010

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Pictures of a Market Crash- Beware the Ides of March, And What Follows After

"It is right to be cautious, and it is human to be afraid." "I think that the economy is currently held together by bubble gum and Ben Bernanke's charm. " (Robert P. Murphy  in Inventories Don't Kill Growth — People Kill Growth)

February 27, 2010

Even today, I think most people do not appreciate the sheer magnitude of the decline, and the damage it has done to the real economy. This is the result, I believe, of three factors:
1. An extraordinary expansion of the Monetary Base by the Federal Reserve not seen since the aftermath of the Crash of 1929, and a swath of financial sector support programs from the Fed and the Treasury, resulting in a spectacular fifty percent retracement rally from the stock market bottom. This is the narcotic that permits the country to not notice that a leg is missing.

2. A comprehensive program of perception management by the government in conjunction with the financial sector to sustain consumer confidence and reduce the chance of further panic. In other words, a web of well-intentioned deceit, subject to abuse.

3. An understandable preoccupation by the individual with the details of breaking news, and a short term focus on particular events, diversions, and controversies, bread and circuses, without a true appreciation of the 'big picture,' in part because of some very effective public relations campaigns and a natural human reluctance to face hard problems.

This is resulting in a remarkable case of cognitive dissonance in which some of the victims of a spectacular man-made calamity are opposing remedies and aid as too costly and impractical, even as they walk around amongst the bleeding carnage.

For those who read the contemporary literature in the early Thirties, this is nothing new. In the early Thirties there was no sense, except for a few notable exceptions, of the magnitude of what had so recently happened. There was the sense of life goes on which seems almost eerie now to a modern reader. Indeed, Herbert Hoover could dismiss a delegation of concerned citizens with the advice that they were too late, the crisis was past, and all was well. Sound familiar?

The parallels with the Thirties and the Teens (today) are many, and uncanny.

There is the reformer President, elected to redress the extremely pro-business policies of his Republican predecessor. In the Thirties they had FDR who was a decisive and experienced leader. In the Teens the US has a relatively inexperienced community organizer, more influenced by the Wall Street monied interests, and a past history of 'playing safe,' who is trying to manage through indirection and persuasion.

There is a Republican minority in the Congress which opposes all new programs and actions despite giving lip service in order to delay and debilitate. In the Thirties the Republicans were over-ridden by a powerful, activist President, who created a "New Deal" set of legislation, much of which was later overturned by a Supreme Court which had been largely seated by the previous Republican Administrations.

Indeed, the remaining New Deal programs that were successful, the reforms of Glass-Steagall and the safety net of Social Security, are being overturned or are under attack in an almost bucket list fashion.

So what next?

Another leg down in the economy and the financial markets is a high probability.

...Although one cannot see it just yet in the fog of corrupted government statistics, the economy is not improving and the US Consumers are flat on their back, scraping by for the most part, except for the upper percentiles who were made fat by the credit bubble, and are still extracting rents from it through officially sanctioned subsidies.

This was no accident; there is a consciousness behind it.

There are far too many otherwise responsible people who are not taking the situation with the high seriousness it deserves. Some would even like to see the US economy collapse, inflicting serious pain and deprivation because it may:
 

1.suit their investment positions and feed their egos because they think themselves above it all,

2. satisfy their ideological and emotional needs to see punishment administered, almost always to others, for the excesses of the credit bubble, especially if they are relatively weak, unwitting victims, and

3. the sheer nastiness and immaturity of a portion of the population which wallows in stereotypes, childish behaviour, and disappointment with their own lives. They tend to find and follow demagogues that feed their bitter hatreds.

They know not what they do, until they do it, and see the results. It is often a good bet to assume that people will be irrational, almost to the point of idiocy and self-destruction. And some of them never wake up until they are overrun, and then will not admit their error out of a stubborn sense of pride and embarrassment.

It seems likely that there will be a new leg down in financial asset valuations, as reality overcomes often not-so-subtle propaganda and disinformation. It may start in March, or it may be a 'market break' that provides a subtle warning for a large decline that begins in September 2010, with multi year progression to lows that are, as of now, almost unimaginable, at least in real terms. I cannot stress this issue of nominal versus real enough. As inflation comes, it will initially be in a 'stealth' manner, with the backing of the currency eroding slowly but steadily, and largely unrecognized for some time. It is not enough to try and count the dollars; one also has to consider the value behind them, the quality of the wealth, and its vitality. This is the case for stagflation.

The Fed is acting to mask quite a bit of this. One would hope that they would also not re-enact the policy error of their predecessors and raise rates prematurely out of fear of inflation before the structural healing can occur.

The debt incurred during the credit bubble cannot be paid and must be liquidated. So far we have largely seen transference of debt obligations from insiders to the public. Ironically these same insiders are lobbying to maintain these subsidies and transfers, and also to take a hard line against any further remediation of the consequences of the collapse, which they caused, on the public, to have more for themselves. Their greed and hypocrisy know no bounds.

But the policy error might not be caused by the Fed's direct action, but replicated by a governmental failure to stimulate the economy effectively AND to reform the highly inefficient and impractical financial system. The purpose of stimulus is to provide a cushion for structural reform and healing to occur, after an external shock, or even a period of reckless excess and lawlessness. The natural cycle can be disrupted beyond its ability to repair itself. But stimulus without reform is the road to further deterioration and addiction.

As it stands today the global trade system is a farcical construct that favors national elites and multinational corporations. Public policy discussion has been trumped by a handful of economic myths and legends that, even though disproved every day, nevertheless remain resilient in public discussions and reactions. This is because they have become familiar, and because they are the instruments of deception for certain groups of disreputable economists and policy influencers.

A more serious market crash might cause people to recognize the severity of their problems, and the thinness of the arguments of the monied interests for the status quo which is most clearly unsustainable. But a sizable minority of the population is always highly suggestible; demagogues rely on this.

The eventual outcome for the US is difficult to forecast with any precision now because there are multiple paths that events might take at several key decision points. Some of them might be rather disruptive and upsetting to civil tranquility. Game changers.

But as the dust continues to settle, the probabilities will continue to clarify.

"Suffering can strengthen our endurance. Endurance encourages strength of character. Character supports hope and confidence even during hard times and trials. And hope does not disappoint us in the end, because God has given us the Spirit and filled our hearts with His love." Romans 5:3-5
It is right to be cautious, and it is human to be afraid. But let us not allow our fears and trials to turn us from our genuine humanity in God's grace no matter how dire the day, even if it may drive some of the world once again into the jaws of desperation and madness.

And if you stumble, gather yourself up and go forward again without turning from the way. For what is the profit to gain and hold some small and temporary advantage in this world, but to lose your self, forever.

Time to outlaw naked credit default swaps By Wolfgang Münchau

An interesting nuance here is that CDS are often sold without any intention to pay in case of default (so called a counterparty risk). "In the world where nobody is allowed to fail, a big enough organization utilizing this strategy will be back with hands out at government coffers and most likely receive the money". They need to introduce insurance fee for naked CDSs payable to a financial stability fund. For example 10% on top.
February 28 2010 | FT.com

I generally do not like to propose bans. But I cannot understand why we are still allowing the trade in credit default swaps without ownership of the underlying securities. Especially in the eurozone, currently subject to a series of speculative attacks, a generalised ban on so-called naked CDSs should be a no-brainer.

Naked CDSs are the instrument of choice for those who take large bets against European governments, most recently in Greece. Ben Bernanke, the chairman of the Federal Reserve, said last week that the Fed was investigating “a number of questions relating to Goldman Sachs and other companies in their derivatives arrangements with Greece”. Using CDSs to destabilise a government was “counter-productive”, he said. Unfortunately, it is legal.

CDSs are over-the-counter contracts negotiated by two parties. They offer the buyer insurance on a bundle of underlying securities. A typical bundle would be €10m worth of Greek government bonds. To insure against default, the buyer of a CDS pays the seller a premium, whose value is denoted in basis points. Last Thursday, a CDS contract on five-year Greek bonds was quoted at 394 basis points. This means that it costs the buyer €394,000 per year, for five years, to insure against default. If Greece defaults, the buyer gets €10m, or some equivalent. What constitutes default is subject to a complicated legal definition.

A naked CDS purchase means that you take out insurance on bonds without actually owning them. It is a purely speculative gamble. There is not one social or economic benefit. Even hardened speculators agree on this point. Especially because naked CDSs constitute a large part of all CDS transactions, the case for banning them is about as a strong as that for banning bank robberies.

Economically, CDSs are insurance for the simple reason that they insure the buyer against the default of an underlying security. A universally accepted aspect of insurance regulation is that you can only insure what you actually own. Insurance is not meant as a gamble, but an instrument to allow the buyer to reduce incalculable risks. Not even the most libertarian extremist would accept that you could take out insurance on your neighbour’s house or the life of your boss.

Technically, CDS are not classified as insurance but as swaps, because they involve an exchange of cash flows. The CDS lobby makes much of those technical characteristics in its defence of the status quo. But this is misleading. Even a traditional insurance contract can be viewed as a swap, as it involves an exchange of cash flows. But nobody in their right mind would use the swap-like characteristics of an insurance contract as an excuse not to regulate the insurance industry. The fact that, unlike insurance, CDSs are tradeable contracts does not change the fundamental economic rationale.

The whole idea of modern financial products is to replicate the payment streams of other, more traditional instruments, while offering better conditions. Selling a CDS is like buying a bond. Buying a CDS is a way of shorting a bond – or of insuring against its default. But that does not change the fact that once you strip away the complex technical machinery, you end up with a product that offers insurance – even though it is a lot more versatile than a standard insurance contract.

Another argument I have heard from a lobbyist is that naked CDSs allow investors to hedge more effectively. This is like saying that a bank robbery brings benefits to the robber. A further stated objection to a ban is that it would be difficult to police. There is no question that a ban of a complex product, such as a CDS, involves technical complexities that commentators like myself probably underestimate. It is conceivable, for example, that the industry might quickly find a legal way round such a ban. Then again, we would not consider legalising bank robberies on the grounds that it is difficult to catch the robber.

So why are we so cautious? From conversations with regulators and law-makers, I suspect they are not always familiar with those products, to put it kindly, and that they may be afraid of regulating something they do not understand. They understand, or think they do, what a hedge fund is. Restricting hedge funds is something they can sell to their electorates. Hedge funds were not at the centre of the crisis, but they are a politically expedient target. Banning products with ugly acronyms that nobody understands seems like unnecessarily hard work.

I do not want to exaggerate the case for a ban. This speculation is neither the underlying cause of the global financial crisis, nor of the eurozone’s underlying economic tensions. But naked CDSs have played an important and direct role in destabilising the financial system. They still do. And banks, whose shareholders and employees have benefited from public rescue programmes, are now using CDSs to speculate against governments.

Where is the political response? The Germans want to bring it to the Group of 20, but they hesitate to do anything unilaterally. Christine Lagarde, the French finance minister, was recently quoted as saying: “What we are going to take away from this crisis is certainly a second look at the validity, solidity of sovereign [credit default swaps].”

A second look? I wonder what they saw when they looked the first time.

helvetius

Disconnection from ownership of the underlying instrument is one of the defining characteristics of derivatives. If they were tied to ownership of the underlying, they wouldn't be derivative - that's why they're called what they're called. In this sense, the concept of a "naked" derivative is practically a redundancy. Derivatives are no more mean to wear clothes than cats or dogs.

By their nature, time risk derivatives (forwards, futures, options) _cannot_ be tied to the underlying because, at least in their physical commodity market origins, the underlying has not yet been produced, therein lies the risk element.

However, despite the foolishness of praising "good" hedgers versus "bad" speculators (common amongst politicians and tabloids, but something I would have thought the FT was a bit beyond?), there is a grain of sense in Munchau's concern about credit derivatives.

It's not that taking default 'insurance' against a nominal exposure you don't have is in itself illegitimate. Today's lengthening, international supply chains, means that companies are exposed to risks further down the supply chain from their direct suppliers, often in different jurisdictions to the ones they do direct transactions in, where supplier failure would cause them losses. Yet you can't (easily or cheaply) get insurance against such indirect risks - hence there is a legitimate risk management role for such 'insurance' against events for which you don't have direct exposure.

The problem with credit derivatives (and I don't recall Munchau supporting George Soros when he called for CDS to be banned back in 2008) is to do with their role in allowing the creation of credit without the level of reserves required by banking regulations. As such CDS have been the financial alchemy behind CDOs, the whole originate-distribute model and the rise of the whole Shadow (for which read, "reserve-lite") Banking sector.

What Bernanke got wrong in his 2000 statement that derivatives would help to reduce systemic risk by spreading risk more evenly, was that that only applies if the aggregate amount of risk remains equal. One of the effects of the de-coupling of derivatives from underlyings is that it also allows the multiplication of aggregate risk, rather than just its redistribution. Together with the opacity due to the dominantly OTC nature of most credit derivatives, resulted in the global financial panic leading up to the 10 October 2008 ISDA auction of Lehman Bros CDS.

Credit derivatives create a specific problem that is not going to be solved until two things happen.

1. Market transparency through central clearing on exchanges (also mitigates counterparty risk)
2. Regulatory requirement for liquid capital reserves to be held against credit derivative exposure, in the same way, and for the same reason, as banks are required to hold against their loan book (and similarly for insurance companies).

#1 Appears to be on the current agenda, although progress is slow and the rearguard action being fought by the lobby is fierce. But #2 doesn't seem to be making much of a showing. Until it does, and until legislators (and, it would seem, some FT commentators), actually acquaint themselves with the mechanics of derivatives in general and credit derivatives in particular, we can look forward to future shadow banking crises like the one we have recently lived through.

Greycoat

Just introduce a small insurance fee for naked CDSs payable to a financial stability fund. For example 10% on top.

gw:

@ A.N.Other,

What Mr Münchau means by saying you can´t insure what you don´t own is the concept of Interest. You can take out life insurance for yourself, partner and kids bcs you have an insurable interest there. You also insure your own property e.g. against fire - but there is very good reason your neighbor can neither take out insurance on your property nor on your life. - One of the problems discussed last year in this context was that as owner of certain CDS there could be an advantage of forcing a company to default - and that is socially not justifiable and should not be tolerated.

This said, as pointed out in my first posting below, I think the analogy with insurance is wrong. What´s needed is market regulation, giving transparency that is lost in the otc trade.

- Has it ever occurred to you that otc markets, due to their relative smallness and illiquidity are subject to manipulation and could in fact send the wrong price signals to markets? Just think about Greece. Do the existing short positions really justify the almost hysterical market reaktions?

Greek sov debt trading at EM levels is a joke. Someone seems to have lost any sense of proportion there. May this gross exaggeration be due to wrong price signals from the cds market?

Erol Riza:

Evreka, at last an FT writer has seen that naked CDS are simply socialy unacceptable. MR Munchau deserves credit for highlighting this fact which should have been on regulators radar long time ago. For those who are not aware investment banks issued structured notes with leveraged bets on countries going bust. Other trades were fist to default trades which meant that a basket of countries where identified and investors rceived a high rate so long as no country defaulted. These rades have nothing to do with insurance but everything to do with profit for the banks. Buying insurance when a bank has an underlying exposue to a credit (be that corporate or sovereign) is offstting the risk but sleculating on country's or corporates is ertainl nothing to do with hedging.

Moreover, banks which acts as advisors to clients have to keep Chinese walls; does anyone beleive this was religiously implemented at some of the investment banks which have been providing CDS. On top of this disreputable type of transctions one has the hedge funds which were probably buying protection in the form of CDS and shorting Greek bonds to widen the spread on greek bonds and hence profit from the CDS side.

One hopes that Mr Munchau's proposal finds favour with rgulators and naked CDS are BANNED. The world will be a better place.

A.N. Other

ANY risk-transfer tool serves an insurance-like purpose. Stock index futures, short sales, calls, puts, caps, collars, interest rate swaps. What is so different about the CDS risk-transfer compared to these others?

"A universally accepted aspect of insurance regulation is that you can only insure what you actually own."

Wrong. I can insure against my own death, the weather, my partner dying, my companies CEO, business partner, or top salesman dying (key man insurance), losing my job, becoming disabled, a collapse (or boom) in stock prices, or pure market volatility. I don't own any of those things.

"Insurance is not meant as a gamble, but an instrument to allow the buyer to reduce incalculable risks."

Says who? Neither you nor the government get to decide what other people are "meant" to do. We live in free countries not a Chavez-style command economy. Even if your central point about speculation being "socially useless" (more so than the sports cars, luxury watches, or vintage wines your newspaper advertises) was correct, so what? If I am legally and morally entitled to bet on a boxing match, a political election, a throw of the dice or a card game, then I am surely entitled to speculate on the price of financial assets. If it's legal for me to have unprotected sex with 100 people, commit suicide, or put my entire life savings into property with 20:1 leverage, then why on earth should it be illegal to speculate on bond prices? Do you understand the concept of liberty at all?

No country has a right to issue bonds at the price of its choosing. Therefore no harm is being done by accurately pricing debt to reflect default risk. If CDS buyers become too aggressive, then there is sure profit to be made by selling the relevant CDS positions. Banning CDS trading would reduce the price transparency and accuracy of sovereign debt and default risk, and it would criminalize the freedom of contract of consenting adults. Both those are not only socially useless, they are socially harmful and immorally illiberal.

[Feb 28, 2010]  Ben Bernanke Responds To Why Goldman Sachs Needs Fed VaR Exemption, And Other Questions zero hedge

Anonymous: Tyler - GS is doing "god's work" by effectivelly managing asset prices and interest rates for the Treasury and FED- beyond that what else do you need to know? VAR? Comon we cant effectively manage with rules that would apply to mere mortals....

[Feb 26, 2010]  Double dip watch by Emma Saunders

It's probably premature to abandon "double dip" topic even if it sounds like "depression porn".
February 25 | Money Supply FT.com

Calling a turning point is tricky, and offers ample room to make oneself look silly.

But I reckon a good indicator is surprise. If pundits expect the continuation of a trend, and are surprised, that suggests either a temporary blip or a reversal. And if there are many such related surprises, evidence strengthens for the reversal.

Well, there is a lot of surprise in this office at the moment. Every day there seems to be a new (negative) data release for the UK or US - and every day I see colleagues raising eyebrows at the size of that surprise. An eyebrow raise, in Britain, is a powerful indicator.

So I’m keeping a list, below, of the latest data releases. All the ones I’ve listed have been surprises, either because of a change of direction, or an acceleration. Do counter this list with positive economic indicators, if you can think of any. I’m concerned I’m filtering unconsciously:

These are all latest data.

US

  1. Unemployment: initial weekly claims rise; fall expected (FT, DOL data)
  2. Mortgage applications: Jan lowest since May 1997 (Calc Risk, MBA release)
  3. New house sales: Jan sharply down on December (FT, Census)
  4. Consumer confidence: down sharply from 56.5 to 46 (FT, Conference Board)
  5. Underwater homeowners: up 600,000 in one quarter (Felix Salmon)

Europe

  1. Business lending: contraction accelerates, 2.7% Jan from 2.2% Dec (FT)

UK

  1. Business investment: +0.1% expected; -5.8% recorded (FT, ONS)
  2. Gross mortgage lending*: sharp and unexpected reduction in loans (FT, BBA)
  3. Government borrowing: poor tax income pushes borrowing up in January - first time since 1993 (Money Supply, ONS)

*Net lending was also down. This is partly explained by the end of a house purchase tax relief (’stamp duty holiday’) at the end of December.

Tags: ,

[Feb 25, 2010] barry ritholtz still bullish after all these gains

Yahoo! Finance

AMTM

so greed is good. even when you realize that you're about to go off a cliff, you value wealth over self-preservation. Someone once told me that while it is okay to be speculative, greedy when it comes to advancing one's self, it is still prudent (and quite smart) to fear poverty. I mean I dabble with stocks, blah blah blah, but at the end of the day I can see the undeserved optimism and overall collaborating, nay, collusion that regular joes are doing: continuing to gamble casino style like mr.ritholtz (and i say regular joe as to say he's not ultra rich like any one at regional fed or NYS fed)...its amazing how complacent we are right now.

taopraxis

Too many people want to get rich quickly without working very hard, thus the stock market is a very seductive game. Unfortunately, life does not work that way. Unless you are rich, corrupt, and moving in circles of money, power, and nepotism, my advice is to stay away from the stock market. Most of the people who in stock funds, today, are basically savers, not investors. They literally do not know what they're buying. In a word, they're suckers. A generation is in the process of being ruined, financially speaking. No exit, no happy endings...depression.

 

[Feb 25, 2010]  Is The SPY Getting A Jump At Key Levels From A Quant Algo

02/24/2010  | zero hedge

peterpeter

There are so many errors in here:

> First a little background on why the SPY would be a good target for some undercover manipulation.

Because of the intense competitive interest in trading SPY in strat arb funds and the numerous ways to arbitrage it (cash market, other ETFs like IVV, options, futures) - it is a horrible target for any form of manipulation.  I mean, it is I think far fetched that Tyler thinks it is being manipulated in the pre-market, but to think that at 10AM, someone is trying to manipulate SPY is INSANE!  You buy or sell large blocks of SPY exactly because it can handle the volume *without* moving the market.  You can make a very large directional bet without paying much above fair value.  You can not however move SPY much away from fair value, because you will lose your shirt in the process to other market participants.

> This exchange is used because of its very nice rebate structure

You can't be lifting the market with 10K blocks of SPY and getting a rebate.  The order book on SPY is incredibly deep and order anticipation programs are seeing blocks go buy and attempting to make a market in SPY to get the rebate.  So, you can't keep buying and expect that there will not already be a standing order adding liquidity on the books that you'll have to take out.

If there was a single entity (as opposed to many) buying in the period in question, then that buyer was paying a liquidity removal fee to the ECN/Exchange, not getting a rebate.

> The S&P depository Trust buys and sells individual components of the S&P's based on movement within the index. Simple right?

Apparently not simple enough!  State Street buys and sells the components of the index based only on creation and destruction of "creation units", which are 50K blocks of SPY.  If you are an authorized participant and go to State Street with a block of 50K SPY, they'll give you some cash and the corresponding equities.  Conversely, if you go to them with the equities and cash and ask, they'll convert them into shares of SPY.  Beyond that, State Street does not buy and sell individual components - rather, they buy and sell the entire portfolio https://www.spdrs.com/site-content/csv/SPY_All_Holdings.csv

> The algo in question starts buying at 110.04 with one block of 9999 shares, followed by 60k more shares all bought in under two minutes

First, you are assuming somehow that all of the trades happening are from one buyer.  Beyond the fact that is likely a very wrong assumption - the volume you are talking about is not terribly impressive.

SPY traded 173M shares today.  Suppose 150M of that was during regular trading hours (overly conservative figure, it is probably a lot closer to the 173M) - then, 6,410 shares were traded on average per second today during normal trading.  So, 60K shares in 2 minutes, even if you are only looking at INET (that's where I am guessing you are looking) is a spit in the ocean.  On average over the entire course of the day, 769K shares should trade of SPY in a 2 minute window.

>  Once the price gets "jumped" the algo just sits and waits till natural buyers and sellers are few and far between and it either dumps or takes in more

Well, I can't fault your analysis here as being outright wrong, since you are correct - the algorithm (or as I believe is the case, the multiple overlapping algorithms from multiple entities and individual traders that you erroneously believe to be all the same) do/does in fact either dump or take more.  Very insightful observation! (yes, that was sarcasm).

> If there is a huge buyer day in and day out of the SPY whom has no interest in holding for a long period of time how would this affect the components?

A huge buyer who has no interest in holding for a long period of time is obviously (well, I would have hoped it was obvious) a huge seller of the same or a related asset at some not too distant future time period.

> The direct affect of SPY purchasing would cause the cash market(individual stocks, not futures) to trade in a much more liquid manner in whatever direction the purchaser is leaning.

Things are not so clear.  SPY can sometimes lead the cash market, and sometimes it can lag.  In either case, the time differentials are measured in micro-seconds or several ms.... and is not something you are going to be able to see with your off the shelf charts and tools.

While SPY's volume may seem impressive at ~170M today, the top 10 holdings (as measured as their weight in the SP500 index) of SPY traded over 240M shares today.... and that doesn't count the remaining 490 components!

So, yes - some of the time, SPY can lead the cash market, but more often than not, SPY is following the cash market - or being arbitraged against the futures market.

On a long enough timeline, the survival rate for everyone drops to zero

Feb 22, 2010 | zero hedge

A new proposal by House Republicans, lead by Rep. Scott Garrett (R., N.J.), is seeking to address changes to Fannie and Freddie accounting, along the lines of what has been previously proposed by Zero Hedge, and to not only include the GSE's losses as part of the Federal budget, but to also count the debt from the two mortgage zombies toward the nation's total statutory debt limit. As we stated previously, it is only semantics at this point which distinguish the GSE obligations from other Treasury obligations. Yet it is not just us, but the administration's very own Peter Orzsag who was pushing for consolidated GSE accounting two years ago. Yet with GSE debt most recently at $6.3 trillion, or about half of the existing Treasury debt, this would mean total US debt would not only explode by 50% overnight, but the recently increased debt ceiling would be immediately breached and America would find itself in technical default (where it really is right now for all technical purposes).

jeff montanye

how similar is 1990 to 2008 vis a vis the stress test? but, and i never thought i would say it (hard core obama campaigner) thank whomever for the wascally wepublicans. because they actually are an opposition party (as opposed to those incurably cowardly democrats). even as obama copies bush in all but atmospherics, they oppose him. audit the damn fed. count fannie and freddie bailout to infinity in the debt. nominate ron paul. buy gold miners.

Going Down :

"So are all of the countries going to race against each other now?"

When I look at the US, I think it would be a very good thing if Washington included all its liabilities in future budgets, up to and including Fannie Mae, Freddie Mac, Ginnie Mae, FHLB and FHA, since that would provide a much clearer (dare I say honest?) picture of where the country stands. It would also be murder on the dollar. Curiously (for many), the US is not the only party that wants the trillions in mortgage losses off the American books. Germany wants the exact same thing, something all these experts seem to be completely oblivious to.

We have entered the beggar-thy-neighbor phase of the downfall, the race to the bottom is on for currencies. Obama's ludicrous call to double US exports in 5 years fits that same idea. The one viable way left to soften the fall is to entice other countries to buy your products, because that's the only money you don't have to borrow. But you can't achieve that goal with a strong currency. China knows that all too well and keeps the renminbi pegged to the USD. Everything they own is denominated in dollars anyway. But if Germany gets its way, the Chinese currency will rise with the dollar, until the latter is on par with the Euro (it’s €1 to $1.36 today). Once that is done, Germany hopes to once again be the world's largest exporter....

This is not a fight for a meal of kings, this is a down and dirty scramble about the scraps off the table.

mouser98 :

technically, its not default until you miss a payment right? and that won't happen as long as the printing press still works... oh you assumed payment in something other than green TP...

Anonymous

They will continue to be the largest [indirect] purchaser of bonds, as that ensures the status quo. The alternative is a weaker dollar, diminished exports and hundreds of millions hungry and unhappy Chinese.

Your gold hoarding ambitions will also fall flat on their face. Gold prices will be suppressed in a concerted sovereign effort, lest you prefer to buy gold instead of clip coupons. Even if you're right and we actually get to a point where you would actually have use for gold, then you still won't be able to enjoy the rewards of your brilliant foresight because you will be afraid to show/tell you have gold.

Keep it real.

jesus:

They had basically two years to pass anything they wanted. What did they do with it? Nothing but bicker and bullshit, along with Republicrat approved measures like bank blowjobs. The Dems can be counted on to be utterly worthless when in power.

milbank

I assume by "vote nearly everyone out" you mean "and vote the other guys in" as the solution.

You're by definition, insane Connor. How many times do you have to do that before you start to catch on to what's behind the curtain when it comes to "elections" and "choice"?

Miles Kendig:

The ratings agencies are part and parcel of the National Security State so even if the US hits 10K% debt to GDP the country would still have a AAA rating as valid then as it is now.


 

[Feb 23, 2010] Don’t Kid Yourself. Interest Rates are Going Up. by madhedgefundtrader

"Nakamura said the yield on the benchmark U.S. 10-year note will decline to 3 percent by June 30 from 3.80 percent today. "

02/22/2010 | zero hedge

Make no mistake. The shot has been fired across the bow, the chink has appeared in the armor, and the crack has opened up in the dike.

The Fed’s move to raise the discount rate on Thursday from 0.5% to 0.75% may have been technical, widely telegraphed by the Fed minutes, and an unwind of an artificial spike down in rates the economy no longer needs. Sure there was only $15 billion in loans outstanding at the Fed window, against $1 trillion in excess bank reserves.

But it was definitely an UP move for rates. The liquidity tide that has been floating all asset boats has reversed and is starting to recede. We’re about to find out who has been swimming without a swimming suit. The train is leaving the station.

Next week the TALF expires, eventually sucking another $1.5 trillion out of the system. The Fed is reverting from its role as the lender of first resort back to its traditional role as the lender of last resort. Inflationary expectations are going to rise.

While overnight rates are going to remain miniscule, probably for the rest of the year, the long end is going to take this less well. That means that one of the steepest yield curves in history is about to become a lot steeper. I’m thinking the face of Half Dome. [Why ??? -- what will be the driver ???]

Now I know that I have been predicting that a short in 30 year Treasury bonds will be THE great trade of 2010. But don’t pop the champagne bottles just yet. Without more aggressive Fed action, the rise in long rates is unlikely to be a sudden, panicky spike. [Why ??? -- what will be the driver ???]  

So while you can comfortably sit with non leveraged short play like the TBF, you are going to have to nimbly trade the leveraged ones like a demon, such  as the TBT, to keep the cost of carry from eating you alive. You are still sailing upwind against a 4.7% yield, and you can multiply that with leverage. Think of it more as a slow ground offensive, than a lightning fast aerial assault.

But it will grind us inevitably closer towards a major triggering event that will bring real fireworks...

For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily, or listen to me on Hedge Fund Radio at http://www.madhedgefundtrader.biz/ .

Gordon_Gekko

Unless, of course, we have Fed intentionally crash the markets again...er..."deflation".

jdrose1985

I dont hear anyone thinking outside of the box

Failed treasury auction? Uhhh..how many times has that happened since 1790? the answer starts with a z***.

Please, let's be sort of realistic.

Now how about the real world...say 10 year yields fall to 3% and the CPI goes negative, your real return is still pretty good. Beats the hell out of staying in equities where prices are historically due to fall another 50-75% so we can get back to paying realistic prices for earnings.

Preservation is the name of the game, methinks.

Oh and buy a little gold too

Anonymous

See Japan. We are entering deflation. I think being able to get a real rate of 4+% is going to be the trade of 2010.

The global economy is going to find out that it's been swimming naked as stimulus gets paired back.

The demand for Treasuries will be very strong once again.

I'd figure what you think is going to happen will happen after 2011

Anonymous

Why not just by the house for cash as you would any other consumer durable, unless of course you still believe in the magic of credit LOL.

Anonymous

Plain vanilla mortgages are one of the few legitimate uses of 'consumer credit', which is of course why everyone and their doucebag brother started fancying them up to get a cut. While it's possible (and desirable) to by a house for cash, most members of what we once called the 'middle class' are busy making ends meet rather than saving up.

When you get down to it, it makes little difference whether you pay 20 years of rent while you're saving or 30 years of interest while you live in a mortgaged house, you're still paying someone else for the right to have that roof over your head.

MarketTruth

Ripped Chunk ...

"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace. We ask not your counsels or arms. Crouch down and lick the hands which feed you. May your chains set lightly upon you, and may posterity forget that ye were our countrymen."
-- Samuel Adams, speech at the Philadelphia State House, August 1, 1776.

-----------------

And with that said i expect to hear you also went on strike because you and millions of others feel it is the right thing to do. If not strike, please leave us in peace and we all wish you well in your possible slavery to the State.

Anonymous

And you're proposing what, exactly as the alternative? It'll do you well to remember that one of the first things the Founding Fathers did once independence was declared was create the federal government. Then, they discovered that making a pissant weak government was almost worse than no government, so they made a stronger one. So, again I ask you: what's the alternative?

B9K9

California has a projected budget deficit of $20 billion dollars for 2010-2011. However, this does not include a negative balance of $6 billion in UI funds owed to the fed.gov. Since the UI deficit is increasing each month to the tune of $500m+, we're looking at $12 billion at the end of the year.

The total proposed California budget for 2010-2011 is around $100B, so the 20+16 puts us in the territory of running a 35% deficit. Since (state) debt has increased 80% over the last 3 years to $50b ($100b if one adds in local), any reconciliation is going to come out of expenditures.

So how does one cut 20% (assuming the UI debt is forgiven by Uncle Sam)? Well, considering that total state employment costs are around $25B, you could fire everyone and still almost run a deficit. So what's gonna happen is that it's going to come out of schools (previously untouchable) and social spending.

I forgot to add that pensions are significantly underfunded, so if we add in wandering students, out of work teachers/gov't employees, the unemployed who are no longer receiving support and retired cops without pensions, if 2010 doesn't do the trick, 2011 is when this thing is gonna blow.

And some people think we're looking at hyper-inflation. Snort.

lookma

How can you make such a great case for hyperinflation and then throw it all away with such a goofy line at the end?

Hyperinflation is simply monetary panic in the face of crushing deflation.  The crushing deflation is a cause of and prerequisite for hyperinflation.  You have made the case for hyperinflation pretty well, bravo.

B9K9

Asset prices drop, forcing the relative value of debt to increase, so the absolute value of currency ... declines?

I fall in the camp that believes there is a hard $USD oil peg - the days of unbridled QE are done.

I failed to mention that the state of California is hoping the fed.gov contributes $10b to state coffers so that they only have to cut $10b. (10+10=20 total deficit.)

The fed.gov money is not forthcoming. This is telling those who spend their time combing through 1,000 page budgets what is really goin' down.

It all comes down to whether a hard $USD oil peg exists. If so, and Ben has to once again allow the market to set interest rates, as opposed to printing with abandon, then this bitch is going down.

With longish term rates heading north of 6-7%, it's good night Irene. Our little $1.7 trillion deficit isn't gonna get financed. When that happens, the states are on their own. (No more, cough, 'stimulus' to mask direct state subsidies.)

See my post above for happens next in the great state of California.

Shameful

So what's the result of failed bond auctions then?  Since spending can't/won't be cut and if you think they won't print which will break first?  I mean it would be a hoot to see the USA default on it's debt and not print it away, is that what you see happening?  Most of the states are screwed as is the whole system, so whats left if there is no printing other then debt repudiation? 

I mean I suppose they could just start seizing and taxing to a massive level but that might make a few people decide that they will fight to keep what they have.

Rusty_Shackleford

Of course we're going to print our way out of this.  Don't expect them to call it that though.  They'll think of some other interesting name for it.

"Targeted Quantification" or something like that.

Anonymous

Ah yes, the hard USD oil peg. Yet another guy that thinks oil is infinite.

You're going to starve and die. Oil is not infinite. It doesn't have to run out to starve you. It only needs to be insufficient, and that's what it's going to be.

Gold won't help you. You can't eat it. Guns won't help you; they just inform the mobs of where you are with food.

Oil runs the tractors that plant the hundreds of thousands of acres. That is going to stop.

And then most starve. You want to prepare? Prepare for that.

Anonymous

Once Lord Blankfein and his Tribe are positioned correctly, trading ahead, way ahead of the 'news' the rest of the world gets, for their further enrichment, he and his "coincidences of interestees" will tell the FED what to do next.

It matters not whether it is keeping rates the same, raising them or lowering them. All that matters is the positions that Lord Blankfein is building.

All the rest is just conversation.

jc125d

I am seeing a chiche' spike in the MHFT Index.

Cliche, that is...(pronounced klee-shay) is a saying, expression, idea, or element of an artistic work which has been overused to the point of losing its original meaning or effect rendering it a stereotype, especially when at some earlier time it was considered meaningful or novel. Sorry, MHFT.

seventree

But at least we will see who is swimming naked when a shot is fired across the bow of the train leaving the station.

RSDallas

Deflation will be the dominant winner through about 2015.  It will take that long for the slow bleed (deleveraging) to free up some credit capacity. 

You can't get inflation if the consumer is not spending and they aren't and won't be anytime soon. 

We may see isolated inflation in the energy, metals and food industries, but they will only inflate until they become to much a burden on the zombie US consumer which will then spin or economy downward into many "mini" recessions for a long time to come.

Things could get better quicker if they would get on with the ever so needed liquidation of all this rancid, misallocated debt as well as the cutting back spending in the local, state and national governments that is clogging our system.

ghostfaceinvestah

"Next week the TALF expires, eventually sucking another $1.5 trillion out of the system."

Huh?  TALF funded 1.5T?

Are you talking about the MBS program (which was not TALF)?  When is that money going to be sucked out of the system?  Over ten years when the mortgages pay down?

Anonymous  

Rates don't go up in Depressions. I guess this time is different?

ghostfaceinvestah 

Tell that to the Argentinians.  Or the Greeks.

Anonymous

SO we will be the only G3 nation raising rates, ramping the USD with the goal to kill the inflation bogey man and crush any sort of housing recovery, mutlinational competitiveness at the same time....think not Mad HFT but really like your articles. Look for the Reston 6 hedge funds continue to grow assets at above mkt rate...

Anonymous

Bank holiday coming:

Paul Joseph Watson
Prison Planet.com
Monday, February 22, 2010

A new advisory being sent by America’s third largest bank to its account holders has stoked fears that major financial institutions could be preparing for old fashioned bank runs if the economy takes a turn for the worse.

Originally reported by John Carney over at the Business Insider website, Citigroup is sending the following information to customers along with their bank statements.

“Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts.

While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change.”

Anonymous

If you think this is news, check your bank's account agreements. Odds are pretty good you are already subject to this potential restriction and don't even know it.

A few minutes and Google will get you:

Bank of America Deposit Agreement, Section XX.Q.
JPMorganChaseWAMU Account Rules, Page 11.

Anonymous

long the 30yr will indeed be a nice trade this year. ~3.50% at end-of-year will be close to 25% return.

wait - you didn't say 'short', did you? what planet are you on?

Madcow

Debt and tax service are DEFLATIONARY. So look for further economic contraction, defaults, etc. 

Energy may rise due to production declines and that will have an impact on food prices. So "volatile" food an energy will rise. But everything else will fall.

If the Treasury continues to raise taxes and forces tens of millions of families and small businesses into bankruptcy, the banks will be able to swoop in and scoop up their liquidated assets at pennies on the dollar.

Deflation is good for the "TBTF" banks and for the US Dollar too -

Anonymous

The "short the 30 year t-bond trade" is looking stale and overcrowded, particularly with the global recovery now in
serious doubt and the record decline in bank loans.

jc125d

I used to hear bullshit like this in the boardroom when I was a rookie stockbroker 20 years ago.

We did a lot of damage with our great ideas, supplemented by the great research we heard on the Morning Call, not to mention the excellent business building ideas offered by the free lunch purveyors.

Good thing with a hedge fund they are all qualified investors with throw away money.

godfader

What happened to all those guys who were screaming to short JGBs when the Japs bailed out their failed brokers in 1998, and then after they started QE in 2001? I hope I don't have to post charts. The JGB bears have been eaten alive.

Econophile

Mad. I tend to agree on the trend to higher rates, but what about flight to safety issues if European banks debt exposure to emerging markets is exposed plus more sovereign debt crises? What's your view on this?

Anonymous

Got duration?

Who knows this cycle better, Wall St or the Japanese?

http://www.bloomberg.com/apps/news?pid=20601009&sid=aUaFf71VVrR4

Japan Hoarding Treasuries Counters Retreat by China - BBG 2/22/2010

In a Bloomberg News survey at the end of 2009, Barclays Capital Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of the 18 primary dealers that trade directly with the Federal Reserve forecast the 10-year yield would rise to 4.14 percent in 2010, from 3.84 percent on Dec. 31.

“Employment is very fragile,” said Hiromasa Nakamura, a senior investor who helps oversee the equivalent of $21.1 billion in Tokyo at Mizuho, part of Japan’s second-largest bank by assets. “U.S. households will increase their savings. That’s negative for the economy and positive for bonds.”

Nakamura said the yield on the benchmark U.S. 10-year note will decline to 3 percent by June 30 from 3.80 percent today.

Investors would earn 8 percent if Nakamura’s forecast is accurate, according to data compiled by Bloomberg.

by Fruffing
on Mon, 02/22/2010 - 15:19
 

Japan Hoarding Treasuries Counters Retreat by China

Bloomberg today.   My money's on those inscrutable Asiatics...

[Feb 23, 2010] Is AIG the main CDS insurer for Greek government debt - Credit Writedowns

Yves Smith and I received a tip at the weekend from a friend who reads the German press regularly about credit default swaps (CDS) on Greek government debt. Read Yves’ piece based on that article here. Below is mine.

Previously, I had mentioned the CDS exposure of the hapless German Landesbanks (banks owned by the individual German states or Länder – hence the term Landesbank). These same companies lost enormous amounts of money in the subprime meltdown – and apparently they have all sorts of other toxic exposure like Greek CDS still on the books.

So I find it interesting that the German daily Frankfurter Allgemeine is focussing instead on the AIG CDS connection to Greece.  Here’s part of what they had to say (my translation from German original):

London investment bankers named the American insurer AIG as an additional seller of CDS. It had to be nationalised during the financial crisis, because it had sold default insurance on U.S. mortgage bonds. The burden would have led to the collapse of the once largest insurer in the world. Before the financial crisis, AIG is said to have insured a large amount of sovereign credit risk. If there is still a major insurance positions on Greece, then the American government would have a strong interest in preventing a default of the country.

Even if it just concerns market rumours with the Greek banks and AIG, the examples illustrate the weakness of the CDS market. The protection is sold by banks or insurers, which themselves have only limited capital resources. As a general rule, they also have a much lower credit rating than the countries whose default they are insuring. The insurance provided by CDS may turn out to have been a bubble.

We await further details.  But, what should be clear here is that those banks and financial institutions that were caught out during the initial crisis period are probably the same ones now at risk yet again – except this time they start from a weaker capital position.

Source

Die Fieberkurve der griechischen Schuldenkrise – FAZ

[Feb 22, 2010] Wray- Memo to Greece- Make War, Not Love, With Goldman Sachs

naked capitalism

Generally, speaking, these CDSs lead to credit downgrades by ratings agencies, which drive spreads higher. In other words, Wall Street, led here by Goldman and AIG, helped to create the debt, then helped to create the hysteria about possible defaults. As CDS prices rise and Greece’s credit rating collapses, the interest rate it must pay on bonds rises—fueling a death spiral because it cannot cut spending or raise taxes sufficiently to reduce its deficit.

... ... ...

Dimitri Papadimitriou has recently made what we consider to be an important plea for moderation of the hysteria about Greece’s debt. Writing in the Financial Times, he complained that

The plethora of articles in your pages and others, some arguing in favour and other against a bail-out, contribute to market confusion and drive the country’s financing costs to record levels. It is not yet clear that a bail-out is even needed, but this market confusion is rendering the government’s ability to achieve its deficit goals ever more difficult.

Indeed, we suspect that the same financial firms that helped to get Greece into its predicament are profiting from—and stoking the fires of—the hysteria. He goes on, “what Greece really needs now is a holiday from further market confusion being created by contradictory, alarmist public commentary”.

Greece, Euroland in general, and the rest of the world all need a holiday from the manipulation and destruction of our economies by Wall Street firms that profit from speculative bubbles, from burying firms, households, and governments under mountains and debt, and even from the crises that they create. Governments all over the globe should use all legal means at their disposal to ferret out the bad faith and even fraudulent deals that global financial behemoths are foisting on us.

[Feb 22, 2010] "We Need Jobs, not Deficit Cuts"

Jamie Galbraith:

We need jobs, not deficit cuts, by James Galbraith, CIF: "Now that the immediate crisis has passed," Policy Network asks for "long-term strategies to shape our post-recession economies" and "to promote economic growth".

But the immediate crisis hasn't passed. It is not over for the jobless. It is not over for those losing their homes. It is not over for Greece, Spain, Portugal, or Iceland, facing ruin in the capital markets. ...

People need work. We face the challenge of climate change. The broad outline of a program is therefore plain. There is no mystery about it. In 1929, Keynes wrote, "there is work to do; there are men to do it. Why not bring them together?" Today as then, it is that simple.

Do we need to "rethink the relation between the market and the state"? A futile hope! Those who once thought the market could flourish without the state have either already "rethought", or they cannot think. They are our own Stanley Baldwins and when they discourse on this subject, "it not only is nonsense … but it looks like nonsense to any simpleminded person who considers it with a fresh, unprejudiced mind".

In the crisis, the financial sector collapsed. It hasn't recovered. ... In this situation, the state must act. It can act through the banking system by mandate, as it does in China and as it used to do in Japan and France. Or it can bypass the banks and go to work directly – as it did in America in the New Deal and as Keynes proposed for Britain in 1929.

A jobs program? Keynes again: "No, says Baldwin. There are mysterious, unintelligible reasons of high finance and economic theory as to why this is impossible. It would be most rash. It would probably ruin the country. Abra would rise, cadabra would fall… No, cries Baldwin. It would be most unjust… Unemployment is the lot of man… For the more the fewer, the higher the less."

The question facing world leaders today is not what to do. It is whether to do it. There are two goals to meet: full employment and sustainable energy. That's technically complex. But the complexities are complexities of engineering, organization and politics. They are not complexities of economics or finance.

The question is posed as though it involved deep questions and high obstacles, whose true nature the uninitiated cannot be expected to grasp. Thus the hue and cry over public debt and deficits – projected to be unsustainable – for reasons never stated – in the long run. Our papers and our television speak of almost nothing else. But if they are right – as all the voices of Wall Street and the City say – then how come the long-term interest rate on the government bonds of the rich countries remains so low? ...

In truth, the deficit/debt uproar is a deliberate effort to sidetrack attention, to defeat the will of the electorates in the US, as well as Greece among others, who stubbornly insist on effective action, economic recovery and financial reform. Those behind the uproar never foresaw the financial crisis. They never warned against the dangers of excessive private debt. Their interest is plain: they profit from private debts. So it pays to make believe that private is productive and public is sterile, that private is stable and public is not, when the reality is the other way around.

A final word from Keynes: "It may seem very wise to sit back and wag the head. But while we wait, the unused labor of the workless is not piling up to our credit in a bank, ready to be used at some later time. It is running irrevocably to waste; it is irretrievably lost. Every puff of Mr Baldwin's pipe costs us thousands of pounds."

Every day that goes by with unemployment higher than it needs to be means that people are struggling needlessly. People need jobs. And not at some point in the future when Congress gets around to it (if they ever do), this can't wait another day. It should have been done months and months ago.

Congress ought to have the same urgency in dealing with the unemployment problem as it had when banks were in trouble. Collectively the unemployed are too big to remain jobless, and the millions of individual struggles among the unemployed shouldn't be tolerated. But Congress doesn't seem to be in much of a hurry to do anything about it, or give any sign that it much cares.

Selected Comments

Min:

Mark Thoma: "Congress ought to have the same urgency in dealing with the unemployment problem as it had when banks were in trouble."

Amen, brother!

Jobs now!

purple:

I suspect something will eventually be done because it will have to be. US businesses cannot survive without a US consumer. But for now, a faction of US big business thinks they can just run off to Chindia and make billions there. However, both those countries are not interested in seeing their wealth drain away and will - for the foreseeable future - protect their own industries and businesses.

Hence the whining from the EU and US Chamber of Commerce about China's favoritism of domestic companies, etc. But what do they expect ?

anne:

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2010&base_name=it_is_not_a_jobless_recovery_i

February 20, 2010

It Is Not a Jobless Recovery, It is a Growthless Recovery

The New York Times has a good article * on how millions of workers are likely to face prolonged joblessness as a result of the current recession. The article implies that there has been a change in the relationship between economic growth and employment in recent decades as it has taken longer for the economy to recovery the jobs lost in the last two recessions than in prior recessions.

While it has taken longer to recover the jobs lost in the downturn, this has nothing to do with a changed relationship between growth and jobs. The problem is simply that growth has been very weak. Here is the cumulative growth in the 8 quarters following the end of the last 5 recessions:

1970(IV)-1972(IV) -- 8.9%
1975(I)-1977(I) - 9.8%
1982(IV)-1984(IV) - 13.5%
1991(I)-1993(I) -- 6.0%
2001(IV)-2003(IV) -- 5.9%

As can be seen the growth coming out of the last two downturns has been very weak by historical standards. Most projections show that the growth coming out of the current recession will be similarly weak. In short, there is no mystery about the economy's failure to create jobs. Weak growth typically means weak job creation.

By the way, the explanation for the slower growth following the last two downturns and projected for this recovery is not difficult. The 1990-91 recession was not countered with any fiscal stimulus. In fact, the government put in place a deficit reduction package at the start of the recession (not the cause, but it didn't help). In other words, we had really stupid policy, but in Washington, we don't ever say such things.

The 2001 recession, like current one, was caused by the collapse of a bubble. It is very difficult to reverse the effects of a collapsed financial bubble.

* http://www.nytimes.com/2010/02/21/business/economy/21unemployed.html

--Dean Baker

anne:

http://www.nytimes.com/2010/02/21/business/economy/21unemployed.html

February 21, 2010

Millions of Unemployed Face Years Without Jobs
By PETER S. GOODMAN

BUENA PARK, Calif. — Even as the American economy shows tentative signs of a rebound, the human toll of the recession continues to mount, with millions of Americans remaining out of work, out of savings and nearing the end of their unemployment benefits.

Economists fear that the nascent recovery will leave more people behind than in past recessions, failing to create jobs in sufficient numbers to absorb the record-setting ranks of the long-term unemployed.

Call them the new poor: people long accustomed to the comforts of middle-class life who are now relying on public assistance for the first time in their lives — potentially for years to come.

Yet the social safety net is already showing severe strains. Roughly 2.7 million jobless people will lose their unemployment check before the end of April unless Congress approves the Obama administration’s proposal to extend the payments, according to the Labor Department.

Here in Southern California, Jean Eisen has been without work since she lost her job selling beauty salon equipment more than two years ago. In the several months she has endured with neither a paycheck nor an unemployment check, she has relied on local food banks for her groceries.

She has learned to live without the prescription medications she is supposed to take for high blood pressure and cholesterol. She has become effusively religious — an unexpected turn for this onetime standup comic with X-rated material — finding in Christianity her only form of health insurance.

“I pray for healing,” says Ms. Eisen, 57. “When you’ve got nothing, you’ve got to go with what you know.”

Warm, outgoing and prone to the positive, Ms. Eisen has worked much of her life. Now, she is one of 6.3 million Americans who have been unemployed for six months or longer, the largest number since the government began keeping track in 1948. That is more than double the toll in the next-worst period, in the early 1980s.

Men have suffered the largest numbers of job losses in this recession. But Ms. Eisen has the unfortunate distinction of being among a group — women from 45 to 64 years of age — whose long-term unemployment rate has grown rapidly.

In 1983, after a deep recession, women in that range made up only 7 percent of those who had been out of work for six months or longer, according to the Labor Department. Last year, they made up 14 percent.

Twice, Ms. Eisen exhausted her unemployment benefits before her check was restored by a federal extension. Last week, her check ran out again. She and her husband now settle their bills with only his $1,595 monthly disability check. The rent on their apartment is $1,380.

“We’re looking at the very real possibility of being homeless,” she said....

Jo:

What they need to teach in universities for the future is that you can bail out the bad guys or you can help the good guys.

You can't do both; governments around the world chose the former. It's no use theorizing about it after the event and making the already horrific future we face worse through a 'Bailout: Phase II - This time it's for Mainstreet'.
That window has closed.

To repeat, you can't do both.

save_the_rustbelt:

Business owners have little confidence in consumers, have limited access to credit, and are generally scared of the federal government.

Workers are scared for their jobs, are scared to spend despite plenty of great deals, and think Congress is owned by Wall Street.

The hole is deep and the ladder is short.

Reniam Troop:

We've been running outlandish deficits for a decade and job growth halted. Soviet style belief that the government can legislate jobs is folly. Mega-deficits as far as the eye can see is unsustainable and crowds capitol out of the private sector. Learn.

Anonymous:

Reniam:

Until Keynesians understand the causes of structrual malinvestment, they will never learn.

For example: we misallocated trillions of dollars into real estate with the government's support (GSEs, tax credits, etc.). The misallocation provided "jobs" that were built on a mirage of sustainability.

More government will just generate more unsustainable jobs.

Here are some tough steps that no one seems willing to take:

1. Shut down casino capitalism on Wall St
2. Shut down public sector unions.
3. Shut down housing subsidies.
4. Take on medical malpractice lawyers.
5. Take on health insurance companies.
6. Invest in self-sustaining infrastructure.
7. Invest in education.

Keynesian spending without structural reform will just lead to another crisi.

Structure:

Seems like we could solve several of your problems all at once. Impose a million dollar a year extra tax on the richest 1000 Americans for the next 10 years. Kills the banksters, CEOs, and idle wealthy (well and non-idle too, but they'll survive...) Pays off the national debt in no time.

Of course, it does suggest that the national debt is sustainable.

anne:

"We've been running outlandish deficits for a decade and job growth halted. Soviet style belief that the government can legislate jobs is folly."

Actually we have not been running any sort of deficits for 10 years, we have rather been running deficits from July 2001 following the Bush tax cut and weakening of the economy in the short and shallow recession of 2001. Following the initial Bush tax cut, there were continual increases in military spending along with further tax cuts with was just what conservatives wished.

The combination of military spending increases and tax cuts had remarkably little to do with jobs but everything to do with the continual deficits from July 2001 through 2007. Another recession in 2008, more tax cutting and more military spending, added to the deficit.

anne:

"Mega-deficits as far as the eye can see are unsustainable and crowds capitol out of the private sector."

Looking at interest rates from 2001 on would suggest that deficits have in no way crowded out capital from the private sector, but I am immediately willing to have us begin to cut military spending to deal with the deficits, especially so because the crowding out idea could mean that every dollar less in military spending would be a dollar not crowded out of the private sector.

We could do away with "Soviet-style" military spending, and watch business and employment blossoming.

Reniam Troop :

"but I am immediately willing to have us begin to cut military spending to deal with the deficits"

I agree. Military spending should be cut to 33% of current levels.

"Looking at interest rates from 2001 on would suggest that deficits have in no way crowded out capital from the private sector"

Times have changed. We were in a massive credit inflation. Today, we're in a massive credit deflation.

ken melvin:

No one ever started a business w/o borrowing in one form or another. Borrowing for stimulus is much more akin borrowing to do business than it is the household model to which you refer.

Anonymous:

"Times have changed. We were in a massive credit inflation. Today, we're in a massive credit deflation."

Reniam: Japan has failed to reflate, yet Bernanke and company are committed to trying. I fear that instead of reflating, they will destroy the currency.

Goldilocksisableachblond

"Hope you weren't expecting change."

I did , in fact , expect change. Instead I got "Just Words" Obama.

It's still not too late , but I'm afraid it will be soon --- on the order of months to , at best , a few years.

Some "Words" followed ( and preceded ) by "Deeds" , from the past :

" But I cannot, with candor, tell you that all is well with the world. Clouds of suspicion, tides of ill-will and intolerance gather darkly in many places. In our own land we enjoy indeed a fullness of life greater than that of most Nations. But the rush of modern civilization itself has raised for us new difficulties, new problems which must be solved if we are to preserve to the United States the political and economic freedom for which Washington and Jefferson planned and fought."

...

"And so it was to win freedom from the tyranny of political autocracy that the American Revolution was fought. That victory gave the business of governing into the hands of the average man..."

"Since that struggle, however, man's inventive genius released new forces in our land which reordered the lives of our people. The age of machinery, of railroads; of steam and electricity; the telegraph and the radio; mass production, mass distribution—all of these combined to bring forward a new civilization and with it a new problem for those who sought to remain free.

For out of this modern civilization economic royalists carved new dynasties. New kingdoms were built upon concentration of control over material things. Through new uses of corporations, banks and securities, new machinery of industry and agriculture, of labor and capital-all undreamed of by the fathers—the whole structure of modern life was impressed into this royal service.

There was no place among this royalty for our many thousands of small business men and merchants who sought to make a worthy use of the American system of initiative and profit. They were no more free than the worker or the farmer. Even honest and progressive-minded men of wealth, aware of their obligation to their generation, could never know just where they fitted into this dynastic scheme of things.

It was natural and perhaps human that the privileged princes of these new economic dynasties, thirsting for power, reached out for control over Government itself. They created a new despotism and wrapped it in the robes of legal sanction. In its service new mercenaries sought to regiment the people, their labor, and their property. And as a result the average man once more confronts the problem that faced the Minute Man.

The hours men and women worked, the wages they received, the conditions of their labor—these had passed beyond the control of the people, and were imposed by this new industrial dictatorship. The savings of the average family, the capital of the small business man, the investments set aside for old age—other people's money—these were tools which the new economic royalty used to dig itself in."

"Throughout the Nation, opportunity was limited by monopoly. Individual initiative was crushed in the cogs of a great machine. The field open for free business was more and more restricted. Private enterprise, indeed, became too private. It became privileged enterprise, not free enterprise.

An old English judge once said: "Necessitous men are not free men." Liberty requires opportunity to make a living-a living decent according to the standard of the time, a living which gives man not only enough to live by, but something to live for.

For too many of us the political equality we once had won was meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people's property, other people's money, other people's labor, other people's lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness.

Against economic tyranny such as this, the American citizen could appeal only to the organized power of Government. The collapse of 1929 showed up the despotism for what it was. The election of 1932 was the people's mandate to end it. Under that mandate it is being ended."

"These economic royalists complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power. Our allegiance to American institutions requires the overthrow of this kind of power. In vain they seek to hide behind the Flag and the Constitution. In their blindness they forget what the Flag and the Constitution stand for. Now, as always, they stand for democracy, not tyranny; for freedom, not subjection; and against a dictatorship by mob rule and the over-privileged alike."

"Governments can err, Presidents do make mistakes, but the immortal Dante tells us that divine justice weighs the sins of the cold-blooded and the sins of the warm-hearted in different scales."

"Better the occasional faults of a Government that lives in a spirit of charity than the consistent omissions of a Government frozen in the ice of its own indifference."

FDR 6/27/36

http://millercenter.org/scripps/archive/speeches/detail/3305

yuan:

"In our own land we enjoy indeed a fullness of life greater than that of most Nations."

Over the past three decades the standard of living of most americans (e.g. the bottom quintiles) has decreased while income inequality in the usa has increased. Your "fullness of life" and "greater than most nations" is exceptionalist propaganda.

tjfxh :

Unemployment and underemployment are measures of a real output gap that represents huge losses from forgone opportunity in addition to the effect of unemployment in human cost. Not funding programs that would close the gap increases the deficit anyway through automatic stabilizer transfers and lost tax revenue. Closing the gap and addressing unemployment and underemployment makes good sense economically in addition to being the right thing to do.

A government deficit is equal to non-government net financial assets as an accounting identity. Debt issuance to cover the deficit is just provides storage for the increased net financial assets, and it simply a transfer of one asset form (demand deposit) to an interest-bearing government security. The national debt is the accumulated non-government net financial assets saved, a portion of non-government wealth. Deficits do not cause inflation when there is significant unemployment and real capacity underutilization.

"Efficiency is doing thing right, and effectiveness is doing the right thing." Peter F. Drucker

Anonymous

VOX has a post on the subject of debt cycles here:
http://www.voxeu.org/index.php?q=node/4659

americamart:

Unfortunately, the private sector has become synonymous with the corporate oligarchy. Large swathes of entrepreneurial potential have been strangled by mega corporations and their de facto monopolies.

[Feb 22, 2010]  Why the US has really gone broke by Chalmers Johnson

Feb 2008 |  Le Monde diplomatique

Global confidence in the US economy has reached zero, as was proved by last month’s stock market meltdown. But there is an enormous anomaly in the US economy above and beyond the subprime mortgage crisis, the housing bubble and the prospect of recession: 60 years of misallocation of resources, and borrowings, to the establishment and maintenance of a military-industrial complex as the basis of the nation’s economic life. The military adventurers in the Bush administration have much in common with the corporate leaders of the defunct energy company Enron. Both groups thought that they were the “smartest guys in the room” — the title of Alex Gibney’s prize-winning film on what went wrong at Enron. The neoconservatives in the White House and the Pentagon outsmarted themselves. They failed even to address the problem of how to finance their schemes of imperialist wars and global domination.

As a result, going into 2008, the United States finds itself in the anomalous position of being unable to pay for its own elevated living standards or its wasteful, overly large military establishment. Its government no longer even attempts to reduce the ruinous expenses of maintaining huge standing armies, replacing the equipment that seven years of wars have destroyed or worn out, or preparing for a war in outer space against unknown adversaries. Instead, the Bush administration puts off these costs for future generations to pay or repudiate. This fiscal irresponsibility has been disguised through many manipulative financial schemes (causing poorer countries to lend us unprecedented sums of money), but the time of reckoning is fast approaching.

There are three broad aspects to the US debt crisis.

... ... ...

Some of the damage can never be rectified. There are, however, some steps that the US urgently needs to take. These include reversing Bush’s 2001 and 2003 tax cuts for the wealthy, beginning to liquidate our global empire of over 800 military bases, cutting from the defence budget all projects that bear no relationship to national security and ceasing to use the defence budget as a Keynesian jobs programme.

If we do these things we have a chance of squeaking by. If we don’t, we face probable national insolvency and a long depression.

[Feb 21, 2010] Bernanke discounts recovery risk By Julian Delasantellis

Asia Times

But as time passes, a new truth dawns. Yes, Bernanke did save the financial system. But in terms of his wisdom preventing the worst effects of a terrible, grinding recession/depression, with job losses so far on a very similar slope to the 1929-1931 period, well, if this is what we got for the Great Depression's number one scholar, I'd hate to see the product of number two.

In Plutarch's Life of Alexander, the historian observes that "when Alexander saw the breadth of his domain he wept for there were no more worlds to conquer"; but Bernanke did not let the presumably formidable barrier of his 0% short-term interest rates stop him from cutting any further. Thus the introduction of the "quantitative easing" program to achieve the stimulative effects of interest-rate cuts when rates can't be cut any further. Through this program, one observer now pegs the "real" target for the Federal Funds rate at minus 6%.

Thus, as the year turned, the situation that looked out at the world from the United States was that of a massive fiscal stimulus through a projected $1.5 trillion budget deficit, and, on the monetary side, zero percent (or lower) interest rates achieved through massive transfers of assets from the Fed to private interests. The fear of individual or widespread financial market collapse that had been one justification for the aggressive rate cuts and lending programs seemed to be gone, especially since most of the once-threatened banks were now operating under fairly explicit "too big to fail" US Treasury guarantees.

So, for about six months now, the sheer extent that the Fed had left itself supine and prostate before the market's hungry eyes made observers wonder, with each successive post-Fed meeting statement, if and when the Fed's skirts would be pulled down, if and when the policies would start to be reversed. This the Fed did - sort of, recently hinting at an upcoming rate increase in the format of the bastardized Kremlinology under which Fed statements are produced and interpreted. On Thursday, it finally pulled the trigger, with the first rate hike of this new cycle.

It could not have escaped the Fed's gaze what else is currently going on - notably, the crisis in Greece and Euro-periphery debt.

Most of this crisis of excessive borrowing was the result of actions of US commercial banks such as Goldman Sachs (who really may have jumped the shark this time with its whispering in the Greek government's ear on how to borrow more in subterfuge [1]); still, the impression the financial world began to take from these events was that they were just another manifestation of a world absolutely drowning in leverage - all the while with the US Fed working the banking industry like Messalina, trying to please the most with the most.

The combination of the US Fed rate hike and a European Central Bank that soon may be forced to cut rates on the heels of the Greek crisis drove the US dollar up and the euro down, down to its lowest levels since last April. If this currency trend continues, or even if it does not reverse soon, it could shut down one of the few shining stars of the nascent economic recovery - the fairly robust manufacturing sector. That, and the continuing evidence of another imminent dip in finance and real estate (essentially, due to leverage, the same industry) means that Bernanke may be heading down the road of strangling the infant recovery before it even takes its first cry.

Also among the Marvelettes oeuvre was 1961's Please Mr Postman, a sad tale of a young lady not receiving mail from a far-off boyfriend. If they sang it today, it might refer to the postman not delivering one of the thousands of new foreclosure notices that will soon be brought into existence from Thursday's Federal Reserve rate hike. A heroin addict, or one addicted to private borrowing, may kick the habit with the methadone of equally addictive public sector borrowing, but for society as a whole, it's hard to see any benefit here.

[Feb 21, 2010]  UK Business lending Falls At Record Pace; UK Mortgage Lending Drops 32% to 10 Year Low; Bundesbank Fears Second Wave of Credit Crisis; Party's Over

"It is a serious mistake to confuse tax schemes, and stimulus with genuine demand....My dear Darling why do you continually confuse recovery with false demand from stimulus efforts?"
Mish's Global Economic Trend Analysis

Ambrose Evans-Pritchard at the Telegraph is reporting Credit markets flash hottest warning signal since crisis.

Dr Suki Mann, a credit specialist at Societe Generale, said stronger companies should weather any squall but concerns are mounting. "The world has woken up to the real possibility of a double dip. These are nervous times," he said.

BusinessEurope, the EU-wide lobby, warned this week of a "very worrying situation" as it become harder to raise money at a viable cost, if at all. The group called on the European Central Bank to send a "clear signal" about its collateral policy. Fears of tougher ECB rules are a key factor causing market flight from Greek debt.

The sudden halt in bond issues is disturbing since companies have been relying on capital markets to raise money as an alternative to Europe's fragile banks. The ECB said on Tuesday that 42pc of small businesses in the eurozone had reported worsening credit conditions in the second half of last year, despite the emergency stimulus of the authorities.

Conditions appear to be deteriorating. Bank loans to companies contracted at an annual rate of 1.9pc in November and 2.3pc in December. Consumer credit also fell. The Bundesbank fears that disastrous earnings last year will cause scores of German companies to breach loan covenants, triggering a wave of downgrades that further damage German banks and potentially setting off a second wave of the credit crisis.

Party's Over

Unless things quickly reverse, the European corporate bond market is signaling the party is over. Mortgage lending and consumer loans in the UK suggest the same thing.

The European recovery is on its last legs. The global recovery will soon follow. Prepare for an economic relapse. One is highly likely.

Selected Comments

James Cole:

“The supposed recovery in the Euro zone was an illusion. The same old story of bailouts, stimulus and media pumping of expectations manged to drag the economies into some positive growth. If you look at the growth they got versus the government money poured in to get it, you realize the recession never ended. Government borrowing just replaced the private sector and now those debts are getting so big that the EU/UK governments can't continue the bailout and stimulus cash. So they will sink right back into recession. The UK really is toast, a pound crisis could happen anytime. Their debts and falling tax revenues plus an overweight public sector are just nails in their coffin. Europe is also badly placed energy wise. Having to import most of their oil and gas needs. They have nuclear and alternative, but the world is still run by oil and Europe doesn't have their own.

It look like Europe and the USA both are going to have a fall back into deep recession, sovereign debt crisis and growing public discontent. Austerity will come to the people either quietly or with a massive fight. Taxing their way to wealth isn't going to work, even though the public sector work force will ask for that solution. I just can't imagine Britain without it's grossly over sized public workforce. Joblessness would be at crisis levels if money for the public sector simply runs out. 2010 is actually falling apart faster than I thought it would.

A.B. Prosper :

“You can't tax and spend your way out of the situation, stimulating economy is liking to get a car to run bu pouring gas into the engine instead of filling up the tank

However there are a few things that would help that no one has been doing

#1 tweak the tax code to reward hiring people and penalize automation outsourcing and such

#2 lower to work week to 30 hours or so without lowering wages. "work sharing" has some merit in the long run as combined with the above allows the product of excess efficiency to be distributed broadly

#3 Most importantly stop trading with China and other places with much lower standards of living

ChuckD3:

"Work sharing" is a great idea! Since we only need a few full-time farmers to produce all the food we need (and more), and only a few full-time carpenters/plumbers/painters/roofers to build all the houses we need (and more), and only a few full-time shopkeepers to sell us the stuff we need (and more), and only a few full-time mechanical engineers to tend the robots ... We should be working shorter hours and enjoying life more. Instead, those with jobs are working harder, and many have no jobs at all. The main problem, AFAIK, is the contract that says "as long as you work here, we'll pay your pension and health benefits"... so one worker doing 40 hours is a lot cheaper than two doing 20. And then, there are probably a fair number of workers who assume that collecting unemployment while not working is way better than collecting half-wages for half-working.

I suppose this is why French labor regulations forbid working more than 35 hours per week, even between consenting adults. And this is why we have such a flood of French manufactured goods displacing American workers...Not.

omi:

“Junk bonds at 500 something bp spread? WE ARE DOOMED!!!

Market is not signaling that the party is over at all, it's signaling that rates set by central banks are way too low and not in touch with real cost of borrowing money. If junk bonds go to even 800 bp spread that wouldn't be out of whack.

Greece will be fine too, just chill for now.

Risk? What Risk? We Don't See No Stinkin' Risk..

"It is the absolute right of the state to supervise the formation of public opinion."
Paul Joseph Goebbels

As measured by the VIX, the volatility index, the perception of risk in US markets has declined significantly in the last twelve months from over 50 to current readings around 20.

As a response to this changed perception, mutual funds are once again fully invested, with levels of cash reserves at record lows. In other words, the 'other people's money' crowd are all in.

There is an interesting distribution top forming in the US equity markets. This rally has been driven by liquidity delivered from the Fed and the Treasury primarily to the Wall Street banks, who are deriving an extraordinary amount of their income from trading for their own books, at least based on published results.

Much of the rally in US stocks has occurred on thin volumes and in the overnight trading sessions. Definitely not a vote of confidence, and a sign of potential price manipulation in fact.

Is this a 'set up' to separate the public from even more of their own money, using their own money? Perhaps.

The government is frantic to restore confidence in the US markets, and the toxic asset rich banks are more than capable of using that sincere interest to unload their mispriced paper on the greater fools again.

The perception of risk is a powerful tool in shaping the response of markets, and as an instrument of foreign and domestic government policy actions. It is nothing new, as indicated by the quote from Joseph Goebbels, but it is rising to new levels of sophistication and acceptance in nations with at least a nominal commitment to freedom of choice and transparency of governance.

"There is a social theory called reflexivity which refers to the circular relationship between cause and effect. A reflexive relationship is bidirectional where both the cause and the effect affect one another in a situation that renders both functions causes and effects.

The principle of reflexivity was first introduced by the sociologist William Thomas as the Thomas theorem, but more importantly it was later popularized and applied to the financial markets by George Soros. Soros restated the social theory of reflexivity eloquently and simply, as follows:

markets influence events they anticipate – George Soros

This theorem has become a basic tenant of modern central banking. The idea is that manipulation of the psychology of market participants affects the markets themselves. Therefore, if you artificially suppress the price of gold, you reduce inflationary expectations and reduce inflation itself…so the theory goes."

Why Do the World's Central Banks Manipulate the Price of Gold?

For now we must watch the key levels of resistance around 1115 in the SP. A trading range is most probable but there is a potential distribution top forming with a down side objective around 870 on the SP 500.

It does bear watching, closely, keeping in mind that this is an option expiration week, and the traders expect the market to misrepresent its price discovery, as the result of conscious manipulation.

[Feb 20, 2010]  Core Inflation Declines for the first time since 1982

Core inflation is meaningless...
2/19/2010 | CalculatedRisk

From the BLS report on the Consumer Price Index this morning:

On On a seasonally adjusted basis, the January Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent ...

The index for all items less food and energy fell 0.1 percent in January. This decline was largely the result of decreases in the indexes for shelter, new vehicles, and airline fares.

Owners' equivalent rent (OER) declined 0.1% in January, and is declining at about a 1% annualized rate. OER has declined for five consecutive months (a record) and is important because it is the largest component of CPI.

Based on reports of falling rents - and a near record high apartment vacancy rate, OER will probably decline for some time, keeping core CPI low and possibly negative this year. Also - falling rents will push up the price-to-rent ratio, and put additional pressure on house prices.

scone:

 "On a seasonally adjusted basis, the January Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 2.6 percent before seasonal adjustment.

(snip)

The index for all items less food and energy fell 0.1 percent in January. This decline was largely the result of decreases in the indexes for shelter, new vehicles, and airline fares. In contrast, the medical care index posted its largest increase since January 2008, and the index for used cars and trucks increased significantly for the sixth month in a row.

The food index increased in January, with the food at home component posting its largest increase since September 2008. Sharp increases in the indexes for dairy and related products and for fruits and vegetables accounted for most of the increase. "

So it's kind of a mixed bag, really. The fruit and vegetable component is weather-related, the used cars and trucks thing is recession-related, and the medical increase is the chronic uber-doom that's not likely going away soon.

Whiskey:

some investor guy wrote:

The medical part of CPI is another piece of bad methodology. It has been underestimating the medical inflation for decades.

I'm not sure where the good methodology is. The housing component should be the Case-Shiller index, and the notion of a "core" CPI, in which consumers don't purchase food or gas, is absurd.

Rob Dawg:

One person's double dip sucking is another's opportunity for extra ponies.
Housing isn't coming back.
Double dip for sure.
CRE while smaller is more intense.
Government has run out of tricks.

Finally. The real recession we could have had in 2000, were supposed to have in 2004 needed in 2006 and masked in 2008 is coming with late fees and penalties. Good thing we have deflation otherwise the banks might suffer from eroded repayment purchasing power.

[Feb 18, 2010] Capital Controls Again By Simon Johnson

The Baseline Scenario

Adair Turner, head of the UK’s Financial Supervisory Authority, has developed a flair for pushing the official conversation on banking forward.

He spoke in favor of a tax on financial services, long before that was fashionable.  This idea has been picked by both the UK and US governments – and in some amended form is likely to emerge from the G20 intergovernmental summit process later this year.

Turner also pointed out that much of financial innovation is not actually socially useful – and may, in some instances, be profoundly dangerous.  For a while, it seemed that his voice on this point might be lost in the wilderness.  But then President Obama launched the Volcker Rules, which essentially attempt to rein in certain forms of risk-taking (and arguably innovation) by very big banks.

Now Adair Turner is at it again, this time in the 14th Chintaman Deshmukh Memorial Lecture, delivered at the Reserve Bank of India in Mumbai earlier this week.

Turner lays out a more integrated – and skeptical – view of modern finance than we have heard from him before.  He also delves into new issues, of obvious interest to his hosts and – if we are thinking straight – to the rest of us: What do our recent financial crises imply for emerging markets?

He points out that the so-called Asian financial crisis of 1997-98 and the more global crisis of 2008-09 had much in common.

“… both were rooted in, or at least followed after, sustained increases in the relative importance of financial activity relative to real non-financial economic activity, an increasing “financialisation” of the economy.”

The big point here is that the standard thinking about finance is wrong.  More financial development (e.g., an increase in the size of bank deposits or credit relative to GDP) is not necessarily a good thing.  To be sure, “financial repression” in the traditional poorer country fashion – with interest rates held low, often below inflation – was never appealing as it discourages savings, and should not now be a goal.

But allowing finance to become as big as it wants, from usual market processes, is asking for trouble.  The corollary is that “financial liberalization” – just get out of the way, as Alan Greenspan used to argue, and let markets do their thing – can become very dangerous.

This is true for the United States – at one level the last 30 years have been a series of misguided and excessive financial liberalizations.  But it is also true for other countries, presumably at all income levels.

Much of what Turner is arguing on these issues is not new – as he acknowledges, the general points have been made eloquently before, in various fashion, by scholars such as Jagdish Bhagwati (in broad terms) and Arvind Subramanian (in specific form, with numerous co-authors).

But Turner has a knack for bringing officials with him.  He is ahead of the intellectual curve, but not so far divorced as to seem out of touch or irrelevant.  And where exactly is he going, on this occasion?

Turner’s language is nuanced but the thrust of his argument is clear.  We should reevaluate the usual prescription that developing countries (and anyone else) should necessarily open themselves to freer capital flows.

“… the case that short term capital liberalization is beneficial is … based more on ideology and argument by axiom than on any empirical evidence.”

“For what we saw in respect to capital flow liberalization in the 1990s (as in respect to domestic financial liberalization in developed countries) was the assertion of a self-confidence ideology which also happened to be in the direct commercial interest of major financial services firms with powerful political influence in the major and developed economies and in particular in the US.”

Turner stops short of taking the complete Bhagwati-Subramanian position.  Even the most courageous financial regulator on the planet is apparently not yet ready to endorse restrictions on capital flows between countries – presumably, the lobbying pressure on this point is still too intense.

But this is definitely the direction in which Turner is moving – and has already moved – the debate.  Restricting capital flows will imply changes in many other aspects of how we organize our economy, including our fiscal deficit (as a great deal of the short-term capital flows around the world is into and out of US government securities) and what we rely on to sustain growth (as the US has been a big net importer of foreign capital in recent decades).

And it will have significant implications for our financial system which, in recent years, has made a great deal of easy money by moving money around the world – and, as Adair Turner continues to emphasize, has thus created serious global risks.

An edited version of this post appeared on the NYT’s Economix this morning; it is used here with permission.  If you would like to reproduce in full, please contact the New York Times.

Rickk

Mr. Johnson wrote:

“Restricting capital flows will imply changes in many other aspects of how we organize our economy, including our fiscal deficit (as a great deal of the short-term capital flows around the world is into and out of US government securities) and what we rely on to sustain growth (as the US has been a big net importer of foreign capital in recent decades). ”

Capital Control

- Wikipedia – excerpts

“In economics, capital control is the monetary policy device that a country’s government (i.e., sovereign power) uses to regulate the flows into and out of a country’s capital account, i.e., the flows of investment-oriented money into and out of a country or currency.

The decade since the Asian Currency Crisis in 1997-1998 has rekindled debate over the wisdom of developing markets having capital controls.

As it became clear that countries doing this, including Malaysia, Thailand and Mexico, essentially ceded control of their economies to external forces, namely international capital movements, hot money and capital flight; and countries that did not, like the People’s Republic of China and India, retained control and were not nearly as vulnerable to the volatility of international capital movement, some argued that capital controls were advisable for smaller economies to use, and to transition away from them only over long, general evolutionary timelines.[citation needed] Malaysia is an example of a country that switched regimes, from open in the late 1990s, to closed. Economists supporting capital controls in certain cases were not only from the left, but also pro-globalization economists like Jagdish Bhagwati and news publications like The Economist. ”

http://en.wikipedia.org/wiki/Capital_control

Garrett Wollman

Serious question: do larval-stage economists ever learn control theory? Or anything about theory of computation? It seems to me that the crisis might well have been avoided if economic regulators in the developed countries had a better understanding of how systems work. (Is there anybody to whom it is not blindingly obvious that in markets like currencies and oil, where the trading volume vastly exceeds the volume of the real underlying activity, the expected outcome is to overshoot all the peaks and all the troughs?

These sorts of positive-feedback systems cannot help but function as sentiment amplifiers, and it’s a wonder that they don’t oscillate faster than they already do; they are woefully underdamped. Some carefully-applied dampening would be a welcome relief, particularly if the capital tied up in this sort of nonproductive trading was reallocated to some more productive use.)

Doug

As someone noted below, some of the market participants make boatloads of money due to the volatility. If you put a bunch of bankers in a boat and gave them money based on how hard they rocked it, how long do you think it would be before they capsize and call for the the Coast Guard to save them?

The more interesting question is how do you damp the system. Just slowing down the response (trading breaks) or limiting the gain (leverage) does not guarantee that the system will remain stable. Regulating entities (SEC, FED) tend to lose their wherewithal to be counter cyclical because doing so limits booms as well as busts (If I was a bureaucrat, what is my incentive to make the good times to end?).

So really we are back to limiting the damage once a bubble event occurs. How do we let the boat rockers drown (so next time they are much more interested in keeping the boat nice and level) while making sure that the rest of the financial system does not get caught in the undertow?

mikkel

Garrett: The answer is definitely no. I spent a long time trying to find one that even used differential equations and wasn’t successful until I ran into Steve Keen. Keen had a great talk talking about his model inspired by Hyman Minsky’s debt based disequilibrium theory that you can find by poking around on his page, and on the slide showing the systems of equations he just said something to the effect of, “These are differential equations, I put them up primarily so the economists will run screaming out of the room.”

I’m not sure who said it, but there are systems oriented economic textbooks written by control engineers explaining why we have booms and busts and one of them said that if he were asked to design the worst system possible he wouldn’t be able to beat what we have. As I’m watching the carry trade start to unwind right now (which Roubini said is the worst in history) I’m just thinking about all the positive feedback loops that we’re about to be blindsided by…quite frightening.

bxg2

Mr Wollman,

Is your question rhetorical and if so what is the point? I’m sure you know massive swings are _great_ if you reap the full upside of a swing in your trade’s direction but have a put option (resume put for individuals, bailout for firms) if it goes against you. If work on Wall St, you understand and benefit from this dynamic. So then now from “larval-stage” economists – those who are taught above all others about incentives and how people respond to them – what would you expect? A doomed attempt at a disruptive paper on oscillations that gets into a second-rate journal because all your reviewers have their eyes on the prize, or join the gravy train?

Before you answer: remember, you have to put yourself in the shoes of someone who choose to be an economist rather than a doctor or a peace-core worker or a common thug or …? In my experience, young economists are often super-smart and have the basics of control theory and many other formal disciplines down cold but, in this case, how could it ever even occur to them to apply it? They won’t explicitly withhold their ideas if they have them, but well before that pint the incentive-responding part of their brain is saying “don’t think too hard about this, all downside and no upside for you”.

I do not mean to impugn the explicit ethics of economists but I doubt anyone would serious dispute that the profession selects somewhat againt those who can see, or even could make conxeptual sense of, any wider moral picture.

Tony Foresta

A thousand thanks for an informative post.

“…much of financial innovation is not actually socially useful – and may, in some instances, be profoundly dangerous.” Herein lies the core evil. The fact that the “…“financialisation” of the economy” now accounts for 45% of our GDP is terrifying. How do we unwind these crimes and abuses without tumbling the economy into real horrorshow trauma. Well, I thought government, and that thing we call the fed were responsible for sound economic policy. So instead of funnelling $14Trillion of the peoples treasure into the offshore accounts of the predatorclass “den of vipers and thieves” that caused, cloaked, and are now profiting wantonly from the worst economic crisis since the depression, – the socalled government, and the socalled Fed ’should’ have redirected some larger portion of those funds back into the nations infrastructure, and the people directly. We allowed our government to fork over 14 Trillion taxpayer dollars to the predatorclass swindlers and thieves that created this nightmare.

No need to recall that these same vipers and thieves came begging the government for massive immediate bailouts, or else, when the PONZI scheme’s began to unravel in August of 2008, – but simple logic, if not morality would expect that these vipers and thieves left unscathed in their palaces, and having access to even more imponderable wealth would exhibit some contrition, some humility. But no. Not even that. All we witness and evidently tolerate is hubris, wanton greed, deception, fraud, taxevasion, bribery, abuse, and criminal conduct by the very predatorclass oligarchs and criminal enterprizes that conjured, cloaked, and are now profiting wantonly from the most severe economic crisis since the “Great Depression”!

If there are laws, – then heads must role, come what may. It couldn’t be much worse for many Americans. Yeah the superrich are going to get pinched, but our daily lives would not be any worse if in fact the global financial system did collapse. It must collapse or be hung by the neck until dead, for there to be any hope of a new and more equitable global financial system. Let it fall. Let it fall. Let it fall!!!

btraven

Can I say “DUH”???

It is somewhat amazing to me how many people emeshed in the financial world wake up so slowly (if ever) to the obvious difference between “phantom wealth” and “real wealth.”

…….

*”Phantom wealth” is a term coined by David Korten:
http://www.davidkorten.org/

JR Max Wheel

Lord Turner is and has been the UK Government’s favourite “fixer” for a number of years as well as formerly the head of the UK Confederation of British Industry. As an ex- McKinsey consultant, as you would expect he is fluent and intelligent but I would argue far too close to the Governement. he is also an ex-banker! Now as Head of the FSA he has had to address the intellectual deficiencies of that beknighted institution. The FSA failed spectacularly as part of the now derided tripartite system of regulation. He is also Chair of Clmate change committee and has pondered, also for the Government on Pension reform- he has become a sort of Lord High Everything Else, a la Gilbert & Sullivan. Whilst his ideas have atrracted great attention, like the Tobin tax, that seems to be a recipe for passing on the costs to the general public- which is what the banks will do. It is also an easier fix for the G20 passing the issue on to everyone rather than addressing core issues affecting the banks and their behaviour, because it is too politically difficult. These appointees have a habit of articulating ideas, then moving on to the next challenge WITHOUT having fixed the problems. Pensions- still no sensible scheme is evident in the UK, Climate – well we know what a policy muddle that is, let alone getting into the science. Much socailly uselesss activity is integral to societies everywhere so this is hardly an insight- what is the policy prescription then? Constraining capital flows looks another issue on which opinion not action is the outcome. This is not to say that airing the issue is irrelevant – simply that the political great and good and their advisers fail to carry through their intentions. This makes their value at best marginal; at worst it leaves a problem for someone else to clear up.

Tony Foresta

Nice link btraven. The finance oligarchs create nothing but their own compensation. At the end of the day they leave nothing behind but paper, and digits. America and the entire world must expose and then begin the arduous process of unwinding or unraveling of “phantom wealth”. The predatorclass must be put back in the keep, and a new more equitable and lawful global financial system must be erected out of the purtid detritus of the current global financial system.

The mastersoftheuniverse, are indeed masters – but in the tyrannical sense. Their wisdom and expertise on the contrary is quite obviously suspect, and their power is derived singularly and exclusively from criminal conduct.

Why do we allow this evil to exist? Why do we tolerate blatant deception, abuse, and criminal conduct in our finance oligarchs?

There will be a reckoning and balancing, or there will be blood.

M. G. in Progress

I still contend that taxation of financial transactions, including some socially useless financial innovation (negative externalities of finance industry), is far better than any capital control. The recent case of Brazil is interesting.

http://mgiannini.blogspot.com/2009/11/taxing-financial-transactions-why-not.html

Octavio Richetta

In the sense that capital flows have a significant speculative component, capital controls in the form of, for example, requiring that money that comes in stays in for a certain period of time, such as many mutual funds in the US require, make a lot of sense.

Gareth

An interesting case study in this respect might be South Africa, a country at the cross roads between developed and developing countries, which survived the GFC relatively well because of exchange controls.

It has a highly sophisticated financial system, but with developing country capital problems.

For South African’s with some wealth the excon controls have always been a major bugbear, and it really could be argued they have no place in a democracy.

The old apartheid white government used them to stop capital flight, and while the new government has eased them over the past 16 years, they still have a tight rein which has prevented massive capital flights at least 3 times in this period.

The old two-tier “financial rand” system, devised after the 1985 debt default, which separated trade flows from investment, or in that case disinvestment flows, is also something worth considering. A lot fairer, but quite complicated on a global basis I would have thought.

It was also a good way for banksters ( I was one of them!) to rip off clients because of illiquidity, so on that basis alone we might want to avoid it.

Chris Waigl

It’s “Financial Services Authority”. http://en.wikipedia.org/wiki/Financial_Services_Authority . You had me confused for a moment.

Rickk

IMF, reversing course, urges capital controls

FEBRUARY 19, 2010 – Wall Street Journal – excerpts

WASHINGTON— “International Monetary Fund economists, reversing the fund’s past opposition to capital controls, urged developing nations to consider using taxes and regulation to moderate vast inflows of capital so they don’t produce asset bubbles and other financial calamities. It said emerging markets with controls in place had fared better than others in the global downturn.”

The recommendation is the IMF’s firmest embrace of capital controls and a reversal of advice it gave developing nations just three years ago. The IMF has long championed the free flow of capital, as a corollary to the free flow of trade, to help developing countries prosper. But the global financial crisis has prompted the fund to rethink long-held beliefs. It recently suggested the world might be better off with a higher level of inflation than central bankers now are targeting.

“We have tried to look at the evidence and tried to learn something from the current crisis,” said Jonathan Ostry, the IMF’s deputy director of research, who wrote “Capital Inflows: The Role of Controls” with five other IMF economists.

Money is flooding into emerging markets, producing fears that asset bubbles are forming in China, South Korea, Taiwan, Singapore and elsewhere, particularly in real-estate markets. This year, about $722 billion in private capital is expected to flow to developing nations, a 66% increase over 2009 but far below the $1.28 trillion that flowed to emerging markets in 2007 before the financial crisis, according to the Institute of International Finance, a banking trade association.”

http://tinyurl.com/ybzwr2q

Speedhair

Given that all the job creation of the past 10 years in the U.S. has been wiped out thanks to the idiocy of the financial oligarchs (and Harvard MBAs in general with their comparative advantage theories dictating that we export the jobs that have been the bedrock of the middle classes for centuries) what are the odds that Governemnts could reposess their gains for the same period and invest that money into developing a new real economy based on things that nations and their people will need moving forward. You know, trivial stuff, like repaired roads, bridges, water treatment plants, sewers, high speed rail, off planet resource gathering, cleaner energy, fresh water… haven’t read much about space elevators lately.. now there’s a project that would require a few hands…

In a culture supposedely ruled by Law those who willingly act against the interests of society must pay retribution, be jailed, or both. How much more abuse must the average citizen be subjected to before blind self-interest be recognized for what it is.. a capital sin. For those who aren’t religious let me translate. It’s wrong.

J. Blackwell

I do believe wider access in general to credit and capital does have a multiplier effect on any economy. We cannot lose sight of that, but we can of course try and make sure that it is THE driving force behind sugar high growth.

[Feb 19, 2010] William Black On Why Recurrent Crises Will Get Bigger And More Disastrous And Why All Talk Of Change By The Administration Is Just Posturing

Feb 18, 2010  | zero hedge

Bear:

FASB Extortion ... This is the ultimate and most obscene abuse of power we have ever seen in America. The whole market move (666 to 1100) was built on the back of this abuse. The next Pulitzer Prize should explore the background and arm twisting accompanying this decision.

The problem is no cohort can be identified that will benefit from its exposure (except every American voter).

Please someone work on this.

Psquared:

And yet no one is talking about it. Have you heard it mentioned in congressional hearings? No. Have you heard anyone talking about it on MSNBC or CNBC? No. Have you heard anyone asking questions on Sunday talk shows about it? No.

William Black is the first person I have heard come out and say it was coercion and intimidation by congress that caused the FASB to change the rule. I have just skimmed the wikipedia article on the FASB, but apparently it is the SEC that gave the FASB the power to set accounting standards.

Where is the investigative journalism here? Why is no one pursuing this story. This sort of thing should be front and center. But MSM is also owned and regulated by politicians, big business, banks, Wall Street and lobbyists. So what we have left are BBs and Blog sites to report the news. It just does not make 6 pm TV unless Tyler and Marla want to start a TV station.

Anonymous:

 this is not news in the least.....this lack of knowledge and understanding is why this country is doomed doomed doomed....

the cia controlled newsfakers are not going to tell the truth - not because they are controlled by the powers you cite but because they are controlled by much more powerful forces coordinated through the cia....

i am not trying to be mean but a cold dispassionate analysis means the unknowledgeable people make bad decisions....relying on state controlled news channels means you are being brainwashed....

bokapita :

Throughout the last 10 years I have been trying to pass on the understanding that the whole 'fair value' accounting valuation idea was an accident waiting to happen. The profession, worldwide, did not want to know because its clients were loving it (houses cannot go down, right?, neither can anything else that is part of the whole pyramid scam).

So when fair values DO have to be reduced, what happens:- they are abolished. 100% for professional integrity, right? Dear God, they didn't even blush!

Believe me, the accounting profession is far, far more responsible for this entire mess than has been realised. If the profit-reporting rules had been the same as they were 20 years ago, it could not have happened. But, like all the others involved, from politicians downwards, the watchdogs were bought off.

Anonymous :

+1 ..... fair value = whatever a bigger fool is willing to pay on the way up, fair value = whatever you want it to be on the way down

Anonymous:

Of course they're bad traders, but can you honestly name a good trader? I mean, year in and year out?

Don't tell me Rogers. Rogers is too ideological on China to be a good trader. He's also a media whore. Jimmy blows up one day just like his buddy Boone. You can count on that.

Soros? Not a chance. He's also an ideological media whore. I guarantee you Soros will blow up before the game ends.

I can't think of a single trader who doesn't eventually go all LTCM given enough time. Sure, there are guys doing well now but they're not the same guys that were doing well 20 years ago and very few of them had the moral courage to walk away on top. No, this is a game full of sharks who, let's be honest, are intellectually challenged and just looking for a fast buck. The odds say that guy always blows up sooner or later. Im not saying I'm any better but at least (unlike some of you) I know who I am.

SWRichmond:

It was, and in the same sense that the Soviet Union was a lesson. As long as the people were reasonably warm, fed, and well-oiled with vodka, and as long as the system could afford to keep a critical mass of apparatchiks in comfort, the system could sustain itself and stay in power. Only when the economy drooped and the critical mass evaporated did the system collapse.

This is the realpolitik basis for extend and pretend, and it is being done globally.

WaterWings

Closing the 'Collapse Gap': the USSR was better prepared for collapse than the US:

http://www.energybulletin.net/node/23259

Anonymous:

"The most corrupt society will have the most laws."

Tacitus

tom a taxpayer

Thank you William Black.

If the Congressional Financial Crisis Inquiry Commission hired William Black as Chief Investigator, then there would be a better prospect that investigations would lead to prosecutions of the mortgage and banking industry. The Commission should recognize that the public is not interested in just a history of the crimes or any lessons learned baloney. We want the Commission to investigate the bankers to uncover the criminal enterprise that pervaded this crisis.

William Black is author of "The Best Way to Rob a Bank is to Own One".

http://www.utexas.edu/utpress/books/blabes.html

http://www.pbs.org/moyers/journal/04032009/profile.html

For a recap of the rampant criminality that begs for prosecution, see William Black's "Great American Bank Robbery":

http://hammer.ucla.edu/watchlisten/watchlisten/show_id/129363

George the baby:

History will show that this is how the democratic experiment ends, at the greed of the few. It is a pivotal moment, which we are set to squander. We are sitting by the sidelines watching them rape our liberty.

And still we do nothing.

 zhandax:

“Nothing ends nicely, that's why it ends.”

Tom Cruise, Cocktail

Anonymous :

DeToqueville, while touring America about 200 years ago came to the conclusion that the system would work only untill the pols figured out they could purchase votes of the represented. The shift has been from that to the pols only representing lobbying money.

So history has been ignored for a very long time. What would lead anyone to believe that history will be read in the future and decisions made accordingly?

Anonymous:

And nothing is going to change in the U.S as long as they keep giving the masses bread and circuses.

The only thing that would get people moving right now would be empty bellies for about two weeks. But that's not going to happen.

Unemployment will be extended for the duration (even if it's years) and if they have to, I'll bet the government will start subsidizing cable to keep the American Idol flowing into brainwashed households.

Otherwise it would be Riot Central 24/7... and they are smart enough not to allow that.

[Feb 19, 2010]  Capital One Credit Card Charge-Offs Increase to 10.41%

Feb 16, 2010 | Calculated Risk

dum luk:

Usually, I hates them Mises to Pieces, but, as it turns out, I hate banks more:

Does It Make Sense to Resurrect the Glass-Steagall Act- - Frank Shostak - Mises Institute

sportsfan:

Jim A. wrote:

Tightening the bankruptcy laws just enabled the CC companies to make even sketchier loans before they came back to bite 'em in the @ss.

I believe it's generally accepted that the worst sort of predatory lending began in 2005 after the bankruptcy law was changed . . . as a direct result of the changes.

One might even say they planned it that way.

Cinco-X:

Jim A. wrote:

Tightening the bankruptcy laws just enabled the CC companies to make even sketchier loans before they came back to bite 'em in the @ss.

Nice insight; did they securitize these CC loans and buy CDS' as well? That could be telling-

Yalt:

mock turtle wrote:

and now you know il ducie made the trains run on time

Well, he said he did anyway....

Rear Window: Making Italy work: Did Mussolini really get the trains running on time? -
Opinion - The Independent

[Feb 18, 2010] Fed sees paper loss on Bear portfolio: report - Yahoo! News

Nanoo-Nanoo

Savvy Dimon gets a bonus.

I called the NYFed at 212-720-5000. "No comment" "I disagree, sir, it's not a Ponzi" ---"Why not, if they're dumping losses into Maiden Lane and cashing out bonuses? ---"No comment"

shill:

Obama: Well ladies and Gentlemen the teleprompter just told me to tell you....were all screwed.

Good day and God bless.
 

[Feb 18, 2010]  Capital One Credit Card Charge-Offs Increase to 10.41%

Credit card defaults have historically tracked unemployment.

2/16/2010 | CalculatedRisk
From Reuters: Capital One credit card defaults rise in January (ht jb)

Capital One Financial Corp's U.S. credit-card defaults rose in January, in a sign that consumers continue to remain under stress, it said in a regulatory filing.

Capital One said the annualized net charge-off rate -- debts the company believes it will never collect -- for U.S. credit cards rose to 10.41 percent in January from 10.14 percent in December.

Capital One credit card annualized net charge-off rate is now at 10.41% - above the peak in 2005. As Reuters notes, Capital One is usually the first to report monthly credit card charge-offs. The other major credit card issuers will report later today.

Freefall: America, Free Markets, and the Sinking of the World Economy (Hardcover) by Joseph E. Stiglitz

Interesting concent of  'sophisticated ignorance' (using complex computer models to evaluate risk that failed to account for high correlation within and between housing markets;

Mr. Stiglitz uses his experience teaching to give the lay reader a lucid account of how overleveraged banks, a shoddy mortgage industry, predatory lending and unregulated trading contributed to the meltdown, and how, in his opinion, ill-conceived rescue efforts may have halted the freefall but have failed to grapple with more fundamental problems…. His prescience lends credibility to his trenchant analysis of the causes of the fiscal meltdown. (Michiko Kakutani - The New York Times )

Stiglitz is the world's leading scholarly expert on market failure, and this crisis vindicates his life's work. There have been other broad-spectrum books on the genesis and dynamics of the collapse, but Freefall is the most comprehensive to date, grounded in both theory and factual detail…. the definitive critique to date of how the Summers-Geithner strategy fails, both as economics and as politics…. The tone of this book is good-humored and public-minded. (Robert Kuttner - The American Prospect )

5.0 out of 5 stars Excellent and Credible Insights!, January 5, 2010 Loyd E. Eskildson "Pragmatist"

Stiglitz believes that markets lie at the heart of every successful economy, but do not work well without government regulation. In "Freefall" he explains how flawed perspectives and incentives lead to the 'Great Recession' of 2008, and brought mistakes that will prolong the downturn.

Between 1996-2006, Americans used over $2 trillion in home equity to pay for home improvements, cars, medical bills, etc., largely because real income had been stagnant since the early 1990s. Economic recovery requires that we repay the remainder of these amounts, overcome stock market losses (10% between 2000-2009), the loss of some 10 million jobs, and reductions in credit card balances, and find an equivalent amount to the former home-equity sourced financing ($975 billion in 2006 alone - about 7% of GDP) to finance another consumer-driven GDP upturn - without the prior boom in housing and commercial building.

 Stiglitz also points out that the Great Depression coincided with the decline of U.S. agriculture (crop prices were falling before the 1929 crash), and economic growth resumed only after the New Deal and WWII. Similarly, today's recovery from the Great Recession is also hampered by the concomitant shift from manufacturing to services, continued automation and globalization, taxes that have become less progressive (shifting money from those who would spend to those who haven't), and new accounting regulations that discourage mortgage renegotiation.

Stiglitz is particularly critical of the U.S. finance industry - its size (41% of corporate profits in 2007), avarice (maximizing revenues through repeated high fees generated by over-eager and over-sold homeowners needing to refinance adjustable-rate mortgages that repeatedly reset), and 'sophisticated ignorance' (using complex computer models to evaluate risk that failed to account for high correlation within and between housing markets; 'eliminating risk' through buying credit default swaps from AIG - blind to the likelihood AIG could not make good in a housing downturn), and excessive risk (banks leveraged up to 40:1 with increasingly risky mortgage assets - 'liar's loans,' 2nd mortgages, ARMs, no-down-payments; taking advantage of the 'too-big-to-fail' and 'Greenspan/Bernanke put' phenomena). Much of this behavior was driven by lopsided personal financial incentives (bonuses) - if bankers win, they walk off with the proceeds, and if they lose, taxpayers pick up the tab. However, to be fair, any firm that failed to take advantage of every opportunity to boost its earnings and stock price faced the threat of a hostile takeover.

The impact of mortgage defaults is greater than one would otherwise expect because financial wizards found that the highest tranches of securitized mortgages would still earn a AAA rating if some income was provided to the lowest tranches in the 'highly unlikely' event of eg. a 50% overall default, thus boosting the ratings and saleability of lower tranches. (Fortunately for the U.S., many of these mortgages ended up overseas, spreading the disaster.) Another problem is that mortgage speculators make more profit from foreclosure than partial settlements. Meanwhile, investors worried that mortgage servicers might be too soft on borrowers required restrictions that make renegotiation more difficult and lead to more foreclosures. Similarly, those with 2nd-mortgages often found that those holding the second were unwilling to accept a principal write-down as their share of assets would be wiped out. Finally, new government regulations aimed at making banks seem healthier than otherwise allowed changing from 'mark-to-market' valuation of mortgages to long-term 'mark-to-hope' valuation - thus, writing down assets in a renegotiation would generate the very mortgage write-downs the new regulations avoided, and thus increased bank reluctance to do so.

"Freefall" also does an excellent job refuting many of the simple explanations, alibis, and remedies for the 2008 Great Recession. For example, Greenspan's 'nothing he could do' alibi is countered by Stiglitz's 'require higher down payments or margin requirements' (or increase interest rates). To those blaming Community Reinvestment Act requirements for increased mortgages to those with low incomes, Stiglitz says the default rates on those loans was less than in other areas; as for Fannie and Freddie being responsible, they came late into the sub-prime game. Responding to claims that increased regulation would stifle innovation and its role in economic growth, Stiglitz asserts that it is impossible to trace any sustained economic growth to those 'innovative' mortgages. (A 'real' contribution could have been made by less profitable innovative mortgages that helped homeowners stay in their homes.) On the other hand, he also admits that just giving more regulatory power to the Federal Reserve is not a solution - the Federal Reserve didn't use what it did have prior to late 2008; similarly, the SEC boosted leverage limits from 12:1 to 30:1 and higher in 2004 - exactly the wrong move. Banks suggest banning short sales in the future as a preventive measure - Stiglitz, however, points out that the incentive provided short-sellers to discover fraud and reckless lending may actually play a more important role in curbing bad bank behavior than government regulators have.

Other factors, especially government actions, also receive attention from the author. Overall, global supply exceeds demand - thus, the recovery focus needs to be on boosting demand. Stiglitz points out that growing inequality shifts money from those who would have spent it to those who didn't - weakening overall consumer demand. High oil prices have also impacted most those with low incomes, and probably encouraged Greenspan to hold down interest rates to counteract the negative impact. On a broader level, Stiglitz contends that IMF encouragement of national self-discipline and 'rainy-day' funds also weaken consumer demand. As for recommendations for more tax cuts and rebates, Stiglitz says these won't have much impact on consumers saddled with debt and anxiety, and as long as there's excess capacity, businesses will be reluctant to invest (Laffer's supply-curve tax-curve is an irrelevant theory, at best). Stiglitz even suggests elsewhere that the failure of Bush's 2001 tax cuts to stimulate the economy may have also influenced Greenspan to hold down interest rates for too long.

AIG, once bailed out, paid off billions to Goldman Sachs at 100% (Secretary Paulson's former firm), while defunct credit-default-swaps elsewhere were settled at only 13 cents on the dollar, says Stiglitz. Overall, he is very negative on the financial-sector bailout (TARP), believing that the money would much better have been used to capitalize new banks at 12:1 leverage, or not spent at all. The resulting bank subsidies were unfair to taxpayers (Treasury put up most of the money and got short-changed on potential benefits), and implementation was inconsistent - some institutions and stockholders were bailed out, others were not. (The reason lending 'froze up' is that banks didn't know whether they or their peers ere underwater.) The stimulus package, on the other hand, was too small (aimed at 3.6 million jobs, vs. 10 million lost plus 1.5 million new workers/year needing jobs), and was delegated to Congress without clear guidance. The result was a failure to provide mortgage insurance for those losing jobs, while instead creating the 'cash-for-clunkers' (mostly just moved sales from one period to another - [...] estimated only 18% were added sales, costing taxpayers $24,000 apiece; eight of the top ten purchases came from Asian manufacturers), ineffectual tax cuts, putting money into a failing auto industry, and increased road construction (greater global warming) instead of giving even more money to high-speed rail. The stimulus emphasis should have been on fast implementation, high-multiplier impact, and addressing long-term problems (eg. global warming). The employment situation now is worse than just the unemployment rate suggests - there are a record 6 applicants for every opening, the average work week is at 34 hours - the lowest since data was first collected in 1964, many have turned to disability instead of unemployment and are not counted.

Overall, Stiglitz believes there is far too much short-term thinking driving decision-makers, that business lobbies are too strong, and that markets are not naturally efficient. (Other inefficient market areas besides finance include health care, energy, manufacturing.) Meanwhile, we have done nothing to correct the underlying problems (big banks are even bigger) and Stiglitz also fears (reported elsewhere) the U.S. economy faces a "significant chance" of contracting again.

Interesting side-notes: 1)Stiglitz suggests that banks 'too-big-to-fail' should pay higher rates of deposit insurance, and incur restraints on executive incentives. In 1995 our five largest banks' market share was 11%, 40% now. Regardless, the world's largest three banks are now Chinese - #5 is American. (Not to worry - scale economics are no longer a factor for any of those banks, says Stiglitz.) 2)President Reagan made a major mistake in removing Paul Volcker as Chairman of the Federal Reserve Board and appointing Alan Greenspan in his place. Volcker had brought down inflation from more than 11 percent to under 4 percent, which should have assured his reappointment. But Volcker believed financial markets need to be regulated, and Reagan wanted someone who did not. Thus, Stiglitz believes regulations must be mandated, and enforced by a neutral, not political, source. 3)Repealing the Glass-Steagall Act in 1999 changed the culture of banking from conservative to high-risk, and also encouraged even larger institutions. 4)It is ironic that the Bush/Greenspan efforts to minimize government involvement in the economy resulted in our becoming de facto owners of the world's largest auto and insurance companies, and some of the largest banks. 5)Stock options are doubly damaging - they undermine stockholder wealth while remaining largely hidden from stockholders, and they encourage maximum short-term accounting manipulation to move stock prices up. 6)The U.S. national debt will reach 70% of GDP by 2019, and when it hits 90%, paying 5% interest on that debt will consume one-fifth of federal taxes.

Bottom-Line: Most books on current economic issues written for the public are superficial, or even worse, mere demagoguery. Stiglitz's qualifications - Nobel prize-winner in economics (2001), former Chairman of the President's Council of Economic Advisors (1995-97), and former World Bank Chief Economist help provide an important, interesting and credible alternative. "Freefall" was a pleasure to read.

[Feb 18, 2010] Rosenberg's View For 2010 A Return Of Volatility zero hedge

02/17/2010

Ned Zeppelin

I don't think anyone here would dispute the possibility of a summer rally.  What you might hear is dispute concerning the drivers of such a rally, and a discomfort with trading on the basis of "feel good" propaganda and government printing presses running overtime.  If you want to trade on your feeling that everything will be just peachy, go ahead.  If you see reasons for a rally, please share them. But for many, the  current equity pricing seems irrational and unsustainable based on normal drivers. But we live in abnormal times- one only needs to look at the Fed's most recent balance sheet disclosures to see we are not in Kansas anymore, and that what we may have thought important fundamental concepts in investing are quite possibly irrelevant at this point in time.

Anonymous

Ned if you are worried the rally will fail you now have a natural stop at slightly below last week's lows. We will rally mainly because money is still easy, and will remain easy through the summer. Big rally into May, then correct, then rally into August, that's the technical plan. Best of luck!!

John McCloy
So I guess Rosie did not get the message from President Obama today that " He saved the economy and a depression is off the table."

Gee thank O. Now lets all get back to buying LCD's, overpriced homes, SUVs and book those Sandals vacations..Anyone who actually believes that billions of rushed out dollars will not be wasted in an American economical structure where nobody has any sense of responsibility and has learned zero lessons from what occured in 2008 is overly optimistic at best. Now they are discussing extending unemployment benefits once again.All sorts of ideas like 1/2 pay extension. It is laughable that they honestly believe extending health care coverage, Food stamps coverage and benefits will do anything long term to stimulate the economy. All it is doing is the equivalent of a sedative for clueless Americans who they refuse to allow to accept reality.

Can you think of a bigger beauracratic money hole than health care? Sure you could with unions. I just do not understand the logic here and the most revolting aspect of this is he praise they throw around to each other. For God's sake Romer just said a few months ago that "The stimulus package had run it's course" but now the best is en route?

This will go down as the most mishandled propaganda intelligence operation in modern history. What if the market collapses and even more wealth is destroyed because they allowed those with anything left in 401ks to believe the worst was over? It is a dangerous game they are playing and for a government that has repeatedly gotten to many things wrong to have faith in them to pull off this miracle through lies and counterfeiting is laughable with these political headwinds.

Ned Zeppelin

Two realities, one official, the other lurking inside.

John McCloy

+1 And only 2% of the population at best are aware of the one lurking inside. The other 98% neither care, know or want to believe.

Only when they are forced to awaken because of prolonged job loss and poverty will we see just how "Civilized" us Americans are. When the herd of the middle class get moving and ar emotivated by anger you better believe Wall Street and those responsible are going to be loading the Lear Jet with all their money and they will burn the house down before they go.

I think most on Wall Street are just idling buy waiting for the populist anger to go parabolic. They are expecting it and waiting to see it before they exit stage left

[Feb 18, 2010] Martin Wolf on Deficits

McKinsey Global Institute has noted in a recent report: “Historic deleveraging episodes have been painful, on average lasting six to seven years and reducing the ratio of debt to GDP by 25 per cent”.
February 17, 2010 | NYT

Hear, hear.

The only point Wolf doesn’t really emphasize is the extent to which the deficit hysterics are also deficit peacocks. They’re full of bombast, and eager to shoot down anything that might reduce unemployment.

But when it comes to serious proposals to bring the long-run fiscal outlook under control — which means, above all, doing something about health care costs — all we get is the sound of crickets chirping.

[Feb 18, 2010] Coming Soon 5 Million More Foreclosures

February 16, 2010 |  The Big Picture

Studies keep showing what we have known for a long time: Fighting foreclosures is a futile — and counter-productive — use of resources.

New studies by John Burns Real Estate Consulting and Standard & Poor’s Financial Services conclude that loan mod efforts only serve to delay the inevitable, resulting in future foreclosures.

The credit bubble allowed home buyers to get in over their heads, to buy more house than they could afford. Once prices came down and the refi pipeline closed down, it was game over for many of these buyers.

The latest estimates are for another five million delinquent mortgages to go through foreclosure (or alternatively, short sales) over the next few years. Currently, there is an estimated 7.7 million households in some stage of pre-default delinquency.


Thus, whatever grudging progress that has been made in clearing out some of the excess housing inventory will likely suffer a set back as these 5 million homes come out of the shadows and enter the real estate inventory of homes of for sale.

Steve Barry:

“It will be interesting to see how many more mortgages considered safe will be under pressure when unemployment checks run out on another 5 million recipients by this June.”

Unless they extend unemployment, which BTW is crippling the state budgets. Doing so would worsen budgets even more, which will lead to state and local gov’t layoffs, which will cause more foreclosures. There is no free luch here.

phb:

@cognos – dude, you are in deep left field on this one. We haven’t even come close to the “great bottom” – we are just entering the 2nd inning of this game. Way too many games being played by both the homeowner and mortgage holder to call it the bottom. This dead-cat bounce is as rational as the S&P 500 of 2009. Take a deep breath and switch to decaf, you’ll live longer.

bsneath:

BR says: “As noted in Bailout Nation, there is a virtue to foreclosures — it helps drive over-priced homes towards normal levels, increases sales, and removes the prior excesses from the market. Its not pretty or pain free, but it is a necessary part of recovering from a bubble.”

I think this observation may be contingent upon one’s assessment of the status of our economy. During ordinary recessions I could not agree more. Foreclosures are the “tough love” that purgesexcesses out of the housing market, appropriately penalizes the risky behaviors that created the speculative bubble and thus serves as a lessen to all to avoid such behavior in the future. Further, to bail out homeowners, financial intermediaries or investment bankers create the moral hazard that would encourage future risky behavior.

However during depressions, the consequences of this laissez faire approach might be so extreme as to permanently harm (reduce) the economy. Home prices can very well rapidly over shoot on the downside with consequences of even greater permanent collateral damage spilling over into other sectors of the general economy.

We will never know what would have happened had the government not interfered with the housing market – with respect to lower housing prices, reduced housing sales, greater foreclosures, additional bank failures, asset deflation in other areas, job losses, lower general economic activity, decline in GDP, etc. etc. So at this time we are merely engaged in an academic exercise.

Personally, I think we faced (and perhaps still do) such profound risks that we were headed on an economic downward spiral into the depths of the great depression, that the housing subsidies were warranted (even though I have personally gained no benefit from them and I am fully aware that I and my children will eventually have to pay for them through higher taxes) .

Even with these subsidies there has been plenty of punitive damage to the risk takers through out the process, with the obvious and unfortunate exception of the investment bankers at the top who have successfully immunized themselves from any and all damage – direct or collateral – through their political influence. JMHO.

bakho:

Until the media starts shining a light on the wealthy special interests behind the disinformation campaign, the public will continue to be confused. It is always more difficult for people to relearn than it is to teach for the first time.

[Feb 18, 2010] TransUnion- Mortgage Delinquencies at All Time High

ResistanceIsFeudal :

tg wrote:

I think we are going in another direction. A positive one where information immediatedly disseminates around the world where the elites have no more sway than the joe average.

I disagree with you, but also agree about the dissemination of information. The real, and only, weapon we have against this rigged casino which is patriotically called a market lies in access to information. The primary advantage of the well-connected is access to inside information. I submit that information asymmetry is (and has been for decades) the primary basis of the elites' tyrannical power and the more we can level that playing field, the less significance or power that an established elite can exercise over the populace. Unfortunately it's not looking good for the home team -- propaganda, misinformation and control of the channels of mainstream distribution set up a very unfair playing field.

sportsfan:

broward wrote:

Blackhalo wrote:

I for one did underestimate the lengths that the government and Fed would go to

I did, too, but I also fairly sure that a hands-off approach would have resulted in 30%+ unemployment.

--------------------------------------------------------------------------------

I also had the under and thus no ticket to ride, but I do wonder how bad things would have been without 2009's $787B ARRA, separate and apart from 2008's TARP.

There's a good analysis of the upside from the stimulus here: - NY Times

I'm actually surprised that CNN's poll found 56% don't like "the stimulus" or don't like the word "stimulus" or something to that effect. The simple fact is that without it we would have been in deep grease by now (yes, pun intended).

tg:

ResistanceIsFeudal wrote:

The primary basis of the elites' tyrannical power and the more we can level that playing field, the less significance or power that an established elite can exercise over the populace

I agree but two years ago I would have thought that bs. Resistance is not futile but passive

some investor guy:

ResistanceIsFeudal wrote:

disagree with you, but also agree about the dissemination of information. The real, and only, weapon we have against this rigged casino which is patriotically called a market lies in access to information. The primary advantage of the well-connected is access to inside information. I submit that information asymmetry is (and has been for decades) the primary basis of the elites' tyrannical power and the more we can level that playing field, the less significance or power that an established elite can exercise over the populace. Unfortunately it's not looking good for the home team -- propaganda, misinformation and control of the channels of mainstream distribution set up a very unfair playing field.

Wow. I completely disagree.

Information is useful, but you underestimate how spun and tainted information is when sent through normal channels to the rich and powerful. Tons of people want to try to do something to that information to get a particular response. On CR, with anonymous posters, not so much. Many people in power realize this and try to fight against it. It's still tough.

Most people who make serious money are almost necessarily specialists. This is one of the more defensible reasons why many people failed to see the bubble.

There are a lot of advantages to being rich and powerful. Two of the biggest ones are friends and access. If you know tons of people with money and power, and you have a great idea, you have a much better chance of getting something done quickly. Unfortunately, you also have a higher chance of being a well-paid slacker, or getting something stupid funded.

I also disagree on propaganda. Take advertisers for example. Many of them are distraught at their loss of your attention. Before widespread use of the web and Tivo, you might go to the bathroom during commercials, but you mostly tolerated them. Now, you skip them.

It is also much more difficult to suppress a piece of information, or entirely ignore an issue. If bloggers find out someone important is doing something illegal, having friends at the newspapers won't help.

broward:

ResistanceIsFeudal wrote:

. Specialists by definition have informational asymmetry which allows them to exploit opportunities not known to the non-specialist.

But also makes them much more susceptible to manipulation by others. The traditional "free market" assumes equal access to information for all parties. Once you get into specialization, you get partitioning of information which puts specialists at the mercy of gatekeepers. It's a project management problem, too. Traditional free market assumes no boundaries on information accumulation and no latency in its collection.

1 currency now -yogi:

GDP growth is an illusory measure of economic progress.

If the currency float ("money supply-- FRN's") stays constant, economic progress can only be made by deflating consumer prices: more grains of corn, gigs, vacation days, for the same dollar. Otherwise, wealth is merely redistributed.

People like the illusion of growing wealthier by selling their houses at a nominal gain and getting raises in salary and bonuses. They also like paying back debts with devalued currency (especially foreign debts). So the GDP ponzi team creates mythical "hedonic gains" and increases the float through fancy shell games when no one is paying attention.

This allows those with closest access to the new float to make easy money. The primary dealers are not private entities competing in a free market (sorry, Mr. President). The notion is absurd. They borrow at .25%. That is not a market rate.

There is fierce competition to get close to or control the Fed, but this in no way resembles an open market. We still don't know who got the TALF trillion; the FDIC won't tell us if a big bank is failing. Throughout the history of currency use, there has been fierce competition to raid the national treasury. This is why the US Constitution requires a regular public accounting of ALL public funds.

Federal Reserve "independence from politics" is a smokescreen for the raiders. That really means independence from Constitutional checks and balances.

some investor guy:

ResistanceIsFeudal wrote:

Specialists by definition have informational asymmetry which allows them to exploit opportunities not known to the non-specialist. The access of the rich is access to sources of information beyond the ken of the non-elite, again to opportunities and resources unavailable to the rest of us, or to people who have same. The difficulty in suppressing information can be reduced to control of the channels of dissemination, which basically means you either outright control the channels of communication or have marginalized dissenting opinion through misinformation or political maneuvering and psy-ops that foment extremism and non-soluble "talking points" to rally a crowd and distract from the root issues to neutralize the threat.

I work in a job awash with data. I have access to a number of for-fee data sources which our firm subscribes to. I don't use them very much. I typically can get to what I want for free, and somewhat faster. I very regularly tell clients things they don't know, which I usually was able to deduce from public data, their OWN public data.

The big resource I have that a bright college student doesn't have nearly as much of is access to people. I can get in to see tons of clients who wouldn't return a student's call or email.

I don''t think you can control the channels of information, or send out enough disinformation, to fool all of the people all of the time. While there are ardent partisans, more and more people find info for themselves. It's not the access which generally determines this, it's the disposition or personal interest of the individual.

[Feb 17, 2010] Use of temps to fill jobs may no longer signal permanent hiring - USATODAY.com

By Jeannine Aversa, AP Economics Writer

WASHINGTON — It's not the signal it used to be.

When employers hire temporary staff after a recession, it's long been seen as a sign they'll soon hire permanent workers.

Not these days.

Companies have hired more temps for four straight months. But they remain reluctant to make permanent hires because of doubts about the recovery's durability.

Even companies that are boosting production seem inclined to get by with their existing workers, plus temporary staff if necessary.

"I think temporary hiring is less useful a signal than it used to be," says John Silvia, chief economist at Wells Fargo. "Companies aren't testing the waters by turning to temporary firms. They just want part-time workers."

The reasons vary. But economists and business people say the main obstacle is that employers lack confidence that the economic rebound has staying power. Many fear their sales and the overall economy will remain weak or even falter as consumers spend cautiously.

Companies also worry about higher costs related to taxes or health care measures being weighed by Congress and statehouses. That's what Chris DeCapua, owner of employment firm Dawson Careers in Columbus, Ohio, is hearing from clients.

DeCapua says corporate demand for temporary workers has surged. That's especially true for manufacturing-related jobs involving driving forklifts, assembling products, packing merchandise and loading it on trucks.

That demand hasn't spilled over into a demand for permanent workers, and DeCapua doesn't see it turning around anytime soon.

"There is so much uncertainty, and when there is uncertainty, people and companies hold onto their checkbooks," DeCapua says.

Companies "don't want to hire permanent workers and then have to turn around and get rid of them six months later," he says.

DoubleStar, a human resources firm based in West Chester, Penn., hired two temp workers recently to join its 60-person staff. CEO Harry Griendling says in normal times he would have hired two permanent employees.

But Griendling has doubts about the strength of the recovery. He's not ready to absorb the risk and cost of adding permanent staff.

"When I look ahead for the next three to four months, all I see is murkiness," Griendling says.

For years, economists have regarded increased hiring of temp workers as a bridge between no hiring and healthy job creation. It meant employers would soon expand their permanent payrolls to keep up with rising customer demand.

After the 1990-1991 recession, for instance, gains in temporary hiring starting in August 1991 led almost immediately to stepped-up permanent hiring. And after the 2001 recession, temporary hiring rose for three straight months in the summer of 2003. By September, employers were adding permanent jobs each month.

Now, because this recovery seems more tepid and fragile than previous rebounds, temporary hiring may have lost its predictive power, economists say.

"I think a lot of it is manufacturing," says Mark Zandi, chief economist at Moody's Economy.com. "It may be that manufacturers are relying more on temps than in the past because they are more unsure about the ongoing demand for what they produce."

Employers added a net 52,000 temp jobs in January — the fourth consecutive month of gains. Over that time, total U.S. jobs shrank by 106,000. Employers have managed to boost productivity by squeezing more work out of their existing staffs.

For the unemployed, temporary jobs provide a paycheck at a time when the unemployment rate remains near double digits. Still, these jobs generally offer few or no benefits.

Some of the jobless see temporary work as providing a foothold at a desirable employer. Yet it seems far from certain these days that a temp job will lead to permanent work.

Allen Moore, 26, said a temporary job was all he could find last fall after more than six months of unemployment. Jobs disappeared last year around his hometown of Peoria, Ill., after manufacturer Caterpillar cut thousands of positions.

Moore landed a temporary job in September through a staffing agency. He wanted a permanent position. But he found none. He earns $9 an hour making pallets and boxes for FCA Manufacturing in nearby Princeville.

He said he took the job with the hope that he'd be hired as a permanent employee within about three months. The three months have come and gone.

Moore figures the company is waiting for orders to increase before it expands its long-term payroll.

"They think it's going to pick up," he says. "I hope it does."

AP Business Writers Christopher S. Rugaber and Christopher Leonard contributed to this report.

Copyright 2010 The Associated Press.

[Feb 17, 2010] CNBC's Olick: Treasury Concerned about Next Wave of Foreclosures

2/16/2010  | Calculated Risk

From Diana Olick at CNBC: What Mortgage Modifications Say About the Housing Market

Treasury officials today said they are still concerned about a coming wave of foreclosures, many from pay option ARMs and many from the prime jumbo basket, particularly hard hit by unemployment.
Olick also notes that the HAMP report for January has been delayed by weather until tomorrow. And she reports that only 2/3 of HAMP borrowers are current on their payments.

A couple of comments:

The main reason 1/3 of HAMP borrowers are delinquent is because some servicers didn't adequately pre-qualify borrowers before putting them in the program. The Treasury recently changed the guidelines for placing borrowers in to a trial program, and these more stringent pre-qualification requirements must be implemented by June. Most servicers have already started using the new requirements, and the number of new trial modifications will probably slow dramatically.

As James Haggerty at the WSJ noted this morning:

Loan servicers ... seem to have "nearly exhausted the supply of plausible candidates for loan modifications" and will find that many loans are "unredeemable," [a] S&P study says.
Note: the HAMP report tomorrow will be for January. Although the number of permanent modifications probably increased significantly, the actual number will still be very low compared to the number of HAMP trial modifications. Also - it is the report for February that will be VERY interesting because the servicers have been instructed to remove many of the delinquent borrowers from the program after Jan 31, 2010.
Selected Comments

EvilHenryPaulson:

ghostfaceinvestah wrote:

"And why would they think someone $200,000.00 underwater would keep paying on something that will never reach the loan amount? " exactly, what is the point? There is no point. Just wasting more money we don't have.

High Priest Bernanke thinks the negative equity is just an illusion, that if given time people will believe again and the equity will rise

ResistanceIsFeudal:

lawyerliz wrote:

AKA the dark ages.

We'll call them something else, of course... and it will be suitably Orwellian. Probably already being decided in committee, actually.

ghostfaceinvestah:

"High Priest Bernanke thinks the negative equity is just an illusion, that if given time people will believe again and the equity will rise"

Yes indeed, he is a true Keynesian at heart, a strong believer in the animal spirits. Until the day I die I will remain convinced he helped prop up the stock market from March - June last year.

Unfortunately for him, it is a lot harder for him to buy houses outright and hide his tracks, he can buy MBS, but that won't quite cut it.

unirealist:

Last night I watched that wonderful movie American Graffiti again. About America just a few years before it began its downhill slide (circa 1963), when FRN's could still be redeemed for silver coins.

One thing that most people miss when enjoying the film: while it depicts America at its wealthiest, the wealth is mostly hidden--embedded in the productive infrastructure. The kids don't have a lot of pocket money, no cellphones or ipods or gameboys, and their fun is pretty much cheap fun--cruising the Miracle Mile circuit on .20/gal gas, hanging out at Mel's for cheeseburgers and cokes, dancing at the freshman hop. No limo's, no expensive toys, no designer clothes.

None of them intend to become MBA's either.

It's an uplifting film and also heartbreaking. Is it an unrealistic portrayal of life in the US early Sixties? Not really. Yes, it overlooks racial prejudice and endemic hypocrisy and under-the-surface spousal/child abuse and lots of other societal maladies. But having been there at the time, I can tell you that it gets the temper of the times right. The US was on top of the world, and reality still could defeat illusions.

Little did anyone know what was coming.

Like I said, watching the film is a bittersweet experience.

ResistanceIsFeudal:

 lawyerliz wrote:

aHHH, Feudal, did you enjoy your dark ages. (Ireland wasn't dark, by the way.)
Winter follows fall every year. We've clearly not broken the cycle this time, either. The time of 'rest' or nescience isn't all bad, however, just very different than that to which we've been accustomed to regard as life in the past, epic, boom, and a necessary corrective, like passing out after too much drink.
 

[Feb 17, 2010] Hyperinflation As A Debt Repudiation Device? No According To UBS, Yes According To Recently Declassified IMF Paper

Some time ago UBS economist Paul Donovan claimed that hyperinflation as a policy tool to inflate away a staggering debt load (for those of you who have missed all the recent musings by SocGen's Edwards and Grice, this is precisely the situation the developed world countries, not to mention the STUPIDs, find themselves in right now) is unworkable due to the impacts this type of concerted action would have on broader markets.

 "The idea that governments can readily inflate their way out of their debt problems is a misnomer — arising, perhaps, from confusion between the fate of the individual bondholder and the response of the collective market... [M]odern governments can not rely on markets to remain collectively indifferent to inflation. Inflation will raise the nominal cost of borrowing (of course) but through the inflation uncertainty risk premium it will also add to the real cost of borrowing."

Yet a recently declassified paper by the IMF's Guillermo Calvo "Is Inflation Effective for Liquidating Short-Term Nominal Debt?" (a document which was previously not for public use) comes to a frighteningly different conclusion, one which could imply that the last weapon in the Fed's, and the administration's arsenal, could very well be just this heretofore unthinkable "bazooka approach" previously thought only possible in such developing countries as Korea and Venezuela.

[Jan 16, 2010] Hyperinflation As A Debt Repudiation Device No According To UBS, Yes According To Recently Declassified IMF Paper

Feb 16, 2010 | zero hedge

JW n FL:

In credit markets, the recent backup in corporate spreads validates our concerns earlier this year that 2009’s remarkable rally in investment-grade bonds had reached fair and in some cases overvalued levels.  However, we continue to believe that the current combination of accommodative monetary policy by the U.S. Federal Reserve and strong economic growth in developing market economies will benefit investment portfolios tilted toward risk-based assets in general and stocks, commodities and high-yield bonds in particular.  Finally, our forward-looking attention remains keenly focused on the aggregate and regional contours of global economic growth as well as when and to what extent the past two years’ extraordinary stimulus measures will be unwound by their sponsoring governments and central banks.

http://www.northerntrust.com/pws/jsp/display2.jsp?TYPE=interior&XML=pages/nt/0810/1222892049944_989.xml

Anonymous

Am I the only idiot who is wondering exactly against whom are we going to devalue? We're not on a fixed exchange rate nor are we on a gold or gold-exchange standard. Devaluing relative to the yuan is relatively meaningless in the grand scheme of things.

Anonymous:

" A once-and-for-all devaluation will give rise to inflation but will not necessarily lead to an increase in the nominal interest rate" Is this guy serious?

why with a friend like this, the fed really doesn't need an enemy.

He is forgetting the different countries currency status. For something like this to take place in the US,there is no telling where the DXY will be. As it is, people are losing faith in the dollar, and who is going to believe a government which will say "only this once". And with constant trade deficit, this is the worst thing that a country like the US could do (they probably will do it because it is the worst option, lol).

And if they think that a lower dollar is good,because it will encorage exports,look no further that the trade deficit with Japan. While their currency almost doubled between 1985 and now, the trade deficit with Japan stayed the same (sometimes higher,but no lower by much).

So, here is a scenario of a possible outcome of a one time inflationary event: A free fall in the DXY to levels unknown and unexpected as all and every foreign reserve system will try to be the first to unload.

That will be followed by a spike in every imported good. The worst would be a spike by oil to exceed the $140 level it reached in 2008.

Results?

Remember June and Jul of 2008? Because this is where the economy started falling from the cliff, and not when LEH collapsed. It could be even argued that the sharp increase in oil was the catalyst behind all that which followed.

Reason?

All people who bought homes in far away suberbia have probably done their calculation based on certain price of a gallon (stupid I know, but people nowadays are always one step ahead of the next paycheck), when they were suddenly met with the choice of keeping their jobs, or keeping their house and not paying for the commute. And in any such choice, the job always come first...
 

[Jan 16, 2010] Junk Bond Spreads Widening A Canary in the Coal Mine

"Watch the bond markets!" is a very good recommendation but very difficult to follow. Bond market telling many different things at once so it is easy to misinterpret what it is saying :-) For example many fixed income specialists recommended to sell junk at least starting from last August. If we assume that junk peaked in mid Jan of 2010,  that was somewhat early call.  I think that it might be possible that "less junky junk" like Vanguard High Yield Corporate will outperform S&P500 in 2010 downturn, if any.  After all many S&P500 companies have junk bond ratings now.  I wonder how many companies in S&P500 index are currently rated as junk.
Feb 15, 2010 | naked capitalism

As readers no doubt know all too well, the market premium versus safer ones contracts in robust times and widens in downturns. And since credit markets typically signal downturns months before the equity markets, junk bonds are one place to look for advance warnings of changes in economic fortunes (albeit with a risk of false positives).

The Financial Times reports (hat tip reader Joe C) that sovereign debt worries are leading investors to exit junk bonds at a particularly rapid clip:

Investors are selling out of “junk” bonds at the fastest rate since September 2005, in the latest indication that concerns over sovereign debt are spreading to other credit markets.

In the week that ended on Wednesday, nearly $1bn was withdrawn from US funds that hold high-yield corporate bonds (junk bonds), according to Lipper FMI – the largest outflow in almost four and a half years.

As a result, the past month has seen the biggest sell-off of US junk bonds since the equity market bottomed out in March 2009, said Martin Fridson, chief executive of Fridson Investment Advisors, which specialises in high-yield bonds.

Spreads – the difference between the yields on junk bonds compared with US Treasury bonds – have widened by more than 100 basis points since January 11, and now stand at about 700 basis points, as measured by the Bank of America Merrill Lynch Index.

K Ackermann:

And then there was last week’s treasury auction that had some very unusual characteristics, and some say was nearly a failed auction.

Watch the bond markets!

[Feb 15, 2010]  Weekend Homework President’s Report on the Economy

February 12, 2010 | The Big Picture

Be sure to take a look at the President’s Report on the Economy, in handy PDF size here . . .

beatstreet:

This proves our leader has a sense of humor. Cliff’s note please.

Moss:

Well at least one Industry is booming:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7IMnXY_.OG4&pos=9

kmckellop:

“….Although economists will surely analyze this downturn extensively in the years to come, there is widespread consensus that its central precipitating factor was a boom and bust in ASSET PRICES, especially house prices……”

They still don’t get it. Its origins are a psychologically driven runaway credit boom with a subsequent psychologically driven (deflationary) contracting credit bust. This only encourages me to press my short positions more. Until they face reality, the path of least resistance is down.

kmckellop:

RE: DeDude: IMHO we were due for an oversold bounce a year ago and now its over or nearly over and the longer term trend resumes. It doesn’t mater that a few $trillion were thrown at the collapsing world economies… the trend goes on. I will be a difference world at the bottom…with plenty of opportunities…it’s not the end of the world.

DeDude:

kmckellop; I agree we were due for an oversold bounce a year ago, but that had to do with the chicken little investor world, not the real economy. In the real economy we were facing a down spiral of frozen credit, failed businesses, fired workers, less consumption, failed businesses etc, etc.

The couple of trillions thrown at that problem turned what was the early stages of a classic world-wide full-blown decade-long depression, into a much less serious problem of a severe recession (probably a double dip if the GOPsters get their way).

Any look at the data clearly show that stimulus made a huge break/difference in the trends. I agree that the bottom in investor world will have plenty of opportunities for vultures to pick bones, and that is fine with me as long as it is just one investor class vulture picking the bones of another investor class vulture. My problem is when it is the bones of real people who actually work for a living, that are being picked.

[Feb 14, 2010] Eliot Spitzer Discusses The Cataclysm Of 2008-2009 zero hedge

Whether you love or hate Eliot Spitzer, the former New York Attorney General and Governor of New York State usually introduces perspectives as both a former politician and activist which are relevant, and in our day and age unprecedented Wall Street-D.C. corruption, very necessary. His daily appearances on the Dylan Ratigan show provide a much needed exposition on the extreme commingling of power and financial interests, that has become the norm as an ultra-small conformist minority in America controls the vast majority of the wealth of not only this country, but the entire world. The Fora.tv presentation below from Spitzer's recent appearance at the Commonwealth Club provides a crash course to anyone who wishes to catch up with the views of the disgraced governor who has slowly attempted to restore his public image as a political and financial activist. Can he restore his image? If he continues to expose the glaring corruption and brings attention to the at times criminal conflicts of interest, we believe the answer is yes.

Presentation highlights:

The full presentation can be seen here, while the individual segments are as follows:

01. Introduction
02. Spitzer Opening Remarks
03. Issue 1: Viewing the Economy from a Global Perspective
 
04. An Economic Switch: Revolving Around China
05. Government Fail
06. Issue 2: What Should Government Do?
07. Rule 1: Ensure Integrity in the Market
08. Rule 2: Regulate Externalities
09. Rule 3: Regulation of Core Values
10. Issue 3: How Have We Dealt with the Financial Crisis?11. Economic Reform Fail
12. Need to Address Employment Issue
13. Q1: Role of Fraud vs. Being Wrong in Crisis
14. Q2: Views on 'Too Big to Fail'
15. Q3: The Peter Principle in the Government
16. Q4: Assessment of Obama's Economic Team
17. Q5: Building Blue-Collar Jobs in a Global Economy
18. Q6: Reaction to Supreme Court Campaign Finance Decision
19. Q7: China's Investment Issues
20. Q8: Hope for Government
21. Q9: Resignation Scandal and Advice for Aspiring Politicians
22. Q10: Regulation Hindering Competition
23. Q11: Releasing AIG E-mails to the Public
24. Q12: 'White-Collarization' of Organized Crime
25. Q13: Advice to Congress
26. Q14: Healthcare Reform Fail
27. Q15: What's Next for Spitzer?
28. Q16: Public Education Reform
29. Q17: The Spitzer Legacy

MsCreant

None of them are telling us the truth about what is going on. I wish I could be as black and white about it as you are choosing to be, but unfortunately reality is shades of grey. Spitzer is grey and potentially quite useful.

I have things about my past that would make it impossible for me to run for office. Thing of it is, it was all in my youth. I have the wisdom to understand that if one is too rigid, they only follow the rules because they are told certain things are bad. If you make the mistakes, you gain a wisdom that can be extrapolated to other areas of your life.

If I were Spitzer's wife, I would divorce him. But I don't throw him out as a potential soldier in this fight.

And the timing on when he got caught, well...

Psquared :

Well said mscreant. Well said.

Even moral people also make immoral choices. Ego above chivalry, pride over fairness, greed over compassion and generosity. Life forces hard choices on all of us and we do learn from mistakes. I've not seen many people learn from rigidity.

In my opinion, choosing meanness, harshness, unforgiveness and hate is sinful too.
"When the power of love overcomes the love of power, the world will know peace."

- Jimi Hendrix

[But some will say he was a no good, pot smoking, acid dropping lunatic. Besides, he was a black man. But Bob Marley, another black man, believed like Jimi, that music could change the world.]
 

SWRichmond :

Middle class western morality is a weapon that is routinely used against us. Do not for a second believe that any of the ruling class indulge in any such morality. They are, by their observable actions, liars, thieves, and much much worse. They use our morality to protect themselves from us, not for our own good, and their control of the media makes it easy to hide their flaws. Spitzer got uppity and had to be taken down, and it was easy: "He cheated on his wife, with a prostitute! AAAAAHHHHHHHHH!!!!!!!"

Unlike Clinton, who took advantage of an underling....

dogbreath:

Clinton/Lewinsky was a major distraction for years.  prime time opium.  My guess is Lewinsky's handlers knew Ol' Bills weakness and placed the cookie jar within reach.  In E.S.'s case, that call girl was prime.  The whole story can't possibly be know in public about how the introduction was made, by whom etc.  Other people on both sides of the affair had to have know.  The biggest industries in any major capitol are high class prostitution and extortion.

Psquared :

Another good post.

The ruling class of every age looks remarkably like the Pharisees of Jesus day. And so history repeats itself again. It is time for mankind to evolve.

WaterWings :

Very true. Asymmetrical ethics. Just like the debt slave wanting to responsibly pay off his debts, even though the banks lend their "free" money from the Fed to him at 29.99% APR.

Mr. Anonymous:

With all due respect, ES tapped a woman who sold her body. So what. Two consenting adults engaging in commerce.

If only Goldman were so forthright.

Nice description of a woman earning a living. But the real whores are the ones working the Street.

Problem Is:

 "If I were Spitzer's wife, I would divorce him. But I don't throw him out as a potential soldier in this fight."

Agreed. He screwed around, it is Elliot's fault. But can he do the job? Would he be competent to run the SEC? I screwed a prostitute = I am incompetent to run the SEC ...would be the kind of absurdity an agent provocateur sock puppet, Andrei Vyshinsky-SKI would hoist into a discussion.

bbbilly1326 :

When you speak about recent but past political filth, and fail to include GWB on the list, your credibilty is lost.

RE: Spitzer's recent (and past) activity, I'm reminded of one of my old fave song lyrics: "Freedom's just another word for nothing left to lose" (Me and Bobby McGee).

Having had everything he valued taken away, Spitzer is now free.......and that makes him dangerous to those in power.

I with him godspeed on his new journey.

pros :

Wall Street set him up with the prostitute because he is the only politician in America with the knowledge, guts, experience and intelligence to take them on.

Most stats indicate at one time or another 75% of men pay for sex...Duh...

what he did is more common and normal than spitting on the subway tracks.

JR

Of 2665 men completing a standard health screening questionnaire in the UK, 10% (267) reported paid sex. – Characteristics of men who pay for sex: a UK sexual health clinic survey, August 9, 2006.

A considerable proportion of men worldwide buy sex from female prostitutes, with most estimates of lifetime prevalence ranging from 7 to 39 percent, depending on the country and study. – 2008 Scientific American Mind

Infidelity statistics from WomanSavers.com show that the large percentage of men, at least 70 percent, are faithful to their wives:

…22 percent of married men have strayed at least once during their married lives.

…22 percent of men and 14 percent of women admitted to having sexual relations outside their marriage sometime in their past.

…5 percent of married men and 3 percent of married women reported having sex with someone other than their spouse in the 1997...

…About 24 percent of men and 14 percent of women have had sex outside their marriages, according to a Dec. 21, 1998 report in USA Today on a national study by the University of California, San Francisco.

I wouldn’t go by the statistical “educated guesses” used by authors exploiting truth and the downfall of man, particularly females, who are looking for sensation, causes and a raison d’etre to sell their books on sex and their feminist hopes.

http://www.womansavers.com/infidelity-statistics.asp.

That said, Elliot Spitzer at least has paid a price for his infidelity, unlike Bill Clinton. I, too, think Spitzer has a future because, as you say, he has "the knowledge, guts, experience and intelligence to take them on."

milbank:

Set aside whether one thinks prostitution is moral or not per se.

Spitzer was agressively prosecuting organized prostitution rings while he was a patron of such rings. That shows a total moral and ethical hypocracy that should preclude him from ever being in elected or appointed office again. A man of his psychological makeup should never again be in the position of holding the public's trust.

Add to the fact that he indirectly admitted to participating in numerous felonies including but, not limited to, The Mann Act, that he knew he was committing them when making them. He paid no criminal price for these crimes as long as he resigned the governorship.

It's amazing how people bitch about the corruption in government but, when confronted with whether or not to re-admit a corrupt politician back into government, find a way to justify it as long as he says the right things about whatever.

Eliot Spitzer has always said the right things as far as I'm concerned. It doesn't change the fact that he is not psychologically fit to hold the public trust via some office ever again.

MsCreant :

Very grey stuff. There is something to what you say here and elsewhere that rings true. I'm just not seeing too many on the horizon that know/understand what is going on AND are running for office. I start thinking about doing what they do in hacker world, send the hackers after the hackers. Not sure the hackers they send are reformed, and won't take advantage of the situation, but who else to do it?

Putting him in the SEC becomes an interesting idea...

milbank :

I'm just not seeing too many on the horizon that know/understand what is going on AND are running for office. I start thinking about doing what they do in hacker world, send the hackers after the hackers. Not sure the hackers they send are reformed, and won't take advantage of the situation, but who else to do it?

First MsCreant, I've always admired your comments at ZH and the way you take on the jerks who cross your path at times.

That you are "not seeing too many on the horizon that know/understand what is going on AND are running for office" might be true. That there aren't plenty out there who do know/understand and want to run for office I say is true.

The problem is, the ones you and I get to vote for have already been vetted by the corporations and other powerful business/banking interests before you or I get the chance to vote for them no matter which party is running them. Who do you think pays for their campaigns?

Spitzer got as far as he did because he comes from an ultra-wealthy family and didn't need the campaign money so he wasn't in the pockets of the special interests. He was already in the position you want to put him in, elected office, and you can see what happened. Instead of being on the take he turned out to be an end-user (no pun intended) of the crimes he was particularly aggressive in prosecuting.

The hacker analogy above does not apply to Eliot Spitzer. He wasn't a Pimp who got caught. He wasn't a banker who was breaking laws. He was already in the situation you want to put him in when he was Attorney General and then Governor of New York, elected to root out corruption.

To the SEC:

The problem of the SEC isn't a "Mary Schapiro" problem. It's an SEC problem that, in the particular situation, goes back through Christopher Cox, Harvey Pitt and Arthur Levitt. Both in Democratic and Republican administrations. Why? It's the institution of the SEC as it is set up that is the problem. As it is set up, it is actually used to protect and cover for the perps from the rules and laws it should be prosecuting. It's not really a watchdog over Wall Street but, a lapdog of Wall Street. Only Congress can truly clean that up not any one man. I refer you to my earlier paragraphs regarding politicians and campaign financing to understand why that goes and will go nowhere.

As far as being appointed Chairman of the SEC? Again, it's not the party or the President, that makes the difference, the SEC is not the watchdog over Wall Street. That is an illusion fed to the electorate who continues to buy into it. It is the lapdog of Wall St. Schapiro, Cox, Pitt, Levitt Democrat, Republican, it makes no difference. Our American system of government has pre-ordained that.

Spitzer had a great shot of going all the way to the White House. Fortunately, his personal psychopathy and it's power over the choices he made was exposed.

Anonymous:

MsCreant, you have a flexibility in your thought I find very admirable. I would not want to be on the other side of a debate from you. And I also would be open to viewing Spitzer's discretions with a practical bent IF the discretion he had been caught for were outside of his area of interest. But because he was attacking prostitution on the one hand as a prosecutor and engaging in it on the other hand? That is the purest of hypocrisy. I would love for us as taxpayers to be able to use his skills, but this level of hypocrisy is too far even for my (very relaxed) standards for morality in politicians.

Zippyin Annapolis :

Elliot is one smart dude who decided to try somebody on for size and they simply had the balls and money to call his bluff big time. They are still laughing about it no doubt.

It is hard to understand how an expert in debit transfers in the context of money laundering payments (he is) and an expert in federal jurisdiction questions (transporting prostitutes across state lines is --er--a felony) could be so breathtakingly sloppy and stupid.

It is like he wanted to get caught --which in and of itself opens up a whole new dimension in the psycho-profile of this talented individual.

Anonymous:

Odd how 'patterns in financial transactions' brought Spitzer's 'transgressions' to light. So very many similar situations by other public officials go on without any publicity - and note that this was not even prosecuted..... How much information has 'Total Information Awareness' dug up on politicians? How much of that FISA 'warrantless wiretapping' was directed against political foes? No need to burgularize the Watergate when you can read all the emails and listen into all the conversations...... It's easy to manipulate politicians if you know all their dirty secrets.

It very much looks like people went digging - very deep - for dirt on Spitzer to shut him up and stop him. He was raising serious questions at the time - BEFORE the merde hit the fan.

Sadly there was dirt to find - though that seems to be the case far too often. Few public figures - even those doing a good job serving the public - seem to have unimpeachable records with squeaky clean lives but his private sins provided a too convenient way to halt some very 'inconvenient' questions. Spitzer was on to this mess long before it became public.

MsCreant :

I have been speculating that this is the case for years. What ever would restrain them from using these kinds of abilities against the other pols? Nothing. My husband used to be a low level NSA spook. He says, very simply, "We can intercept anything we want to." They knew this stuff about Elliot for a long time would be my guess.

SWRichmond

Mr. Vyshinsky seems to want to singlehandedly hijack this thread. I have noticed a trend with recent threads that there is an early and repeated attempt to get them off topic and keep them there.

Problem Is:

+11111. Exactly!

Hence the assertion:

"...would be the kind of absurdity an agent provocateur sock puppet, <cough> Andrei Vyshinsky-SKI <cough> would hoist into a discussion."

If I may be allowed to shamelessly self promote. At least I know when I'm a whorin'.

Anonymous:

It seems that you are forgetting,that the "subprime" fiasco occured when thi guy was in office in ine capacity or another. this is like TG blaming it on previous administration when he was asked "what was your position during that time" by a congressman. By the way,this "one super human being"who is going to solve all the ills,is I thought something that belongs to the crowd of "the American idol"and not to the crowd of ZH.

So out of millions upon millions of people,it is Elliot Spitzer with his baggage who is going to solve the problems of Wall St. And by the way,I didn't read that anybody of the people he "bothered"went to jail.

I am sorry,but a lot of the responses here disappointed me. It only shows that even within ZH crowds, some people still believe the MSM media propaganda in showing that Spitzer cleaned Wall st. It was all theatrical and probably about turf war. Proof? The whole subrime fiasco...

G. Marx

Let's examine "rage", shall we?

I read a great deal of rage expressed daily on this website, by not only its staff, but also those members of the public who contribute via the comments option. IMO, much of the rage expressed here fits into one of two categories, rage against the abuse of power and rage against hypocrisy, primarily by those in positions of power be they public or private.

So the cult of Spitzer I witness here and elsewhere confuses me. This man abused both his position of power and did so in the most hypocritical of fashion. He prosecuted and convicted people who did nothing more than what he did (I'm referring to the prostitution business). And those he prosecuted did not take an oath to uphold the law (he was charged to enforce), maintain the sanctity of the office he held, nor did they swear to uphold and defend the constitution of the united states. They did not put their personal honor on the line, he did. Does that mean anything to Spitzer's apologist?

Why do so many attempt to give him a pass or excuse a character trait which history demonstrates time and again to be one that's hardly temporary? The desire for power, and the abuse of power, by an office holder is rarely, if ever, a one time affair. Lord Acton made note of this tendency a couple of centuries ago. Tell me how a man corrupted by power, will not again be compromised and corrupted by it should he once again obtain, or be appointed to, a position of power? Is this the best we can do? A nation of three hundred million people and we clamor for the proven corrupt to save us from the suspected corrupt? Those of you who do so, how many times have you compared the modern day US to Rome? Cannot your secret longing for Elliot not also be a modern manifestation of mistaken popular sentimentality exhibited during the decline of Rome?

I personally have no doubt that Mr. Spitzer is your typically corrupt US politician and then some. One who takes a populist theme (for which he has no real convictions) and runs with it, for nothing more than to rehabilitate tarnished reputation so as to once again be among the ruling political elite. How many former politicians (and even current) could I submit as an example of such a phenomena? Should we start with the recently deceased Rep. Murtha? Who made rage against the Iraq war is battle cry and once his party obtained majority rule (in part through his forefront on the populist antiwar theme), he quietly slipped into the background the war forgotten and then handed out pork by the truck load so as to further the corrupt process for which many raged against.

"Fool me once, shame on you. Fool me twice, shame on me."

Are there really that many suckers here who secretly long to be fooled yet again?

Compassion? Sure, may Mr. Spitzer in all his privileged glory find the courage and discipline to be faithful to his wife and enjoy a happy marriage form this time forth. May he also apply what earnest talents and skills he has so as to obtain honest employment in the private sector where he can rehabilitate his tarnished character and should he yet stray again, his place in the private sector will help to minimize the damage done by his next misstep in exercising a lack of sound moral, legal and ethical judgement.

MsCreant :

I hate to admit this, but you and Milbank have given me cause to pause. Food for thought G. Marx.

I am quite concerned that very few of us could go through this political process as it exists now, and not have something seriously change us (is that the change we can believe in?) by the time you saw us, say 2-4 years later. The power process itself corrupts, I fear.

This juror is now undecided.

SWRichmond :

Yes, but of course you see, what we are now discussiing is NOT Mr. Spitzer's account of the financial debacle and the ongoing pillaging, but rather Mr. Spitzer himself. Hijack accomplished! We might as well be discussing Dancing With The Stars.

Is it so difficult to say "Yes, you have a point there, Mr. Spitzer" without believing that grants him some kind of fawning total trust? When one cannot argue with facts, one impugnes the fact presenter.

It is the difference between fact and emotion. Emotion is fun, but fact is how I choose to make my major decisions.

G. Marx

When there are so many worthy of our praise for their insight and analysis who are also free of taint, why should we even place Mr. Spitzer among them? To do so plays into the hands of our enemies. For it is they who will point to the tainted among those we put forth as our public champions and retort: "See, the face of their cause is a fallen man who violated his oath to both spouse and nation." It makes no tactical sense on the rhetorical front to weaken our lines with the corrupt likes of Elliot Spitzer.

Me thinks many have invested much of their own reputation in championing the past legal efforts of Mr. Spitzer and they now seek to reform him, so as to not have egg on their own faces for being duped time and again by this man while he held public office.

Benito Mussolini championed for the "trains to run on time." Should he then be the poster boy for airline efficiency?

Zippyin Annapolis:

Well Richmond, fire away--what of the golden nuggets offered by Spitzer?

Frankly I did not get much out of it--a lot of already plowed anti bankster rhetoric (to which I concur) laced with a lot of burned out spittle one might expect from a failed NE liberal who presided over a failed NE state government a la Corzine.

SWRichmond:

Graucho / Zippy

My point is simple, and I'm sure it's not lost on you both: the above thread contains innumerable rants and rages that are simply about Spitzer himself. I'm not going to bother counting them. Again, I prefer to make decisions based on fact and logic rather than emotion, and the rants and rages are strictly emotional. As such, they take up space and add nothing that is useful at all, and in fact are themselves a distraction, much more of a distraction than anyone's ability to say "Hey, that whore bull Spitzer is quoted on Zerohedge, those ZHers must be bad people."

G. Marx

Said "rants and rages" are a prime example of how corrupt individuals such as Spitzer are an unwelcome dsitraction to a much needed public discussion.

SWRichmond

You choose to allow emotion to enter discussions and inform your decision-making more than I.

G. Marx

Incorrect, I recognize the nature of debate in the public forum. I study how those who shape public policy go about their business and I listen to the techniques utilized by politicians and their partisans. It is not how I wish it to be, its how things are. Additionally, unlike the general public, I don't get caught up in the cult of personality or the fuhrerprinzip ("leader principle").

onelight

I recognize value in that approach, Marx.

Seeing things clearly in rational realistic terms is essential in forming an understanding of how things are and what is to be done. I would argue that the truth often includes more than the facts, and one must balance the spirit and letter of the law, as it were. However, in the early and final analysis, facts matter very much, as they inform the suitability issue with regard to outcomes, ie. which is the correct pathway forward for this person and this community (Spitzer and the national polity).

I mention that because in my earlier and perhaps reflexive emphasis on the political redemption principle---and the cost to society when it is not valued---one can get blinkered by perceptions and sentiments concerning a specific person, their situation and what they seek from others.

And too, there has been merit here in the idea that Spitzer has many options for his own renewal and future service to the country, which do not have to include preferred things on the high political plane in the near term.

Which goes to the issue of suitability for leadership, on the basis of personal character as well as in the content of what he is actually saying in the public forum, ie. are his ideas actually new and useful?

milbank

Not that you mentioned my posts SWRichmond but, I assume I am part of what you are saying. My comments were in response to those who were saying Spitzer should run again for public office or be appointed Chairman of the SEC.

As far as what Spitzer said? There is not much to say except, "So, what's new? " He said nothing that most of you haven't already heard or thought already. He gave the government a "C-" grade on what has already been done but, he agreed with TARP and most of the way things have been done already. He made general, non-specific pontifications. He had no specific solutions.

He sounded like a politician in that he sounded like he was saying something but, in reality, said nothing new and added no real, specific, solutions.

chindit13:

Eliot Spitzer does an all too human thing and he is castigated and run from an office for which he was damaged but still more capable than most.  His wife and family suffer for his mistakes.  We who are with sin cast lots of stones.

Goldman Sachs puts together a package of the worst trash in existence and sells it to some backwater clown who is managing the pension assets of men and women with small children to feed.  Goldman immediately shorts the very paper it sold, or at least buys CDS' on it, knowing it will fail and the buyer will suffer, or rather the buyer's clients will suffer.  Record bonuses and endless taxpayer assistance is the "punishment".

If we are going to be all high and mighty moral, we might at least try to be consistent.

Or we could take a lesson from the French, who couldn't care less about someone's peccadilloes.  Jacques Chirac has long maintained, with France's full knowledge, a Japanese second wife and family in Kyoto.  It never harmed his career.

Sometimes it is better to take competence where you can get it, remembering the old saying "if my demons leave me I fear my angels will soon follow".

WaterWings:

I didn't watch the whole thing, but I really enjoyed watching what I did. Your points, however, are extremely valid in my worldview - which causes me to realize how dishonest I was with myself in evaluating him, not as a good person that just made a mistake, but as a photo negative of what he actually is. He praised Bernanke's integrity! LOL. And he thinks China is digging the world out of this recession! I thought it was a little hinky.

The whole prostitute scenario seemed fishy to me in the first place. If he really does run for a major office by 2012 I will not be surprised - Spitzer: The New Hope. At least that is how they will try to sell him; not with those exact words.

Thanks for watching the whole thing and adding your thoughts.

MsCreant :

Good discussion on this thread. The hypocrisy angle has me hung up. I may want a knowledgeable warrior so bad that I am going into denial about who this character really is. And I will say this, I have watched him in other programs "apologize" and "accept responsibility" for his offense, but he sounds like he is spouting strategic words, logically placed, knowing they are the right thing to say, but not very felt AT ALL. That registered on my BS radar very clearly and I consciously overlooked it and told myself that while he does not really get it yet, about what he did, that perhaps on the path he is on, he will evolve into it.

Some of the comments here brought back that impression. Seeing him almost jump out of his chair when a commentator said his crime didn't matter and was unrelated to the job he was doing, and that he was set up. You could see Spitzer wanted to jump on that and agree with it pretty badly, but then held his own choke collar and said, "I won't comment about that, I'll just say that I take responsibility for what I did and not say anything else."

Spitzer could become an awesome journalist/investigative reporter. That would be very acceptable in my book. His credibility in that role might actually be enhanced because of his background.

Is this not where the frontline of this war is being fought?
 

[Feb 14, 2010] El CNI investiga las presiones especulativas sobre España ·

The NRC investigates speculative pressure on Spain (Google translation). 

ELPAÍS.com

The National Intelligence Center (CNI) is investigating what is behind the speculative attacks on financial markets against Spain, in line with the Greek fiscal crisis and contagion effects in several southern European countries.The Economic Intelligence Unit, created to defend the economic, commercial and industrial strategic sectors, similar to that found in other European countries investigates whether investors attacks and aggressiveness shown by some Anglo-Saxon media obeys market dynamics and the challenges facing the Spanish economy, or if there is something more behind that campaign.

To this end, economic intelligence agents take weeks to investigate, in addition to the usual contacts with various executives and experts, according to several sources consulted. CNI sources declined to comment on it.

The [Media] noise of recent times is normal in every crisis.  Appeared in the early nineties, when some political leaders denounced a campaign against the peseta and other European currencies. President José Luis Rodríguez Zapatero has hinted several times that of the attacks on British and American press is an offensive against the euro is affecting himself to Spain. Privately, Zapatero has shown his surprise on the virulence of some newspapers, something he suggested in his recent visit to World Economic Forum in Davos (Switzerland), where the guru of the New York University Nouriel Roubini said that Spain "is a threat to the euro zone.

"If Greece fell, is a problem for the euro area," said Roubini. "If Spain goes down, it's a disaster," he said amid the storm against the Greek debt at the time was beginning to affect also the Portuguese and Spanish.

Development Minister and deputy secretary general of the PSOE, José Blanco, has gone several steps further and has come to ensure in a recent interview that "nothing is happening in the world, including foreign newspaper editorials, by chance or innocent " and then complain about " somewhat murky maneuvers "of financial speculators. These theories have found some resonance, although Secretary of State for Economic Affairs, José Manuel Campa, said emphatically the other day that "no conspiracy". Elena Salgado Vice President visited the British newspaper Financial Times quoted Zapatero as usual for one of the rams of this campaign-to defend the soundness of the Spanish economy.

Companies, banks, industries and intelligence services are not so different.  All of them are developed "in a common environment that is characterized by increasingly narrow, changing, interdependent, complex and, as claimed by the CIA director, requires responsiveness in real time," claimed in a speech at the Universidad Rey Juan Carlos the former director of CNI Alberto Saiz, replaced by Felix Sanz Roldan in July last year.

Among the tasks of economic intelligence collection in CNI-regulatory law and detailed in-Intelligence Directive include political risk assessment of countries (guidance on assessing business investment) and macroeconomic analysis (economic stability , monitoring of strategic sectors), "all with special attention to its impact on the Spanish economy," according to the abovementioned document, "to prevent any risk or threat affecting the independence and integrity of Spain" and "trying to better Responding to the challenges posed by the current global economy. "

Within this activity, agents of the CNI are in frequent contact with several leading experts in the field of economy and financial markets.

[Feb 14, 2010] Sovereign Default Update: Spanish Intelligence Agency Is Probing CDS/FX Speculators

Feb 14, 2010 | zero hedge

Miles Kendig:

...and the hits just keep on rolling here on WBZH.  Sad really that sovereigns have given up the ability to manage their own economies and currencies to private super national central banks and individuals outside of the span of sovereign control or influence. Now that the whole process has for all intents and purposes spun so far out of control as to render any other sovereign action moot sovereigns have decided to start with the hurrumph action.  The only thing that would garner any real interest is if Spain were to actually produce findings and hold those accountable criminally, render the perpetrators to prison and their wealth to the state/crown.  The essence of the matter is if sovereign governments can in fact regain sovereign control or not.

And now todays TV listings....

http://www.youtube.com/watch?v=wYKJz05fEVo

glenlloyd:

You can't have it both ways. You can't have high debt to GDP and expect to pay low debt to GDP bps for credit. The exception to this at the moment is the US but that too will end and end badly I think.

If you don't want the speculation then don't run up the debt. This could all have been prevented, regardless as to whether these peripheral states are less competitive than the core EU, they didn't have to hand over expensive social programs. And if they had any sense to begin with they would have recognized that if things went south, as they invariably do at some point, that they would be in more trouble.

Debt, and especially massive debt, just opens you up to all sorts of boogy men. Banking on future income to pay for present day "wants" is a bad deal when it gets out of control. Just look at the mortgage refi extraction and HELOC situation..living beyond our means.

 

[Feb 14, 2010] Calculated Risk New Jersey State of Fiscal Emergency

Feb 12, 2010 | CalculatedRisk

From Reuters: New Jersey governor declares fiscal emergency

New Jersey Governor Chris Christie on Thursday declared a "fiscal emergency," allowing him to reserve or freeze state spending as part of his plan to tackle one of the largest 2011 deficits among U.S. states.
...
The deficit in the current budget, which ends on June 30, is $2.2 billion, while the gap in the following budget has spiked to $11 billion from a forecast of $8 billion in November ... the largest per-capita budget shortfall of any U.S. state
Just a late night budget update ...

Speed:

The inverted pyramid is beginning to wobble.

One state retiree, 49 years old, paid, over the course of his entire career, a total of $124,000 towards his retirement pension and health benefits. What will we pay him? $3.3 million in pension payments over his life and nearly $500,000 for health care benefits -- a total of $3.8m on a $120,000 investment. Is that fair?

A retired teacher paid $62,000 towards her pension and nothing, yes nothing, for full family medical, dental and vision coverage over her entire career. What will we pay her? $1.4 million in pension benefits and another $215,000 in health care benefit premiums over her lifetime. Is it “fair” for all of us and our children to have to pay for this excess?

Feckless Ness:

Weather Helm, public employee unions were originally intended to stop the cronyism that let politicians give all the jobs to their supporters. They may still serve that purpose.

El Cliffo:

Weather Helm suggested banning public employee unions, not all unions. That's probably because a government and a public employee union are not really negotiating adversaries any more, but buddies on the same side of the table.

mock turtle:

ok

i read the speech over at mish's

wow ,49 years old, is gonna get $3.3 million in pension payments over his life and nearly $500,000 for health care benefits

i live in washington state, here we dont get a full retirement until age 65 no matter how many years we work

does this 49 year old get to retire at any age he wants with a full retirement??

if thats the case i say forget calling just the union names...

WTF are the officers of the state, and the legislators and contract negotiators thinking?

where i live is a union friendly state but nothing like this. Our formula...2, times years of service, expressed as a percent (so 2 times 30 years = 60%) times final 5 years of average salary

so when i worked as a juvenile corrections staff the average top salary for a "jrc1" was 35k (supervisor 42k, program manager 48k etc)

2 x 30 = 60% x 35k = $21,000 per year beginning at age 65

early retirement with 20 plus years of service over age 55 yielded a big reduction from the above formula..as much as half off!!

the top person in our correctional facility, the superintendent currently salaried at 68K last time I checked

so these new jersey numbers are astounding especially if the 49 yr old new jersey guy gets full retirement right away!

mock turtle:

ok parting comment

i stand by the position that there are good unions and bad unions...just like there are well run states, and corporations, and bad ones

the solution isnt to ban all unions nor corporations

there has to be reasonable regulation

sounds like some of these states allow companies or the state to abuse employees

and some of the states allow unions to run wild

and finally some like here in WA that are close to in balance

Fluffy the Obese Persian Cat:

Oxtail wrote:

I think Kanchou's point was that a police union will stick up for individual officers who might get targeted by people of influence if they arrest someone with pull.

Yes. And it applies to teachers as well. ~12 years ago I was in my initial MSHA mine site training with a former shop teacher from a farming town on I-80, an unLOVEly little place which I shan't name. He talked a little about better pay at the mines, etc..... but it came out pretty quickly that he'd left after being force to pass students who didn't bother to show up to his classes, because of who their families were. Small town in a state without crazy coastal public sety). She's making ~160K. It's obscene, given the straitened circumstances of so many taxpayers out there. And her husband's a cop, on the Island as well. They're on easy street and the people they "serve" are just getting screwed.

Kanchou:

I think Kanchou's point was that a police union will stick up for individual officers who might get targeted by people of influence if they arrest someone with pull.

Yep. In particular, I had this in mind when I wrote that

Sonoma judge get jail times for DUI charge

Besides her personal power, the person in question is also married to presiding judge of one of the state appellate court. In many parts of the world, she would had been allowed to continue driving.

1 currency now -yogi:

Weather Helm wrote:

How refreshing to see a governor stand up to the abusive public unions.

The fat fuck will be lucky not to have his fat head on a pike. Not a word from fatty about fat cat bonuses. Battle lines are being drawn.

That Barton Fink Feeling:

Weather Helm wrote:

Cops and firefighters can't justify their pay with hazard exposure, either. For one, our soldiers in Iraq and Afghanistan are in far more danger than they are, yet they receive 1/3 or 1/2 the pay of firefighters and cops.

Firstly, a semantic query: why in your first sentence are there merely "cops and firefighters," possessed by no one, but in the next "our soldiers"?

Secondly, on numbers: if you look at the public expenditures for mercenaries (eg, Xe) in Iraq and Afghanistan, you'll find your valuation is selective and reductive. You'll have to account for the larger salaries of "our" mercenaries if you want an accurate basis for comparison to those of domestic cops and firefighters.

Thirdly, on danger: I know a Korean War vet who later became a firefighter and will tell you he endured as much if not more risk hauling "his" fellow Illinoisans from burning buildings than when he was using a flamethrower to burn North Koreans to death. I know a Vietnam vet who had a good war in Saigon shuffling papers, drinking and playing guitar. Two good men who would spit if they read your post.

Fourthly, the speed-round question: In order to refer to large numbers of your fellow countrymen as "parasites," what part of you has to wither and drop off?

mp:

The simple fact is that, in American business, productivity gains aren't shared with workers.

That's why we have unions.

It's really that simple.

Kanchou:

El Cliffo wrote:

New Jersey Governor Christie may be fat, but he was left this problem of lavish spending by Democrat Jon Corzine

The Whitman Effect

Published: July 9, 1995

In political terms, Gov. Christine Todd Whitman of New Jersey has had a sensational first year and a half in office. With a recently enacted $16 billion budget, she has cut income taxes as promised in two years instead of three, without shredding local aid or social programs. Small wonder that she is being talked about for the national Republican ticket. But these achievements are accompanied by genuine risks to the long-term financial health of the state. Looked at closely, Mrs. Whitman's fiscal practices reflect less of a Republican revolution in downsized government than the same old game of spending now and paying the price later.

The Governor's first year in office was marked by a reduction in annual payments to the state employee pension fund, which allowed her to implement the first phase of her promised 30 percent cut in the income tax rate. This page was critical of that move as certain to raise the state budget liability for pensions drastically in future years. But Mrs. Whitman persuaded the legislators, if not the bond-rating agencies, that the pension system was "overfunded" and that it was a matter of equity that current taxpayers not have to foot the bill for future retirement costs. She was unfortunately employing a dubious practice to which desperate governors and mayors across the country have been turning in these years of fiscal stringency.

unirealist:

I think we ought to be careful about tarring public unions. They have flourished financially in large part because of the bubbles in gov't revenue caused by the bubbles in tech and housing. Witness Calpers and OR Pers, which projected 8% gains in their investments ad infinitum, and based pensions/benefits for retirees on those insane figures.

Meanwhile, the private sector workers (union and non-union alike) have been hammered in pay and retirement by the downward pressure of globalizing the workforce. Public employees did not have to contend with that pressure because you can't very well outsource such jobs.

Personally, it incenses me to see hedge fund presidents taking home a billion dollars a year. And they don't even add anything worthwhile to society, which at least police and teachers and firefighters do.

It would be a damned shame if the blame for our ongoing collapse fell on public unions. For God's sake, guys, let's not hang each other. There are more appropriate targets, don't you think?

unirealist:

The reality is public unions are public enemy number one.
--mish shedlock

Good Christ. Never mind the Fed, Goldman Sacs, the TBTF banks, the corrupted regulators at the SEC and other agencies, the endless supid wars that so wasted our societal surpluses, the politicians who feathered their own nests, the rise of FIRE to make up 40% of corporate profits, and the most dramatic shift in income inequality since the Great Depression.

Never mind all those other things, they were niggling problems.

It's the public unions that brought western civilization to its knees.

Good Christ, Mish. Screw your head back on, but put the brain back in first.

Or are you employed by the same folks that brought us the polarizing distractions of the red and blue Culture Wars?

1 currency now -yogi :

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Translation: "Maximum $$ to investors, we don't care about anything else". Higher wages means lower profits for investors. Mish: GFY.

Pellice:

Feckless Ness wrote:

So what powers does he gain by declaring a "fiscal emergency?" He can't set aside union contracts, and that's where most of the money goes.

Union contracts have already been set aside, under Corzine. Virtually every public union set aside its contract and signed a "Memorandum of Understanding" eliminating raises last year.

Pellice:

Weather Helm wrote:

I have yet to see any public union voluntarily forfeit benes, pay raises, pension funds or anything whatsoever to alleviate some of the untenable burden they have helped create. Instead, they always demonstrate for one thing, without exception: more money.

Most New Jersey public unions did just that last year, forfeited raises.

Nanoo-Nanoo:

I'm shaking my head this morning. The debate overnight misses some key points. The first is about the benefits earned by public servants. In states that have high costs of living otherwise (besides taxation) their salaries are reflective of that as well as their benefits. Once upon a time, pension plans were self sustaining and walled off from payola and the Wall Street gurus. Public teachers, university professors and workers paid into that system. The last 15 or so years, state owned pension plans found (like ordinary savings of people) they had to diversify to maintain reasonable wages and benefits because of inflation, particularly in health care and inflation projections. Not all of them are overly-generous or pay 100% out. Like most things, you can find examples of poorly managed ones and well managed ones. Today, however, ALL of them are at risk as this great recession has left no one and nothing untouched.

Today school districts and cities are paying the price for the clearly criminal ARS scheme to fund everything. The courts ruled ARS's as illegal but there have been few prosecuted. Just like front runs against their own clients by large broker/dealers, these securities that were considered one of the safest investments were the same and broadly issued by brokers to school districts, states, hospitals, colleges and cities along with Interest rate swaps, etc. Structured finance became the rule for funding everything.

People get irate over taxation and paying for these services, all the while not looking at the core reasons. Tax avoidance by the most wealthy corporations and individuals means everyone else has to make up for what they aren't paying. They have endless means to shield their profits, wealth from the higher percentages the rest of us schmucks pay. They have personnel whose sole purpose is to find the means to avoid paying it, the rest of us don't have duel balance sheets or multiple accounts in the Cayman's and UBS. Warren Buffet even said it comparing what he pays by percentage in taxation on his salary to a secretary working in his organization who paid more in taxation.

There is zero accountability. We've spent trillions supporting the leeches of high finance. Yet argue if the 70-year-old teacher deserves retirement benefits adequate enough that she can pay for her medications. This is really throwing grandma under the bus.

Today, right now, Medicare reimbursement for physicians, hospitals, nursing homes, etc. in on the table to get axed even more. This means a gigantic gift to insurance companies who over the last 10 years have become increasingly abusive with supplemental insurance premiums, denial of benefits and even over-charging of government, they get to have it all while the rest of us will get less. Pharma can charge everyone of us any profit on any drug they want because they can while other nations pay fractionally for the exact same product, exact same manufacturers and guess what, they still make a profit there, its just not a triple digit or more profit.

Wake up, the robbery continues UNABATED. Politicians and media pit us against each other. Its a diversionary tactic. Using the market as the sole means to 'make money work' is insanity. People who are responsible are punished for being responsible, the are hoards of us who can't risk one penny to that extremely gamed casino. Insurance models worked before, pension plans worked before. This all boils down to human rights. Shall we be a nation of stressed out slaves? Shall we continue with the silent taxes and threats of more overt taxation on the poor and middle class while that top 5% lobbies our so called representatives for more sweet deals, loopholes that line the pockets of both?

Vast misallocation of capital; hoarding of profits to protect the most wealthy while socializing the losses on high risk bets is unacceptable. Globalization that ignored forced labor to capture entire market sectors is unacceptable and is clearly against international law and our own laws. We do a great disservice to those who fought and lost their lives to keep us free from shackles, slavery and fascism. Corporate fascism is the reality from misguided people who believed in self-healing and regulating markets. In reality it became the biggest example of robbery and cronyism ever. This isn't progress, it is robbing from the poor to give to the rich.

Yipes, this is long but the problems are complex. It is that complexity that provides the cover for the core problems but follow the money and it goes straight to the top of governments and those TBTF institutions that became the primary dealer of greed and profits at any cost.

middyfeek:

The pension mess in NJ was unquestionably caused by Christie Whitman who was nothing but a silly dilettante to begin with.

One of the core problems in our society is that politics attracts mediocrities.

Nanoo-Nanoo:

I'm flattered Pellice. I rant in the mornings as many here know. I'm growing uneasy as there does not appear to be anyone who will act in the service of public who fund it all. Wall Street effectively cut out Main Street. Economic measurements serviced Wall Street rather than Main Street. The markets are no longer a reflection of Main Street and its relative health, it became separated.

Corruption from the top down is evident, the real-estate market is just one example but was the beginning of the wonderful conundrum we find ourselves in. Moral hazard exists everywhere now as lying, cheating and narcissism is evident everywhere you look as it became the methods to live like rock stars, take more than you give, get a position that has a lop-sided reward system. Playing HS politics in the workplace will be rewarded more than actual production.

Vocations, like physicans, professors, researchers, nurses, engineers etc. are difficult to achieve and come out ahead. Other vocations like police, fireman, EMTs, educators otherwise are necessary if we want to live in a civil society vs anarchy. Those economists and MBAs reward those who add nothing vs those who work very hard to achieve and add to society. It requires extreme discipline, insight and living below ones means to have any financial security at all. Even then,there are those who think those decades of work, paying taxes, contributing to retirement accounts are fodder and somehow that is viewed as a nothing more than welfare payments.

There are functions in society for its relative security, peace and quality of life that do not fit the Harvard Business School Models. Unfortunately, our lives, our production, our future ability to produce, our private information, our illnesses, everything has become a commodity to use and profit from. It is a sick paradigm that requires major reform in every area. There are more 'administrative' staff in hospitals than hands-on care providers because of the patchwork quilt of insurers and their complexities in coverage. Hospitals cannot turn a profit when tens of millions are left uninsured or under-insured yet there are those who think its okay to turn infants away, bleeding people away for the simple reason they lost their coverage when they lost their job. Or their small business cannot afford anything but inadequate basic coverage. Its SICK. College students have to drop out if they are unfortunate and get appendicitis requiring surgery or injured-the bills too great, so they have to find a job instead of continuing that expensive education...its a double whammy, then their college loans are due too. Many never recover for the rest of their lives. Its SICK.

I want to see someone stand in front of the ER, look people in the eye and say NO, your infant doesn't count go away.

There is plenty of blame to go around. All the finger pointing isn't going to solve any of these problems. The point is that we are currently a 'service based' society but just exactly where is the service? Considering the wealth of this nation relatively speaking, the numbers of people who are out of work, why is there no service? The reason is because time is also a commodity, time is money. The reason is businesses do not want to pay workers for full-time employment unless they have to. Even then, there is no security. One IT company which will remain nameless I know will fire full time employees-then rehire them as 'consultants' with no guarantees of hours per work week, no benefits, no contract, nothing.

There is no honor among thieves. We've all been discounted and deemed unnecessary. Our production, labor, intellect and creativity are obviously not valued anymore. The only ones apparently valued are that top 5% of executives who have done such an outstanding job and their wealth of pharaohs. So now what?

nova:

Management seems to be unified on high pay. No squabbling among the bankers. We will rip each other tp shreds if we think the guy down the street has a "better" deal but we still bow to the nobility

StickyDownside:

Most New Jersey public unions did just that last year, forfeited raises.

To whoever posted this, could you clarify whether that means COLAs as well? In the private non-union world, if your gross pay increases, it's a raise. COLA is virtually unheard of as a distinct reason for a pay increase.

Gregory Arenius:

@StickyDownside

According to the SSA website there won't be a SS COLA for 2010 because the index they use (CPI-W?) hasn't gone up at all. Don't know that that means anything for other contracts with a COLA in them but it is interesting none the less.

Greg

some investor guy:

unirealist wrote:

It would be a damned shame if the blame for our ongoing collapse fell on public unions.

In the case of public education, that's where a lot of the blame belongs. Police and fire, not so much.
 
 

Pellice:

StickyDownside wrote:

Most New Jersey public unions did just that last year, forfeited raises.

To whoever posted this, could you clarify whether that means COLAs as well? In the private non-union world, if your gross pay increases, it's a raise. COLA is virtually unheard of as a distinct reason for a pay increase.

The public union with which I am familiar does not have COLAS for employees (and most retired employees have a 403(b), so no COLAS there, either). I suspect that most are similar, but I had better not speak definitively about the ones about which I know less.

dum luk:

Due to the huge political power of the unions they can play a large role in who gets to negotiate with them.

Obviously, you never actually worked in a government job.

Juvenal Delinquent:

I'm thinking the best place to sit this one out would be a 3rd world country where the populace has never known anything other than grinding poverty.

Comrade Kristina:

Private sector unions now only represent 8% of workers and yet I still hear them being blamed for the crash.

My husband is IBEW. As a fourth year apprentice here in Florida his pay scale is 15.56 per hr with insurance if he is working.

Of course work isn't steady enough to keep insurance so he has none. I'm trying to see all these great benefits we are getting that has broken the economy but for the life of me I'm just not seeing it.

crazyv:

Comrade Kristina wrote:

It's the health insurance stupid.

--------------------------------------------------------------------------------

It is politician meddling in health insurance that is the problem.

Explain to me why everybody should access to the latest and best medical technology? Is there any other walk of life where that is true? The things were do have inequality contribute far more to longevity and well being than does the medical establishment- good housing, good schools, clean water and air, low crime , good food..

What is wrong with a health insurance policy that covers only medical procedures that have been around for 10 years? Such a policy will be relatively cheap and it will drive down the cost of established medical procedures.

The problem is that pharma companies, medical device and equipment makers and doctors all have a vested interest in getting insurance to cover their latest product because without insurance there would be no market for the vast majority of products.

traderwalt:

If you or someone on your family was diagnosed with cancer, would you accept or expect treatments that were outmoded 10 years ago?

Oh, I'm sorry, it's other people who should get these outdated treatments... Geeeeeeeesh! 

[Feb 14, 2010] Using sovereign wealth to rebuild America”  by Emma Saunders

February 12, 2010 | Money Supply FT.com

Should the state buy up your pensions and invest them in roads and railways?

The idea is that a US sovereign wealth* fund would dip into public and private pension savings and invest the money in much-needed infrastructure. If it worked, the economy would benefit, infrastructure would benefit, pensions would receive a healthy return and savings would be made for the next generation.

If those infrastructure projects made a loss, however, it would be bad news for anyone with a pension and put further burdens onto the as-yet unborn. However unpopular traders might be, do we trust our retirement income more in the hands of governments?

*It is a bit of a stretch of the term ‘wealth’: SWFs usually catch existing cashflow rather than seeking it out.

fx

what are you smoking? what are those guys floating this idea smokin?

Please name a railroad, bridge, highway, subway, etc. that actually makes money and is not subsidized. please find at least one.

[Feb 14, 2010]  We’ve got a Problem in Governing in this Country

That's the classic sign of the crisis: governing elite cannot govern in an old way and governed masses do not want to be governed in an old way...
Economist's View

Steve:

You have to be really really ignorant of history to believe that a government has ever acted in the interests of the people without massive duress. I guess the replacement of actual history in popular culture with Star Wars & Star Trek & the like explains the popular support for statism over the last few decades which is hopefully ebbing now that this latest god has failed.

[Feb 14, 2010] Fear, loathing, and the federal budget deficit

L. Randall Wray looks at the differences between the federal budget and household budgets in this piece at New Deal 2.0 and comes away wondering what all the deficit fuss is about.

Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household’s budget: “No household can continually spend more than its income, and neither can the federal government”. On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household. Let us enumerate some relevant differences.

1. The US federal government is 221 years old ... There is no “day of reckoning”, no final piper-paying date for the sovereign government.
...
2. With one brief exception, the federal government has been in debt every year since 1776.
...
3. With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression
...
4. The federal government is the issuer of our currency ... I don’t know any household that is able to spend by crediting bank deposits and reserves
...
5. Some claim that if the government continues to run deficits, some day the dollar’s value will fall ... But only a moron would refuse to accept dollars today on the belief that at some unknown date in the hypothetical and distant future their value might be less than today’s value
...
If the speaker claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, ask him or her why we have managed to avoid retiring debt since 1837-is 173 years long enough to establish a “sustainable” pattern?
In the words of Michal Gold of The Big Chill, "I don't know anyone who could get through the day without two or three juicy rationalizations. They're more important than sex".

This is a pretty juicy one...

Surely there is wisdom in that last statement about 173 years of deficits in the U.S. - not too many people really believe we'll pay off the national debt, even if we could - but, surely there is also something quite different about the last ten years than the preceding 163.

[Feb 14, 2010] The $700 Billion U.S. Funding Hole; Desperately Seeking A Very Indiscriminate Treasury Buyer zero hedge

This rather old (Jan 24, 2010) post explains the mechanics of US debt for laymen much better then any university textbook. A must read.
Jan 24, 2010 | zero hedge

A month ago we observed that in 2010, the supply/demand picture for US fixed income would be very problematic, as there was no immediate apparent substitute to fill the void resulting from the departure of the constant bid provided by the Federal Reserve's Quantitative Easing in both the UST and the MBS markets. The conclusion was that there would need to be a dramatic increase in demand for debt securities across the board, with an emphasis of Treasuries and MBS.

Today, we focus on the most critical segment of debt issuance for 2010 - those ever critical US Treasuries, without whose weekly uptake by various investors, the multitrillion budget deficit will become unfundable. Using estimates from Morgan Stanley for 2010 Treasury supply and demand, the conclusion is that there will be a demand shortfall of at least half a trillion, and realistically $700 billion, to satisfy the roughly $1.7 trillion in net ($2.4 trillion gross) coupon issuance in the upcoming year.

The implication is that back end prices will decline sharply due to an ever increasing supply overhang, even as nearly $800 billion in Bills are paid down, thereby further accentuating the steepness of the bond curve....

...Those cynically inclined may wonder why Bernanke's reconfirmation should take place prior to any potential Q.E. 2 announcement. Perhaps this country's Senators would further evaluate their support of the Chairman once they experience the popular anger which will accompany the next leg down in the US currency the minute Mr. Bernanke announces that the Fed will need to continue being the market in treasuries and mortgage backed securities, further eroding the collateral behind the greenback.

...Combining the supply and demand for Treasuries yields the following chart. Fact: in 2010, a best case of demand projections, indicates there will be a $400 billion shortfall for total Treasury supply... and a worst case of a stunning $700 billion funding shortfall. This is "just" a little worse than Greece

...On December 31, 2009, a majority of U.S. debt (marketable Bill, Coupons, TIPS) was held by foreigners, making America a net foreign creditor nation. Compare this with Japan, where 93% of sovereign bonds are held by domestic accounts.

...The biggest problem this data indicates is that foreign demand will not go willingly with the Treasury's demand to extend the average Treasury maturity from 4 to 7 years: foreigners purchased 145% of the Fiscal 2008 net issuance of $255 and a meager 26% of the Fiscal 2009 of $1,271 billion.

And herein lies the rub, as MS points out, the foreign bid is usually a direct function of the amount of global trade and the associated trade gap experienced by the U.S. Historically, the excess trade gap was not an issue, as China, Japan and net exporter partners had to recycle their otherwise useless dollars back in the U.S., and they did so by purchasing U.S. bonds, thereby allowing U.S. consumers to borrow ever cheaper and to purchase yet more Chinese and Japanese trinkets, rinse, repeat.

As Zero Hedge pointed out some time ago, the deputy governor of the PBoC, Zhu Min, said the most logical, yet scariest, thing for the US Treasury.

"The United States cannot force foreign governments to increase their holdings of Treasuries," Zhu said, according to an audio recording of his remarks. "Double the holdings? It is definitely impossible."

"The US current account deficit is falling as residents' savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world," he added. "The world does not have so much money to buy more US Treasuries."

Zero Hedge has previously demonstrated the problem associated with China's trade surplus, which while still positive, saw a significant drop from the prior year. And compounding this is the concern that while China is still accumulating FX reserves, it may now be diversifying its US-denominated holdings. Yet setting diversification concerns aside, the bigger picture indicates that China UST purchases usually are a function of FX reserves: should the US continue on the recent protectionist path, this will implicitly make Chinese demand for Treasuries even scarcer.

Recently the "Household" sector as defined in the Federal Reserve's Flow of Funds, attained some notoriety after, as Zero Hedge disclosed first, Eric Sprott brought up allegations of covert monetization and general ponziness by the Fed via the "Household" sector. We will stay away from semantics, and present what is known: at the end of 2009, "households" held 12% of Treasury debt, or $800 billion: less than a quarter of Foreign holdings of $3.6 trillion. The inappropriately-named household sector consists of individual households, nonprofits, hedge funds, private equty, private foundations, labor unions and others, and Treasury holdings allocated to it, are calculated as a differential between total USTs outstanding and known amounts held by other investors. Basically, it serves as a plug to "everything else."

Regardless of semantics, a critical point must be added to the Sprott analysis, and also to Goldman's optimistic outlook on bonds, which is predicated on increased household purchases. As a reminder, Goldman speculates:

Increased saving by households and businesses creates a potential demand for Treasury securities as well as less competition for lenders' funds; flow of funds data and bank balance sheet reports confirm that the domestic private sector is increasing its allocation to Treasury securities.

Is Goldman overly optimistic on their expectation that U.S. households will finally do what their Japanese equivalents have been doing for decades? The answer is yes. But before we get into this, we need to point out that the recent surge in "Household" buying has not been effected in one bit by actual households and individual investors. Why is this? After all, the household savings rate has increased from 0.8% in April 2008 to 4.8% in December 2009. Yet as a reminder, the two key components of Household Treasury holdings include Savings Bonds, which are what households actually buy when they wish to purchase government debt, and Other Treasuries, which are marketable Treasuries, and which average households have no access to.

It is a notable observation, that while the savings rate has indeed increased, holdings of savings bonds have not only stayed flat, but have declined over the past year: this is perfectly explainable by the combination of an increasing savings mentality coupled with a desire to deleverage: i.e., Rosenberg's new frugal normal. Goldman, which has bet the house on household Treasury purchasing to keep rates low, will be disappointed.

... As can be seen, actual households have not been active purchasers at all in the recent bond buying spree.

...Yet while it will take much more to convince Goldman in its faulty assumptions, what is without doubt, is that the same "reallocation" trade that has taken place in Foreign purchasing, has been paralleled in the Household sector. As the chart below shows, while Treasury holdings have surged over the past year, this has been purely a function of a collapse in Agency/MBS holdings.

...

With just $68 billion left in Households' MBS holdings, the reallocation is over, which means that the household sector will no longer be a major purchaser of Treasuries, and all of this on the backdrop of actual consumers, whose Saving Bonds holdings have dropped from $197 billion to $192 billion over the past two years. On the other hand, should "Households" end up purchasing substantially more than expected, then the Sprott thesis will have to be seriously revisited.

Commercial Banks

A major wildcard for 2010 Treasury demand will come from commercial banks, whose $1+ trillion in excess reserves, courtesy of flawed monetary policy, may be used if not to spur consumer lending, then at least to acquire treasuries.

...Yet even if banks unleash the full power of their excess reserve holdings it will likely not do much for back end supply. The reason is that banks traditionally purchase USTs in the 2-4 year sector, as they get most of their duration via their mortgage holdings, and with rising rates, existing duration has grown. As banks receive much better returns by lending direct, moves along the curve are i) rare and ii) merely placeholder measures until the economy improves, which explains their unwillingness to stray far on the back end of the curve.

The reason why this may be problematic is that there is an incremental $350 billion in new gross issuance in the 5Y - 30Y part of the curve alone, which is precisely the part that is least attractive to the banking sector.

...Another major concern to banks is the prevalent uncertainty about possible future inflation: the Fed's liquidity spigot is as worrying to banks as it is to all but the staunchest deflationists.

Federal Reserve

Up to this point, we have demonstrated that under realistic assumptions, the traditional buyers of Treasuries will be insufficient to plug the demand hole. As the Fed will not sell any of the roughly $770 billion in Treasuries on its balance sheet with a ZIRP policy still in place, the only question is whether Ben Bernanke will step in and roll out QE 2. Of course, the implications to the stock and currency markets will be drastic should the Fed relapse to its old financial heroin-dispersing ways.

Conclusion

While near end supply will likely not be as difficult to satisfy, the back-end will face increasing yield pressure in order to stimulate demand. This means that long yields will begin a slow trickle higher to attract the missing demand that currently is unaccounted for. Should this happen, and should the likes of Morgan Stanley be correct in expecting even further steepening, the implications on mortgages will likely be severe. Which is why we are confident that the Fed, which is all too aware that the economic situation is far worse than what is presented in the mainstream media, will expand quantitative easing not only to more MBS purchases (mostly to facilitate yet more reallocation trades), but to direct Treasury purchases once again. In doing so, the Fed will surely short-circuit the market beyond all repair.

A practical idea on how to approach this binary outcome, would be the implementation of the kind of barbell trade that has made John Paulson a billionaire: should the Fed announce QE 2, the dollar will plunge, and gold will surge. Due to negative convexity between these two asset classes, we anticipate a non-linear acceleration in the price of gold compared to the DXY. Alternatively, should the Fed stay pat and do nothing to prevent the verticalization in the yield curve, the other side of the barbell would be to reward those who would benefit the most from the resultant even greater curve steepness, expressing this with long financial exposure (the more levered, the better). Another levered way to play the increasing curve steepness would be putting on the Julian Robertson-proposed Constant Maturity Swap trade (discussed previously in depth here).

Lastly, should the Fed attempt to stimulate an endogenous flight to safety and boost demand for Coupons artificially, we believe, as we have said before, that the FRBNY will certainly implement a stock market crash. The alternatives, an interest rate hike and QE. We believe that while the probability of QE 2 is increasing with every day, the likelihood of a rate raise is negligible, leaving the market crash theory as the wildcard. We will not handicap this outcome and instead let every reader decide for themselves.

Nonetheless, as this week demonstrated all too well, once the market gains downward momentum, even the much expected daily offer-lifters may be mysteriously elusive. Hedge appropriately.

Selected Comments

hooligan2009:

congrats on a good analysis of the upcoming demand and supply for US treasuries. I suggest that you need to include three other areas:

  1. The demand from a global perspective, that is, G7 + PIGS deficit funding and
  2. The global consumers "draw-down rate", that is, the need by holders for their money back to fund retirement, health and house payments
  3. The flow of global trade, that is, the net trade surplus and deficit supply of all currencies that is available for G7 + PIGS to steal, I mean borrow.

From 1) the Fed and other central banks have funded the "mark to market" effects of excess leveraged capacity by buying around 30% of capacity that is not required and continue to sponsor the misallocation of "scarce" tax payer resources away from benefits to tax payers (government for the people, by the people, etc, so atrocious and smug delegation of proper government to ivory towered civil servants).

From 2) consumers (or investors, as you describe) actually need their money back at an increasing rate. Parallels exist for health and housing, but as baby boomers increasingly retire (and continue a ten year old trend of increasing in Japan) and live for twenty years, they want their 5% per annum in "drawdown" for the twenty years they have before they die. This 5% will increase in 5% increments. This is a "drawdown rate" and is the new cost of debt, that doesn't feature in any economic analysis that I have seen.

3) As global capacity was overleveraged, global trade nominal levels will settle at lower levels to reflect "correct" capacity and demand. The net trade numbers you allude to, should better reflect "petro-dollars" and other resources dollars as well "trade dollars" and a world map of money flow drawn up.

As G7 + PIGS progress towards the failure of the macro economic model they use, other countries who have not failed (yet) like BRIC will spend their cash at home, not in G7 + PIGS economies.

Trade and petro dollar flows are the source of funds, I think that you have addressed China, so well done, but not put it in the context of (somewhat ignorant and traditionally dollar friendly) petro dollars or the other BRIC countries local situations.

Japan has shown that a ponzi scheme of failed Government can persist for decades. Whether this can happen in isolation or whether G7 + PIGS can do it is the question.

There is a tipping point, but so far, the lunatics running our fiat (ponzi) asylums have convinced consumers that consumers are the lunatics.

MrPalladium:

"but as baby boomers increasingly retire (and continue a ten year old trend of increasing in Japan) and live for twenty years, they want their 5% per annum in "drawdown" for the twenty years they have before they die. This 5% will increase in 5% increments. This is a "drawdown rate" and is the new cost of debt, that doesn't feature in any economic analysis that I have seen."

Outflows to U.S., Japanese and European retirees for the next 20 years. This guarantees under-performance of stocks and rising interest rates for the next 20 years, and it seems that even bearish analysts are in complete denial about this stark reality.

And all these retirees will be cutting back on consumption and downsizing their homes to cut back on taxes and utilities.

We will have to live with the massive forces of deflation for a long time, as the CBs of the developed world create a roller coaster for stock and bond prices with episodes of unrestrained money printing alternating with periods of restraint.

Fortunes will be made by those who can see reality and catch the tops and bottoms of the red flag waves on the investment beach.

Seer:

And all these retirees will be cutting back on consumption and downsizing their homes to cut back on taxes and utilities.

Not necessarily. After all, who is going to be able to purchase these homes formerly known as homes-as-nest-eggs? Wages continue to be pummeled.

I would suggest that you're going to see a lot of boarding going on. These "retirees" will be renting out rooms. I suspect that more of this is occurring, given that rent is being driven down: with people losing homes you'd think that rent would be coming up a bit, but that's not the case; this means that the supply of rentals is greater than the demand; prices are too high- resolution? people doubling up in residences (cheaper).

Mark Beck

I would like to give you a heads up on what may happen if Government cannot pay its bills, and the FED debased the dollar as much as they dare, the program most likely to be cut first is Social Security. It is by far the easiest to whittle down politically, much easier than Medicare or Medicaid.

The point is, the Government will have to cut benefits. It is just a matter of which one will be cut first.

kurt_cagle :

Japan has shown that a ponzi scheme of failed Government can persist for decades. Whether this can happen in isolation or whether G7 + PIGS can do it is the question. There is a tipping point, but so far, the lunatics running our fiat (ponzi) asylums have convinced consumers that consumers are the lunatics.

However, Japan's ponzi scheme began in 1990 just when the West was beginning to go through a long term bull market, the Japanese economy was and is an export economy, and saving in Japan has long been considerably higher than in the US. This all served to soften the shock -- turning what could have been a nasty collapse into a long slow decline.

None of those conditions hold true for the US. It's only strength at this point is the fact that the dollar is the reserve currency, and that is unravelling. It's also worth noting that the political will for any back-door funding (QE2, 401K taps, whatever) is also becoming increasingly untenable. I'd be far more likely to price in a stock market crash at this point, and possibly a spike as the dollar shoots up and then just as quickly collapses.

Additionally, the PIGS aren't Japan. Japan's always had a fairly isolationist economy and political orientation. The PIGS are second tier financial players in a far more interconnected economy - and a lot of the strain on their economy is due to poor meshing with Germany. Thus, any collapse that happens there will be rapid, cause widespread discontent and even rioting, and will almost certain end up in the change of the governments, adding even more chaos.

Seer :

Clearly, money is being pushed hard. I've wondered whether it's not really some big recall of the USD? Trying to create any global currency while many continue to hold USD (except the Chinese- the US doesn't care about them, as they've been looking to kill the "communists" for a long time now) would be problematic.

But... if concentrated in less "corporate" hands (after all, contrary to what many think, this is all a big fascist operation) would be the way to accomplish it: govt and business joined at the hip.

TPTB have to protect stability else they lose their positions of power (oh, and how sad That would be!). The move, therefore, HAS to be toward some new economic restructuring: even the Chinese will have to give in, though, they, as happens to everyone who deals with the US, will ultimately get screwed.

john_connor :

Great article TD.

The idea that the Fed can increase short term rates is laughable. If they did, it would be a political stunt, and it would have to be accompanied by an increase in interest paid on excess reserves.

Other than that, I see equities going down, way down, whether it happens sooner or later. the smart money left the building long ago, and even Joe six pack has bailed in a lot of cases. What you will see is a darwinian battle amongst the presidents working group of hedge funds, until there is one or two left standing.

I will say this, after witnessing the velocity of Friday's drop, I can't imagine what it will be like when the downside momentum really picks up. I envision something like October 2008 to the 5th power. It will be downright scary, and there will be no opportunity to get in on the short side.

Assetman

Agreed, in many fronts here.

Zero interest rates at the short end are here to stay, despite more and more Americans realizing this is a quiet form of bank bailout.

QE 2.0 is also highly likely, but this will be a challenge to implement because it's a political timebomb. If BB gets nominated and QE restarts with more MBS buying after March, the Senators who said "yes" will be history. Of course, other incumbents are likely to be in trouble.

As it stands, those who want to see the reflation trade to continue are meeting with lots of resistance. Investors so distrust the stock market, they are willing to stick money into assets with almost no return. Given recent trading patters (on both up and down days) the incrmental buyers of equities are quant driven, not J6P driven. While propping up the stock market gains an illusion of confidence, it appears that most people just don't buy it.

The window needs to be open for the Treasury market, especially at the longer end. The Fed could purchase Treasuries again, distrorting the Fed balance sheet even more, putting more pressure on the USD.

TPTB probably should allow the stock market to pop, and engineer a flight to quality...it's preferable to have investors fund this deficit at long durations than have the Fed print their way to oblivion. Perhaps those in the US are wating for something bigger to happen in Europe or Japan, maybe to hope a global move to Treasuries will happen.

The bottom line will be more looting by the financial elite-- the question will be what form will it take. While those in power will try their best to fool the masses, the looting willb traced. Obama has a heck of a lot more bark than bite, and will continue to get steamrolled by his economic advisers. By 2012, I think Obama will be glad his one and only term is almost over.

So will a majority of eligible voters.

Anonymous :

However should world equity markets crap out and performance in the EU zone zone drops, along with the ever growing financial disasters in the former east block countries which threatens the solvency of many EU banks.......and there could be a big demand for US paper.

I don't know what the shit is going to happen financially to this world, but I do know that it's never quite what we expect.

Anonymous :

Bond funds had great returns in 2009 leading many individuals to invest in them.

If rates go up in 2010 and bond fund returns go down then investors could start pulling money out of bond funds leading to liquidation by the funds and increasing the supply/demand gap.

TheGoodDoctor :

Very interesting article thanks for posting. What I glean from this is that as aggregate demand drops so will GDP thusly continuing to worsen our situation.

Madcow:

Funding for debt is drying up not because of voluntary preferences for asset classes or yields or sovereign exposure ... Funding is drying up because NEW CASH can't be created by the busted fractional reserve fiat debt is money fantasy machine. That's all that matters. Without new cash, all the rents, bonds, debts, etc can't be "serviced" and its game over.

There's no escaping the deflationary vortex. the DJ:Gold ratio will go back to 1:1. probably within the next 12-18 months.

Many people think Gold is over-valued at $1100. I completely agree.

A DJ forced to reckon with true economic value of assets, liabilities, consolidated balance sheets, etc etc - would trade below $900.

Once we're back to pre-1980 levels, the asset market can begin to heal. But first, Obama is going to be forced to go on national television to say something like "sorry folks, but all that money you've been investing in stocks, mutual funds, insurance policies, annuities, REITs, etc - is GONE. you got tricked fair and square, and now its time to move on."

assumptionblindness:

You forgot to mention sovereign bankruptcy, martial law, and global geopolitical chaos. Deflation run wild!

Where's the optimism, Madcow?

Anonymous:

I am in banking, specifically risk management for community banks. I am hearing rumblings that because of this "liquidity scare" and over 1000 banks eventually going away, the Feds are going to use this opportunity to demand banks hold at least 10% of earning assets in Treasury's. There are over 7000 community banks in the US...do the math and you will see that this will more than accommodate the future supply.

Anonymous :

i am not sure i buy that....if there are ~16t usd assets in banking per the article and ~1% are in treasuries today that means 9% conversion of assets to treasuries remains....the banks are woefully undercapitalized if figured on a pre-fasb mark to market basis....

so the only other location of assets / capital is the 1t usd sitting in the fed...(unless the banks sell good performing assets for treasury junk)....

9% of 16t is 1.44t so the banks can't meet the 10% requirement although some will get close....

my concern is that the 1t usd sitting in the fed may already be in treasuries and that it is not truly cash - frn....

regardless of the form of the excess reserves it means that ben cannot possibly implement reverse repos or any other trick to sop up liquidity and impose a treasury holdings requirement

keep a watch on excess reserves as qe continues until march...i bet those reserves rise to the 1.3t level as ben buys more mbs and takes them off the books in an elaborate shell game....

clearly these are acts of desperation....the titanic did not sink immediately and there was the orchestra playing tunes until the bitter end...

this shell game is more proof that ben will be reconfirmed...who else could manage this joke?

Anonymous :

The Treasury Department's estimates that 2010 tax revenues will be $2.2 trillion which would be an increase from 2009 fiscal year revenues of $2.1 trillion.

Realistically, the trend in the first quarter (Oct, Nov, Dec) indicates tax revenues will fall this year. In the best case, to $2 trillion and, in the worst case,to $1.8 trillion.

This easily increases TD's funding gap to $800 billion - $1 trillion.

Also, as for a stock market crash being a solution, I disagree.

A stock market crash will certainly damage the economy again, and tax revenues would likely fall to the worst case $1.7 to $1.8 trillion. As well, I think it's almost a certainty Obama would again "stimulate" the economy with even more government spending.

Expenditures would likely rise to around $4 trillion. Basic arithmetic shows the amount of debt needed to be issued would increase from $1.7 trillion to around $2.3-2.5 trillion which would mean that the supply of treasuries needed would increase to match and possibly exceed any new demand due to flight to safety from the market.

I believe the Fed will be forced to continue to monetize debt at an increasingly greater pace. If you look back at previous episodes of hyperinflation, they are almost always due to the central bank monetizing government debt. They are not due to banks making loans to consumers.

kurt_cagle:

I don't think that most people feel that the stock market crashing is a necessary part of the process, save that in the process of crashing it has a possibility (albeit slim) of inflicting enough damage upon the parasites on the system to shake them off. On the other hand, I think a lot of people (especially on ZH) expect the market to crash at some point as the patently impossible valuations come back to some semblance of reality.

The reality is that at this stage, there's been a significant malinvest into the banks to make investors whole. This has benefited a few very wealthy, powerful people, largely at the cost of (much higher) future taxes on everyone else. There are relatively few people who would argue that government investments into energy R&D, communications technology, education, infrastructure, green-tech and bio are not worthwhile, there are far more who feel that paying back gamblers who made bad bets is a waste of money. The stock market's valuation at this stage has been due almost entirely to fairly transparent manipulation on low volume by a few specialized traders, made largely with "borrowed" US funds.

Finally, I think Obama's options for stimulating the economy are becoming increasingly limited. Politically QE2 is a non-starter, as Bernanke is losing support even among those who previously championed him. Thus the tough rhetoric out of Washington these days - it's becoming more likely that Obama is beginning to realize that the banks have no interest in playing ball, and are becoming more liability than asset.

If BAC, C, WFC, GS, etc. are forced into failing, then a great deal of debt gets wiped out - essentially the equivalent of a default. Investors, those who took the risks, get their haircuts, and quite possibly for a little while all investment in the US would stop ... but it would eventually resume, because investors are looking for yield. The alternative would be to let the dollar go into freefall, which causes all kinds of problems on the international stage, and will only weaken the props under the USD as reserve currency.

ex ante:

the problem with your conclusion is that EVERYONE already has the trade on.  they are all parked in the front end waiting for yields to rise with the curve is at the steepest level in history.  

With all the supply coming in the front, they would likely lead the sell off and flatten the curve. 

At 4.5% the long bond yield is not that far from where it should trade with a very slow growth economy.  

Sure it is very likely there will be a supply induced sell-off but you will likely see a 4% 5YR and a 5% 30YR. 

If the curve flattens and the massive inflation premium is removed the dollar will rally and gold will get obliterated. 

The move we had in Dec was just a taste....

SWRichmond :

at 4.5% the long bond yield is not that far from where it should trade with a very slow growth economy.

What growth? You mean like "The Recession is Over!" growth?

SWRichmond

The regime of falling interest rates is over.  Rates are as low as they can go.  The purpose of QE is to simultate negative interest rates.  Our lenders recognize QE for what it is.

The U.S. government has probably already been forced to promise to demonstrate U.S. commitment by "making the U.S. citizens pay"; our private retirement assets have already been promised to the pot.  It's every man for himself, and the government controls the courts, the media, the exchanges, the banks, the value of the currency, and the rules.

Anonymous :

A very solid analysis marginally undermined by some lack of context (what else is going on that may affect--even positively!--the demand shortfall seen here) and your preference for hyperbole ("plunge", etc.)

Some of the commenters here have provided some context, such as how the problem in the US may be better/worse than the problem elsewhere in the world.

I also agree with one comment here that the Fed won't declare QEII, it will just work behind the scenes to this effect.

Anonymous:

Hello, can't you see the obvious solution? I admire your hard work, mr. Durden, but the heart of the matter is that the US federal government does not need to issue debt in order to spend. Zhu Min's words point at the same. "there simply isn't that much money!" Don't issue it, then! All you need to know is that a) the US is sovereign in it's currency and b) it's got plenty of people & organizations it can tax.

If you're worried about the size of US public debt vs. GDP, check the good ole CIA factbook: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html

FYI, the US ranks 61st. Canada, btw, 21nd. If you consider Canada a wealthy country, it follows that the US, with it's bigger economy, can easily support public debt twice as large. Suppose that the president announced a jobguarantee.

If he doesn't, suppose he succeeds in creating jobs by some other means. More people working means more tax revenue. Wouldn't you value that over any discussion on issuance of public debt or it's size?


Seer

GDP is pure crap! In it you'll find such things as cleaning up toxic dumps; yeah, right, a "product!" I won't even talk about the "contributions" by the financial sector!

Anonymous :

Excellent reading, but...

ZH opposes QE, yet at the same time complains about falling price levels, unemployment, etc. I'm confused, unless one really wants financial armageddon.

The problem is not the introduction of more base currency into the system per se - this is needed. The problem is the failure to accompany QE with heightened capital asset ratios and stricter regulation (including on foreign banks operating in the US) in order to wean the entire US economy off of credit expansion, and limit the hyperinflationary blowback. QE + bank regulation = good. QE + no bank regulation = hyperdependence on short term credit and more moral hazard.

Given the massive debt overhang and high unemployment, a strong dollar now seems like it will steepen the already steep yield curve due to expectation of longer term monetization/default in order to subsidize the shorter term low rates.

I entirely fail to understand how one can defend a strong dollar, btw, and at the same time complain about the US trade deficit. Perpetuation of a strong dollar can only increase the trade deficit, which will be accompanied by huge fiscal deficits... But even worse is perpetuation of a strong dollar that is unsustainable, implying a future devaluation - in that case, we have all the problems of a strong dollar, but the carry trades still yield high commodity prices. Again, worst of all worlds. The better approach is a rapid, single, sharp devaluation combined with fiscal constraint (not going to get either). The only pro-strong-dollar argument out there is that we've spent 30 years ignoring foreign energy dependence.

kurt_cagle

We're in a race to the bottom - everyone wants to make their currency weaker than other currencies in order to stimulate exports, but that strategy clearly won't work, especially when you're an import-oriented country (such as the US clearly is). More to the point, it can be argued that one of the responsibilities that the US has as the holder of the reserve currency is to maintain it's stability, and it's been the abrogation of this responsibility (through poor monetary mismanagement on the part of the government and the corresponding lack of oversight on the financial industry) that has led us to where we are today.

Raise interest rates, and it will cause the TBTF banks to fail, and healthier ones can then come and pick up the slack more efficiently. Raise interest rates, and you attract foreign investment in a world where yield is currently low. Raise interest rates and you purge the system of excess capacity. Yes, unemployment then shoots up to 25% for a year or so (and you spend accordingly to minimize the pain on those who can't afford it), but after a year to eighteen months of that, you've cleared out a lot of deadwood, you see a lot of new investment into more contemporary systems and solutions and you change behavior of people accordingly to become more responsible with their own economic health.

The other thing that would need to happen would be in re-establishing localized energy production, preferrably in the greenest way possible. Most people forget that a significant amount of that trade deficit is due to the purchase of foreign oil. Re-orient for a sustainable economy where the US moves towards a net neutral stance - it's trade balance becomes zero with a small amount of variability. This would mean shifting away from a pure consumer economy (something that's patently unsustainable) and more towards more localized internal markets.

Once the US economic system became more healthy, then it could shift it's stance again, but this is one of those cases where the US has to get better before it can help anyone else.

A strong dollar is only bad when your economy is predicated exclusively on being a net exporter, and the US hasn't been a net exporter for years. However, policy is still being developed as if it were. The disconnect between policy and reality is now making the system unsustainable, which means that unless it is managed, the snap-back will be chaotic and catastrophic.

What_Me_Worry

Absolutely amazing write-up.

Imagine if someone from the MSM tried to articulate this to their viewers. They might as well just be talking to a tree. Good thing the good men and women running those network are caring enough to shelter everyone from the bomb about to be dropped on them. They, also, are doing "god's work".

Ignorance is surely bliss.

My only counter-point. If the fed monetizes yet again, couldn't that spark another temporary rally in the market due to the same tired argument of "all the liquidity sloshing around"? I'm not saying it wouldn't end in tears. However, the market seems to be a function of liquidity instead of valuation. Everyone is willing to pretend now, why would it be any different for the rest of 2010?

I'm in the wild-card camp. I think they make up some bogus excuse that they must raise rates to tackle impending inflation risks (if the market manages to hold up into the current drop). All along, their reasoning is just to scare people back into treasuries. Even a simple quarter point could do that.

Anonymous :

$3 trillion of money market funds earning 0.02%. That's the funding source. No QE necessary. Just pay 1.5% on 3 month t-bills and you'll draw $1 trillion easily.

Anonymous

Tyler, I have a feeling you and Sprott are dead wrong on the household sector. You said the following:

"Yet as a reminder, the two key components of Household Treasury holdings include Savings Bonds, which are what households actually buy when they wish to purchase government debt, and Other Treasuries, which are marketable Treasuries, and which average households have no access to."

Do you seriously believe that households do not have access to marketable Treasuries? Have you heard of something called a brokerage account? Last year alone I went from $0 in Treasury holdings to putting 50% of my assets in Treasuries. I purchased all of them on the secondary market. I do not need a lecture about being stupid for buying Treasuries. I'm also buying massive amounts of gold and silver. In my mind, the only things worth owning are Treasuries, gold, and silver. I will say this: the 11/2018 3.75% note I own is already trading 20 basis points under the 10-year rate. As the Fed is forced to keep rates btw. 0%-1% for years, I will continue to watch the 8 year 10 month note I own turn into a 7 year, 5 year, etc. and watching the yield continue to fall over time, regardless of what the 10 year does. Time is on my side.

I will not sell it prior to maturity, so I do not care how low in price the note could go if for some reason the Fed grows a pair and does hike rates.

And, in the meantime, if Treasuries rates want to march higher, I'll make a boatload on the gold and silver I own, while collecting a 3.75% yield (state tax exempt, so yield is effectively higher).

Gordon_Gekko

I do not need a lecture about being stupid for buying Treasuries.

I think you do, because you are. Well, did you ever consider the possibility of the currency in which the bond is denominated (i.e. the dollar) crashing? Would you be satisfied with a 4% return when food prices are rocketing 10-20% a MONTH? The currency is only as useful as what it buys you - period.

laughing_swordfish:

Well said GG. Why is this fool putting only 1/2 his money in Au or Ag? The ANSWER IS: GOLD (and possibly silver)...BITCHES!!!

Master Bates

You're right. He should put ALL of his money in an asset that will soon be in a downtrend, and most likely already is.

.end sarcasm.

Anonymous

I have most of my money in 10 year treasuries. Yield can't go up above 4%. Tie ins to mortgage rates would necessitate Fed purchases of the 10 year should this happen, so potential downside is small.

Upside is large if we have a stock market crash. If status quo prevails, I'll just enjoy my coupons. I also have 20$ of my money in physical gold, just in case!!

Pike Bishop :

As a Main Street Civilian to the intricacies of Markets, thank you for the assessment and explanation.

Although I'm sure there are probably implications for nuances which I lack understanding, the message is clear.

Through artifice and intention, we have jiggered the bond markets into a nexus of accumulated risk.

The dynamics being some combination of a perpetual motion machine and a Ponzi scheme. One only exists in delusion, and the other falls upon itself by it very weight. And these risks can have stunning impact on the economy, here on the ground.

I would like to add to the discussion that history according to Simon Johnson (and (consistent with machinations to date) would indicate that any shortfall in demand for Treasuries would require the rounding up of the usual suspects. Every oligarchic regime or corporatocracy continues to flog the peasantry, until the national economic seed corn has been devoured, along with the feed corn.

An obvious strategy being to return the bounty from this annoying (to them) habit of saving, to subsidize the fumbling illusion of a recovering economy.

One way or another, they will cattle-herd it back into their sovereign debt game. If it is going to be capital which no longer supports headliner GDP spending, then it will be commandeered for (their) next best utilization. Whether they push it or pull it, is immaterial. The game must continue, until the economy catches up to support its weight.

The fundamental fuck-up being,-- the longer you play the game, the more you diminish the economy's ability to come to the rescue. Plus when it gets there, it is so tattered and ugly, one must wonder for what the effort was.

"Hutchins, it's getting cold in here. Throw some more peasants on the fire."

Seer:

Excellent! Yes, often nuances are nuisances, distractions.

The "economy" won't be able to pick up because it is predicated on unsustainable consumption. It's going to start getting really cold!

Gloomy:

I have most of my money in 10 year treasuries. Rate is capped at about 4%. If it goes higher Fed will buy them to keep mortgage rates down. If market crashes I will make a nice bundle. If not, I'll just enjoy my interest checks. I also keep 20% of my stash in physical gold, just in case!

Gordon_Gekko

It's funny how happy you are having invested your money in "Guaranteed Certificates of Confiscation". The money sucking government machine's price managers have convinced everybody that it is great to buy something that THE FED IS ALREADY "BUYING" WITH "MONEY" CREATED OUT OF THIN AIR, and even better if you buy it during a crash. So let me get this straight - the stock market crashes because the US economy has cratered but then you go buy it's bankrupt government's debt as a "safe-haven"? ROTFLMFAO! Jesus man! Learn to think for yourself instead of blindly following whatever some idiot "economists" (even some bloggers) happen to spout. Really, there are very few humans left with a functioning brain these days. BTW, ever heard of something called purchasing power?. You are assuming the dollar's purchasing power will remain constant throughout your life, when in fact, it is decreasing exponentially.

Gloomy:

Well, having doubled my money during the market crash, I think its a bit unfair to criticize me so harshly. You know nothing about my investment skills.

You are way too linear in your thinking. The Fed will monetize successfully for a long time. Sure, the day of reckoning will come. I think it will be more than 10 years though.

First, Japan, China, and the Eurozone will implode. We'll get ours eventually. And by the time that happens I'll be long out of treasuries. If, a black swan hastens the day, gold will go up enough to more than make up for my losses.

Anonymous

I look at our money supply as real money and magic money.

  • Real money as an example is what was paid into social security and removed and replaced with IOU`s.
  • Magic money is the money stacked to the heavens in the Feds back room. That's the money they use to buy part of the debt and in return get interest from our Government on money they never had to begin with. I`m going with a push to grab the only real money left, money in our 401k`s and IRA`s.

A push for forced participation to loot the last bit of real money around. Then not another peep until the morning we wake up to total default of our money and the rumble of United Nations tanks rolling into town to quell the unrest. A small few live happy ever after.

ozziindaus:

Here's a quick solution that can be implemented by 2011. Call it the New 5 step 5 year plan.


1.Nationalize all the TBTF's and any other institution accepting TARP even though it's been paid back.
2.Liquidate all the assets to fund the nations debt requirements for the next 5 years.
3.Cap all future debt programs as of this minute. Health care, SS, QEII......
4.Invest the excess in innovation, technology and manufacturing.
5.Set the US back on the path of global competitiveness rather than scandalous ponziness.
 

Anonymous

sounds pretty logical and perhaps it might work. but in this case, they are not interested in solutions to this crisis, because this crisis was brought on us, in purpose as part of a specific plan, the intentional degradation and destruction of the united states and its middle class, because we are impediment to world government. so they must bring us down third world status. make sure you know this. they are not interested in fixing anything. they are not interested in our national interest. they are not the least bit interested in this country, or liberty or freedom. they could care less. what they do want is world government and they will stop at nothing to accomplish this, in their lifetimes. they have worked for this goal for a very long time, and it would appear they are pushing hard in this generation to see it come through. these scumbags must be stopped by any means necessary.

Hysteria :

Exactly. Everything makes sense when you understand the plan.

Poverty of the masses is the tool used to keep the oligarchy in power. As Orwell, privy to the Fabian Socialist elite methods, explains in 1984:

“From the moment when the machine [capitalism] first made its appearance it was clear to all thinking people that the need for human drudgery, and therefore to a great extent for human inequality, had disappeared. If the machine were used deliberately for that end, hunger, overwork, dirt, illiteracy, and disease could be eliminated within a few generations. But it was also clear that an all-around increase in wealth threatened the destruction... of a hierarchical society. In a world in which everyone worked short hours, had enough to eat, lived in a house with a bathroom and a refrigerator, and possessed a motorcar or even an air-plane, the most obvious and perhaps the most important form of inequality would already have disappeared. If it once became general, wealth would confer no distinction. Such a society could not long remain stable. For if leisure and security were enjoyed by all alike, the great mass of human beings who are normally stupefied by poverty would become literate and would learn to think for themselves; and when once they had done this, they would sooner or later realize that the privileged minority had no function, and they would sweep it away. In the long run, a hierarchical society was only possible on a basis of poverty and ignorance...

It is deliberate policy to keep even the favoured groups somewhere near the brink of hardship because a general state of scarcity increases the importance of small privileges and thus magnifies the distinction between one group and another.“

kurt_cagle :

Innovation is, by its very nature, deflationary. Double the speed of a processor and you've effectively replaced two computers with one. Provide a new medical breakthrough and fewer people get sick, reducing the amount of money to be spent on health care. Make energy systems more efficient and you spend less on raw resources in order to achieve the same gain. Make it possible for a ten year old to publish on the web and eventually the money to be gained by being a gateway to the news drops dramatically as you become just another voice.

Innovation by itself may improve the quality of life, but only if the fruits of that innovation are distributed equally. In most cases they aren't, but rather benefit investors at the expense of wage earners (as a side note, once you start awarding a disproportionate number of stock options to a manager, they have become an investor - it is not in their best interest to see the profit margin of the company reduced by taking on more employees).

Twenty years ago, producing a quality sales presentation would take a team of between ten and twenty people a week of work. Today it takes a single person perhaps a couple of hours to do the same thing. The sum of those innovations means that there's been a 500 fold increase in productivity. Put another way, there's 500 times less money that would have been injected into the economy, with the corresponding profits going not towards increasing workers' salaries but providing outsized returns on investment.

Some of this is made up by being able to do other things faster, but there is also a limit at which point demand no longer matches supply. If you have the ability to produce 100 widgets an hour pre-technology and increase that to 1000 widgets an hour post-technology, there is no guarantee that there is a demand for more than perhaps a few hundred more, at which point you end up reducing prices (deflation occurs).

The US economy was not always a growth economy. This only really occurred after World War II, when you had a rapidly rising population all entering child-rearing age at the same time, and people were purchasing new homes, new cars, furniture, taxing themselves to build schools (and later universities). That there was money to do so helped of course - the US was the primary player in the world's financial system at that point, and the holder of the reserve currency, as well as being the primary net exporter of oil.

Today population growth has slowed dramatically (and would be below the replacement rate of 2.1 if it wasn't for immigration), a significant amount of those same people buying in the 1950s and 60s are now retiring and moving into fixed income investments, house purchases are deflating naturally as people move away from MacMansions into smaller, more affordable homes, and, of course, we are now the world's largest oil importer.

Most people have enough to satisfy their basic needs of non-food goods (I have four working computers in my house, three printers, scanners, and other assorted electronic good detritus, four DVD players, three TV sets (most of which are no longer watched except when we view things as a family rather than watch over the computer) and so forth. While some of those do eventually wear out of become too slow to work with new software, the demand really isn't there to wholesale replace most of this. I suspect this is true for many other people as well.

Thus, more manufacturing isn't going to solve anything, because demand is simply no longer there. Becoming more competitive isn't going to make much difference either, because most other countries are in the same boat. Food is still necessary, of course, as is oil (though not as much of it), but beyond these two factors, there's actually comparatively little demand for manufactured goods beyond those necessary to maintain replacement levels. That's what few people, even those who make policy, understand. You can stimulate artificial demand only so far before you oversaturate even that market.

So, no, becoming more competitive is not the answer. Rethinking our approach to the economy is.

ozziindaus

Technology, through innovation, in some cases, creates demand where it didn't exist. This is not just replacement of redundant technology. Think about all the new products and services that have emerged over the past few years that no one had ever imagined before. Ideas lie on a exponential curve. So although I agree that technological improvements are deflationary, technological breakthroughs demand a premium. i.e. Apple iPhone and PayPal are some examples proving that although similar products and services existed, the market was still able to raise the premium for their use.

Seer :

the market was still able to raise the premium for their use

But much of this was the boom or tail of the boom period.

And, as I've been repeating, there's the effect of "economies of scale" working in reverse. Most of the latest sales in non-essentials have been fire sales, which border on dumping.

Increasing unemployment further places stress on disposable income. On the whole, the market for innovated products is shrinking: commodities, on the other hand, will always have a market.

Lastly, about "innovation," I think that we make it into more than it really is. Much of the trick is to hide the externalized costs and get something out there into as many hands as possible such that by the time everyone is hooked on something that the externalized costs get socialized (think of all the financial instruments; think of manufacturing processes involving nasty chemicals, general waste (http://www.storyofstuff.com/). And then there's the cost of having created a lot of people dependent upon technological stuff that they won't be able to operate without it.

Seer

Very lucid comments! I agree 100%.

The innovation thing is meaningless without the ability to acquire those new innovations. And right now, and as things continue to turn down, people don't have the money to buy new things. And, anymore the cost of bringing new innovations to market is extremely high, innovations that compel people to go further into debt, is increasing (or more specifically, the affordability is decreasing- less affordable).

Market oversaturation is something that people really have to take into consideration. The "emerging markets" gave a temporary boost, but they cannot carry the day. The biggest market, the US market, is decimated.

Anonymous:

Gordon, let me explain this in very simple terms so you get it: It is impossible, I repeat, impossible for anyone to predict how this economic crisis will play out for the dollar over the next 10 years. I own Treasuries expiring in 2018 and 2019 as well as massive amounts of gold and silver. If we get deflation, I get a return of and on my money when others who shun Treasuries will not. If we get the inflation that I think will not happen until the interest on our debt exceeds gov't revenues (2020s) than at least I have my gold and silver (lots of it). I'm not trying to be a hero. I'm playing it both ways.

Gordon, what are you doing with your money? You paying out interest on a daily basis to someone on the other side of your short Treasuries trade, while you wait the impending dollar collapse that people have been calling for since the late 1970s?

I actually think you are incredibly dumb for thinking that someone who owns Treasuries and gold/silver is making a mistake in this environment.

 hooligan2009

as with madoff, the government financing principle is based on always being able to grow debt to repay past debt, with no limit, because there is always some muppet who either prints debt (money) faster than you.

There is some kind of mantra that says there has to be increasing capacity funded by leverage (borrowing). This is flawed. If companies make money with a good product, why must they borrow at all? Why not expand based on the expansion in profits, not leverage. Ok, this may be simplistic, but imposing a limit on the degree of leverage of close to zero for a company or a government seems not only reasonable but rational.

This leads to another tipping point. Look at Japan. Is there any prospect of Japan ever returning to growth of, say, real of 3% with 2% inflation? Absolutely not! And its easy to see why, this would imply an interest rate of around 5% or two years.Not 0.5%. At 5%, the slow death inflcited on Japan by the tired and past it communists who call themselves politicians, would now mean that an additional 10% of GDP PER ANNUM would get spent on interest and this in itself has a contractionary effect on GDP.

Refer back to my "drawdown rate" post earlier, where the people who have used US treasuries as a strore of value, actually want it back at around 5% per annum before they retire. The impact of this drawdown on governments removes any discretion they have to govern, by removing the surplus of taxes over outlays (structural and growing deficits).

The current model, implemented by Ben et al, has failed. We either get our heads together and come up with a new one, or we condemn ourselves to a long slide into poverty. I am not sure that there are any resources we have that anyone else wants, aside from our brains and experience. Let's put them to better use and stop this win/lose mentality. The first step might be to forgive all debt, start again and say a big "FU" to everyone else

Todd Harrison Expect More Volatility as Market Faces Reality Check by Peter Gorenstein

Feb 11, 2010 | Tech Ticker, Yahoo! Finance

Coming into the year Todd Harrison CEO of Minyanville.com predicted 2010 would be the mirror image of 2009; forecasting good things for the stock market in the first half of the year to be followed by a sell-off in the latter half.

Yet, just shy of six weeks into trading this year, the market is showing few signs of strength and increased volatility.

Has this caused him to change his view?

Not exactly.

Harrison believes the market is indeed facing "a reality check," maybe sooner than he thought, in the form of potential regulatory reform and the growing sovereign debt crisis, currently epitomized by Greece, as discussed here

Though the European Union's begrudging willingness to rescue Greece may have stemmed the crisis for now, Harrison says this debt crisis has a sinister aspect that may indeed set the stage for a second-half correction. "When we saw our financial crisis... the sovereign lifeguards came in and saved corporate America," he says. "Now that the lifeguards are in trouble who's going to be left to save them?"

With no good answer to that fundamental question, Harrison is betting the Volatility Index or VIX has "a lot of room to run." Currently, around 25, the VIX is up nearly 40% from its recent lows but still well below levels seen during the 1997 Asian contagion, the 1998 Long-Term Capital Management collapse and, of course, the credit crisis of 2008 and 2009.

Yahoo! Finance User

This is like Tulip mania, South sea bubble. This one is Financial Mania. People who live through it do not notice it because it is so big. It is like walking on Earth and not noticing it is round, because it is so big. The stock market crash will be visible in 400 year market charts, just like other major crashes. http://www.tradingstocks.net/html/2010_stock_market_forecast.html

Inlightus.com

There are no lifeguards for irresponsible governments. This year will definitely experience another dip. W shaped recovery. Reality check yet to come.
 

Is Larry Summers Getting Tougher-

Financial regulation is currently in no-man’s land, having emerged more or less intact from the House frying pan before facing the gauntlet of the Senate.

To its credit, the Obama administration has in recent weeks taken a firmer position: The excesses of the past decade have to come to an end. This was evident three weeks ago in the new proposals announced by the president to constrain the activities of large banks, which went beyond anything the Treasury Department had proposed last summer.

It was also evident in an interview that Lawrence H. Summers, the president’s chief economic counselor, gave to CNBC on Tuesday. (Ryan Grim has transcribed additional quotations.)

Asked whether the United States has “transitioned into a financial services economy,” Mr. Summers responded:

“The president’s been emphatic on what have been the excesses of the financial sector — irresponsibility, innovation that served no real purpose except the exploitation of customers — and that’s why the president’s pushed so hard for strengthened financial regulation. Look, a healthy financial system is crucial to a healthy economy, but we don’t need the kind of hypertrophy that we’ve seen in the financial system in recent years. . . .”

“We’re certainly emphasizing regulating the bankers now, not supporting the kind of irresponsible growth that we saw historically.”

This seems to represent another modest shift away from the administration’s position over the last year. The administration has repeatedly emphasized the need for better regulation — who could argue with that? — but was not closely linked to the idea that the financial sector is simply too big. The idea that some, if not most, financial innovation has served only to exploit customers is also a recent addition to the administration’s verbal arsenal.  (More background on this view is here.)

The fact that Mr. Summers is doing the talking may also be significant.

Although Mr. Summers, as director of the National Economic Council, is widely believed to be the administration’s chief economic policy maker, when it comes to financial regulation the front man has primarily been Treasury Secretary Timothy F. Geithner, who has been widely perceived as being overly friendly to the banking industry. By remaining out of the limelight, Mr. Summers has preserved the ability to take a tougher line on Wall Street.

That line may be emerging now, just in time for the bruising battle ahead in the Senate.

Of course, it may amount to nothing more than a new marketing campaign designed for political consumption, intended to show that the Democrats are being tough on rich Wall Street bankers. In particular, it seems that the new size limits on banks will be designed to limit growth from this point forward— implying that our current $2 trillion banks are just fine the way they are.

Still, however, the idea that the financial sector is simply too big is a clear and welcome line in the sand.

Over the past two decades, high returns in the financial sector — for shareholders but even more so for employees — have fueled the “hypertrophy” that Mr. Summers referred to.

Not only did money flow into real estate and leveraged buyouts that would have been better invested in real productive capacity, but many smart, ambitious, hard-working people took jobs on Wall Street instead of starting new companies or inventing new products. Since 2007, we have learned that those high returns were illusory: Profits gained when assets rose in value, but were matched by catastrophic losses when the bubble finally popped.

The real question, then, is what reforms the administration will fight for that will actually shrink the size of the financial sector, since there is no evidence that the sector will simply shrink by itself.

While the sector has undergone significant deleveraging, there is no reason for it not to simply leverage up again when the opportunity presents itself. So far the administration has resisted the idea of forcing large banks to become smaller; however, if it succeeds in reducing the size of the sector without breaking up the big banks, the big banks will only have even greater market share and market power.

But now that Mr. Summers has clearly pointed out the problem, we can assess in coming weeks — as the legislative debate on financial reform intensifies in the Senate — whether the administration has a workable strategy for fixing finance.

By Simon Johnson

scathew

It matters not if they can “talk the talk” but rather if they can “walk the walk”.

BTW:

“but many smart, ambitious, hard-working people took jobs on Wall Street”

You forgot “and ethically challenged”.

In any case, a group of people who had the choice between a job that made a difference and/or at least truly interested them and one that made a lot money, are the kind of people I don’t give a damn what their other qualities are. Clearly they are willing to sell their soul (not that I should probably talk at this point).

Yes, I know, there are plenty who do love what they do – more power to them. It’s the ones who steered themselves there over the fact that it would bring in the $$$ that I have little tolerance for. But that goes for doctors, lawyers, or any other profession that people take simply to earn more. They exist in my business as well (computers) and god I hate working with them…

some guy in a cube

“…many smart, ambitious, hard-working people took jobs on Wall Street instead of starting new companies or inventing new products.”

I’ve read this line so many times in so many places, it now has been demoted to cliche.

Duh. If the end of result of “smart, ambitious, hard-working people” is the financial holocaust we’ve just gone through, then you can keep them. Put them on your trophy case, and dust them off every once in awhile, if that gets you through the day.

I’ll take stupid, lazy and slacker, please.
 

Is Summers Ready to Get Tough on Big Banks - Economix Blog - NYTimes.com

Simon Johnson, a fellow at the Peterson Institute for International Economics, and James Kwak are the authors of the forthcoming book “13 Bankers.”

Lawrence H. Summers, an economic adviser to President Obama.Financial regulation is currently in no-man’s land, having emerged more or less intact from the House frying pan before facing the gantlet of the Senate fire.

To its credit, the Obama administration has in recent weeks taken a firmer position: The excesses of the past decade have to come to an end. This was evident three weeks ago in the new proposals announced by the president to constrain the activities of large banks, which went beyond anything the Treasury Department had proposed last summer.

It was also evident in an interview that Lawrence H. Summers, the president’s chief economic counselor, gave to CNBC on Tuesday. (Ryan Grim has transcribed additional quotations.)

Asked whether the United States has “transitioned into a financial services economy,” Mr. Summers responded:

The president’s been emphatic on what have been the excesses of the financial sector — irresponsibility, innovation that served no real purpose except the exploitation of customers — and that’s why the president’s pushed so hard for strengthened financial regulation. Look, a healthy financial system is crucial to a healthy economy, but we don’t need the kind of hypertrophy that we’ve seen in the financial system in recent years. . . .

We’re certainly emphasizing regulating the bankers now, not supporting the kind of irresponsible growth that we saw historically.

This seems to represent another modest shift away from the administration’s position over the last year. The administration has repeatedly emphasized the need for better regulation — who could argue with that? — but was not closely linked to the idea that the financial sector is simply too big. The idea that some, if not most, financial innovation has served only to exploit customers is also a recent addition to the administration’s verbal arsenal. (More background on this view is here.)

The fact that Mr. Summers is doing the talking may also be significant.

Although Mr. Summers, as director of the National Economic Council, is widely believed to be the administration’s chief economic policy maker, when it comes to financial regulation the front man has primarily been Treasury Secretary Timothy F. Geithner, who has been widely perceived as being overly friendly to the banking industry. By remaining out of the limelight, Mr. Summers has preserved the ability to take a tougher line on Wall Street.

That line may be emerging now, just in time for the bruising battle ahead in the Senate.

Of course, it may amount to nothing more than a new marketing campaign designed for political consumption, intended to show that the Democrats are being tough on rich Wall Street bankers. In particular, it seems that the new size limits on banks will be designed to limit growth from this point forward — implying that our current $2 trillion banks are just fine the way they are.

Still, however, the idea that the financial sector is simply too big is a clear and welcome line in the sand.

Over the past two decades, high returns in the financial sector — for shareholders but even more so for employees — have fueled the “hypertrophy” that Mr. Summers referred to.

Not only did money flow into real estate and leveraged buyouts that would have been better invested in real productive capacity, but many smart, ambitious, hard-working people took jobs on Wall Street instead of starting new companies or inventing new products. Since 2007, we have learned that those high returns were illusory: Profits gained when assets rose in value, but were matched by catastrophic losses when the bubble finally popped.

The real question, then, is what reforms the administration will fight for that will actually shrink the size of the financial sector, since there is no evidence that the sector will simply shrink by itself.

While the sector has undergone significant deleveraging, there is no reason for it not to simply leverage up again when the opportunity presents itself. So far the administration has resisted the idea of forcing large banks to become smaller; however, if it succeeds in reducing the size of the sector without breaking up the big banks, the big banks will only have even greater market share and market power.

But now that Mr. Summers has clearly pointed out the problem, we can assess in coming weeks — as the legislative debate on financial reform intensifies in the Senate — whether the administration has a workable strategy for fixing finance.
 

 

There are no lifeguards for irresponsible governments. This year will definitely experience another dip. W shaped recovery. Reality check yet to come.

Showing just how far his previous economic ideology has fallen from grace, White House senior economics adviser Larry Summers went on to CNBC Tuesday morning and sounded off against a "bloated financial system" while offering a ringing endorsement for the president's effort to regulate Wall Street.

Once a cheerleader for Wall Street immoderacy, Summers decried a "system that is based on massive borrowing, intermediated through a bloated financial system, in order to support excessive consumption."

Presented with Wall Street's longtime goals of slashing Medicare and Social Security, Summers refused to swoop down for the deficit hawk bait thrown out by CNBC co-anchor Erin Burnett:

"In the longer term, are you willing to stand up and say, 'Hey, America, your pensions are going to be smaller, your Medicare benefits are going to be lower, your Social Security retirement age is going to go way up and your benefits are going to go lower even if you paid in?'" Burnett asked. "Are we at the point where the government has to say, 'These are painful facts, and we might lose re-election by telling you, but we're going to telling you the truth?'"

"Erin," replied Summers, "listening to you, it sounds like it's an exercise in sadism, who can cause the most pain."

Summers, in sparring with the CNBC hosts, repeatedly called for tough regulation. "The president has been emphatic on what have been the excesses of the financial sector: irresponsibility, innovation that served no real purpose, except the exploitation of customers. And that is why the president has pushed so hard for strength in financial regulation," said Summers.

As Treasury Secretary under Clinton, Summers advocated for the passage of the Gramm-Leach-Bliley Act, which in 1999 repealed key portions of the Glass-Steagall Act and helped create the bloated system propped up by massive borrowing that he decries today.

When the question of regulating derivatives contracts came up in the late '90s, Summers asserted that his faith in the sophistication of the market participants made such rules unnecessary. Summers has since learned that it was that very sophistication that created the problems, rather than prevented them, as banks and traders used their asymmetrical access to market knowledge and information to game the system - what Summers now calls "innovation that served no real purpose, except the exploitation of customers."

His arguments at the time show just how far the ground has shifted. "The parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies," Summers told Congress in the late '90s. "To date there has been no clear evidence of a need for additional regulation of the institutional OTC derivatives market, and we would submit that proponents of such regulation must bear the burden of demonstrating that need."

Summers was wrong. It would be Wall Street itself, rather than proponents of reform, that would end up demonstrating that need. Whether Congress acts on that demonstration remains to be seen.

Simon Johnson: Obama Still Doesn't Get It

It is rather one of the most complete instances ever of savvy businessmen capturing a state and the minds of the people who run it. Is this really what the president seeks to endorse?

Goldman’s Trojan currency swap

February 9, 2010 | FT Alphaville

Nick Drew

Use of swaps with 'tilted' prices was of course an Enron staple: both in terms of the finance it sold to other energy co's, and the finance it received itself from investment banks

Nick Drew

3210

Amazing story and even more amazing it really hasn´t hit the mainstream press yet (it´s not on the current Spiegel homepage). Could become another nail in the coffin for GS.

coffin dodger:

Is there any part of this awful mess that Goldman isn't involved in? 

Industrial policy is not just green technology or an electric car...  by Rdan

Feb 10, 2010 Angry Bear

The New Yorker gives us a small look into policy in china other than the currency peg:

The Problem Statement

U.S. manufacturing’s competitive status is increasingly challenged by other economies. Established industrialized nations such as Japan, Germany, Korea and Taiwan are developing state-of-the-art technologies, which range across all areas of manufacturing from electronics to discrete parts. Products based on technologies that originated in the U.S. economy, such as semiconductors and robotics, are increasingly both developed and produced elsewhere.

Emerging economies, such as China, are acquiring manufacturing capability through modest R&D intensities, tax and other incentives for foreign direct investment, and intellectual property theft. This second group then competes through low-cost labor and the use of exchange rate manipulation along with tariff and non-tariff barriers.

However, emerging technology-based economies have the long-term goal of attaining world-class status as innovators, which means they are not content to operate at the low-technology, labor-intensive portion of manufacturing. China already is producing 30,000 patents annually and its patent application rate trails only the United States and Japan.1 Finally, event the huge U.S. lead in biopharmaceuticals is now under attack, as an increasing number of economies invest in supporting science and technology infrastructures and provide financial incentives for foreign direct investment in this rapidly expanding technology.

The combined long-term impact on the U.S. economy of investments by both established and newly industrialized economies has been the offshoring of substantial portions of U.S. manufacturing supply chains—first the labor-intensive industries but now the high-tech ones, as well.


...

 

In the years that followed, the government pumped billions of dollars into labs and universities and enterprises, on projects ranging from cloning to underwater robots. Then, in 2001, Chinese officials abruptly expanded one program in particular: energy technology. The reasons were clear. Once the largest oil exporter in East Asia, China was now adding more than two thousand cars a day and importing millions of barrels; its energy security hinged on a flotilla of tankers stretched across distant seas. Meanwhile, China was getting nearly eighty per cent of its electricity from coal, which was rendering the air in much of the country unbreathable and hastening climate changes that could undermine China’s future stability. Rising sea levels were on pace to create more refugees in China than in any other country, even Bangladesh.

In 2006, Chinese leaders redoubled their commitment to new energy technology; they boosted funding for research and set targets for installing wind turbines, solar panels, hydroelectric dams, and other renewable sources of energy that were higher than goals in the United States. China doubled its wind-power capacity that year, then doubled it again the next year, and the year after. The country had virtually no solar industry in 2003; five years later, it was manufacturing more solar cells than any other country, winning customers from foreign companies that had invented the technology in the first place. As President Hu Jintao, a political heir of Deng Xiaoping, put it in October of this year, China must “seize preëmptive opportunities in the new round of the global energy revolution.”

 

A China born again green can be hard to imagine, especially for people who live here. After four years in Beijing, I’ve learned how to gauge the pollution before I open the curtains; by dawn on the smoggiest days, the lungs ache.

...

 

David Sandalow, the U.S. Assistant Secretary of Energy for Policy and International Affairs, has been to China five times in five months. He told me, “China’s investment in clean energy is extraordinary.” For America, he added, the implication is clear: “Unless the U.S. makes investments, we are not competitive in the clean-tech sector in the years and decades to come.”

...

 

China is already buying and installing the world’s most efficient transmission lines—“an area where China has actually moved ahead of the U.S.,” according to Deborah Seligsohn, a senior fellow at the World Resources Institute. In the next decade, China plans to install wind-power equipment capable of generating nearly five times the power of the Three Gorges Dam, the world’s largest producer.

...

 

The prospect of a future powered by the sun and the wind is so appealing that it obscures a less charming fact: coal is going nowhere soon. Even the most optimistic forecasts agree that China and the United States, for the foreseeable future, will remain ravenous consumers. (China burns more coal than America, Europe, and Japan combined.) As Julio Friedmann, an energy expert at the Lawrence Livermore National Laboratory, near San Francisco, told me, “The decisions that China and the U.S. make in the next five years in the coal sector will determine the future of this century.”

...

 

When Albert Lin, an American energy entrepreneur on the board of Future Fuels, a Texas-based power-plant developer, set out to find a gasifier for a pioneering new plant that is designed to spew less greenhouse gas, he figured that he would buy one from G.E. or Shell. Then his engineers tested the Xi’an version. It was “the absolute best we’ve seen,” Lin told me. (Lin said that the “secret sauce” in the Chinese design is a clever bit of engineering that recycles the heat created by the gasifier to convert yet more coal into gas.) His company licensed the Chinese design, marking one of the first instances of Chinese coal technology’s coming to America. “Fifteen or twenty years ago, anyone you asked would have said that Western technologies in coal gasification were superior to anything in China,” Lin said. “Now, I think, that claim is not true.”

...

 

The Obama Administration is busy repairing the energy legacy of its predecessor. The stimulus package passed in February put more than thirty-eight billion dollars into the Department of Energy for renewable-energy projects—including four hundred million for ARPA-E, the agency that Bush opposed. (It also allocated a billion dollars toward reviving FutureGen, though a final decision is pending.)

Cantab

China needs energy, all it can get. Green energy in China is not to replace oil or coal but to add another source of energy. China is doing drill baby drill all around the world by partnering with both private and national oil companies. In China Coal production has doubled over the last 10 years.
 
How about this for a start of a pro industry policy in the United States -- open all the offshore promising exploration sites.  

rdan

You missed the point.  

 VtCodger

***How about this for a start of a pro industry policy in the United States -- open all the offshore promising exploration sites.*** 
 
1.  Petroleum prices are set globally, not by domestic volume in the US.  More production in the US will have very little effect on oil prices.  It would affect balance of payments 
 
2.  The reason that lease areas are not all put up at the same time is to maximize royalties.  That's the same thing a private company would do.  The governments are simply acting in a businesslike manner.  You have a problem with that? 
 
3.  It's very unlikely that there is a lot of oil offshore.  Somewhat better chances for natural gas (It's a geology thing), but we don't actually need offshore gas right at the moment as we have just stumbled into a fair amount of easily drilled gas in onshore black shale deposits and don't have the infrastructure to use it. 
 
4.  What oil is out there is mostly going to be very expensive oil because of the cost of recovering it.  Probably better to wait until higher crude prices justify high lease prices. 
 
====== 
 
What would make sense (and I don't know why the Republicans never proposed it) is to try to lease just enough new oil on the North Slope and Arctic Sea to run the trans Alaska pipeline at full capacity.  That'd cut our oil imports by about 10%.  Would have a neglible effect on prices. 
 
====== 
 
In any case, we are dependent on petroleum for 40% of our energy needs.  It looks to me like that is a really bad idea because of a probable huge demand surge overseas in the next few decades with no offsetting supply surge.  IMO we should be concentrating on switching to other energy sources -- just about any other sources other than whale oil and corn based ethanol.  Conservation wouldn't hurt either, but higher energy prices will take care of that.  

Today, 9:35:28 AM

 Cantab

VtCodger, 
 
1.  Petroleum prices are set globally, not by domestic volume in the US.  More production in the US will have very little effect on oil prices.  It would affect balance of payments  
  
So what? The oil production will create jobs and corporate profits, regardless of what happens to oil prices. 
 
2.  The reason that lease areas are not all put up at the same time is to maximize royalties.  That's the same thing a private company would do.  The governments are simply acting in a businesslike manner.  You have a problem with that?   
 
Of course I have a problem with that. The role of the government is to provide leases in an orderly manner to facilitate exploration and production. Having the government use its monoply power to maximize revenue on oil leases or any of the other services they provide to the public would be a nightmare. 
 
3.  It's very unlikely that there is a lot of oil offshore.   
 
This is the downside in my view. I'm not sure there's anything to be had. However, the oil companies investing their own money in exploration are the best judge if this is true or not. 
 
On the future in my view either we develop a new cheap source of energy or the human race is doomed.

VtCodger

***On the future in my view either we develop a new cheap source of energy or the human race is doomed.*** 
 
Basically, Yes 
 
Not doomed, but if we don't develop an abundant energy source and/or dramatically alter our way of doing things or both, this is likely to be a really bad century for the human race. 
 
The best bet looks to be fusion followed distantly by solar and fission.  Problem is that fusion is probably three or four decades away.  We (developed countries plus China) ought to be spending a lot more than we are to try to close that gap.  And we -- all six billion of us -- need a realistic plan to get from here to 2050 in some sort of orderly fashion.  The danger is continuation of the sort of bungling the human race engaged in during the 20th Century is all too likely to lead to that thermonuclear war we somehow avoided last Century.  THAT would be really bad for business. 
 
==== 
 
****Having the government use its monoply power to maximize revenue on oil leases or any of the other services they provide to the public would be a nightmare.  *** 
 
 
But isn't that what your favorite political party favors?  Run the Government like a business?  Surely, YOU aren't advocating running it like a government?  Seriously, maximizing oil lease revenue will ever so slightly ease the unbearable burden of taxation that you will shortly be whinging nonstop about.  Maybe there's some way to do exploration and still maximize lease revenue.  ... maybe 
 
BTW, am I to take it that you would like the FCC to stop auctioning spectrum, and instead allocate it on the basis of perceived social good?  Sure sounds to me like what you are saying.  Keep that sort of thing up and you'll end up a liberal.  

 gordon

VTCodger: "Conservation wouldn't hurt either, but higher energy prices will take care of that". 
 
This reminds me of an old comment of Bakho's, where he lays out the importance of regulation to ensure conservation happens. See here (scroll down to Bakho's comment). Here's  a sample: 
 
"Standards enacted to date are having a significant impact on U.S. energy use while saving consumers and businesses billions of dollars. Appliance standards rank with automobile fuel economy standards as the two most effective federal energy-saving policies.  
  
"In 2000, according to analyses by the U.S. Department of Energy and ACEEE, standards reduced U.S. electricity use by approximately 88 billion kWh and reduced U.S. total energy use by approximately 1,200 trillion Btus. These savings are 2.5% and 1.3% of U.S. electricity and energy use in 2000, respectively". 
 
It's true that Bakho also talked about the market failures which make standards necessary, which seems to imply that in a perfect market standards wouldn't be needed. But remember how the Rocky Mountain Institute's book "Natural Capitalism" hammered on about the cost savings available from conservation which were never implemented. They gave example after example of expensive waste. 
 
 
So in addition to Bakho's list of market failures, I would add the stupidity which prevents people from responding to price signals even when they are present. Once you admit that, the case for regulation becomes overwhelming, and reliance on higher energy prices to "take care" of regulation looks like a pretty forlorn hope.  

The Collapse Of The Euro Insights By Joseph Stiglitz And Hugh Hendry - Two Part BBC Miniseries zero hedge

Feb 10, 2010

jmc8888

Yes but the system has been broken for years/decades.  Liquidity hid that.

It made everyone think times were good, after all people pre good is asinine.  The whole world was told times are good and getting better.  You keep preaching it, people will believe it.  The world did.  The world is screwed because of it.

 

But it's not nations that are failing, it's the broken imperialist banking system making nations fail.  40 years long this road has been. 

Of course you could never know when times would turn around, except you could, but if you believed it, you would have lost in the market for about 40 years.  That's the truth about how irrational the markets have been.  It's 40 years of fluff unwinding.

It's only now everything is coming home to roost.  Which is why the manufacturing in China is a bit illusory.  It's only here because of the broken system, but we better pray it continues afterwards, and that they can shift to domestic demand. 

So many imbalances, so much inflation due to debt, levering up, and as mentioned by otherse, debt held in a strong currency....how could they eventually not fail?  How can any country not fail?  We're all going to be here, unless we switch systems.

Who were the dips who didn't see this all coming? Because it was quite obvious. Funny they're the ones that are pushing austerity now, when they were pushing 'goldilocks economy' and the like and considered someone nuts if they thought otherwise.

If it wasn't obvious, then you were just as oblivious as Greece, which pretty much evens the pedestals out.

So do we blame each other for social spending? Or do we place the blame where it's deserved.

Missing_Link:

So complaining about Greece not saving when times were good is asinine.

Not at all. Greece is inevitably going to serve as a reminder to the rest of the world of the dangers of getting too deep in debt. No way around it; may as well use the educational opportunity.

But it's not nations that are failing, it's the broken imperialist banking system making nations fail. 40 years long this road has been.

Do you blame the pusher, the addict, or the lax law enforcement and regulatory structure that allows the pusher to repeatedly take advantage of the addict?

If you blame only the pusher, you do not solve the problem, and arresting the current set of debt pushers will only create a business opportunity for new set of debt pushers to come in. You MUST address the addict (the public addiction to debt and failure to recognize its dangers) and the regulatory structure (the massive corruption and incompetence in the SEC, FINRA, and Congress, particularly Barney Frank).

Capitalism has not failed us. WE HAVE FAILED CAPITALISM.

Yardfarmer:

a most interesting exchange indeed and indicative of the rock and the hard place which the "sovereigns" find themselves today. Joseph Stiglitz representing the interests of the IMF, is flanked conveniently by one of the government satraps who implement the predatory lending policies of the IMF.

National assets used as collateral are sequestered first in the form of high rates of interest and the expansion of national debt in the inevitable inflation of asset and housing bubbles. With the subsequent and inevitable collapse leading to the austerity of "structural adjustments" said assets are ultimately stripped in subsequent repurchase agreements at fractional costs.

What is forgotten these days is the role Stiglitz, our nobel laureate, played in the same asset stripping and plundering of the former Soviet Union in his capacity of head of the World Bank with the able assistance of head of Russian finance under Al Gore, present OMB head Peter Orszag. The World Bank and IMF then turned their attention to Iceland with the predictable result that under the aegis of Stigltz and Orzsag, the Bank Of Iceland failed precipitating an economic crisis which is still unfolding to this day.

Hendry for his part representative of another notable predator class, hedge fund manager, swoops in to pick the leavings clean with short raid speculation along with Soros, Goldman Sachs et al. all the while squawking "you should have saved for a rainy day".

Meanwhile the "sovereigns" (don't you love that great new term) are left holding the bag and are left to fend off their dispossessed new underclass of plebes rioting, pillaging and robbing, madly scavenging for any scraps that fall from the master's table.

Anonymous:

Really? Does it bother no one that a select very few stand to profit enormously while millions of workers through no fault of their own are forced to have pensions stripped and wages cut? That families may go hungry or without shelter or food? Are we to cheer the death of the euro, civil unrest, upheaval and the growing prospect of war in a world armed to the teeth with nuclear weapons? Debt is not worth one human life. Not one. There has to be some way out of all this without causing so many to suffer for so few.

Anonymous:

Your fatal mistake was to buy into the ridiculous notion that we have moved far beyond the cave.

As The Tribe on Wall Street has proven, the richest among us are Alpha Gorillas, very much barbarians. Look at Haiti and sub-Sahara Africa, Ethiopia, Indonesia, Compton, Detroit, inner cities all over the states devastated by chronic overpopulation and unemployment, drugs, and shootings.

A select few have always profited handsomely, always will. The citizens are not rioting and killing the Tsar Nicholas and his family any longer.

Anonymous:

Chrysler announced they are investing $550 million for a new highly automated Fiat assembly plant capable of producing 140,000 cars per year employing only 400 people. Oh my Goodness, we need 11 million jobs. This is not going to work with free trade, robots, and digitalization. Workers are not needed.

SlorgGamma:

Hendry talking about the real world? No, Hendry, you Wall Street/speculator vampires don't know a damn thing about the real world, because your hundred-million-dollar selves don't live there.

The world doesn't have a Greek sovereign debt problem. The world has a US private debt problem: that wonderful deregulated market you worship ran wild and saddled the US with private debts of somewhere around 280% of GDP, according to the latest Federal Reserve data. Thank goodness that bad, evil government didn't spend that money on foolish luxuries like science, education or green jobs -- no, that wondrous perfectly rational market blew it all on bogus credit derivatives and McMansions and luxury yachts.

Invisible Hand :

Weakness in the dollar...no, the euro...no the ??? is used as evidence that all fiat currencies are doomed and hard currencies (i.e. precious metals) are the best alternative.

I am sympathetic to the this thought.  However, governments cannot allow the prudent few to do well while the imprudent many suffer.

Buy gold and silver for your grandchildren. But when the dollar is really under threat, confiscating PM from "speculators" will the government's first act.  If you want to keep your PM, you will have bury it deep and let your descendants dig it up in 40 years or so when it is legal again.

No one has ever be able to escape the tyranny of government, except by moving to the frontier where there is no government (tough place to live) or being lucky enough to be born (and die) during the brief periods of unusual prosperity when the government could take enough to satisfy its avarice without really being burdensome.

However, like almost all parasites, the more you feed the government, the more it grows until it eventually kills its host.

We are moving out of that sort of fortunate period into a period of oppression because governments never live within their means.  They live within your means and you get to live on the leftovers.

They will take your savings, you possessions and your liberty because ... they can.

carbonmutant:

Keeping things in Perspective

http://static.seekingalpha.com/uploads/2010/2/10/saupload_highestdefaultprob.jpg >

ddtuttle:

This has nothing to with Greece per se. Its all about the EU, and what it has to do to contain this. Piece meal bailouts are irrelevant, the real problem has to be dealt with. As Hugh says, it's all about too much debt. Buying time with more debt is economic suicide, but working it down is political suicide. Pick your poison. Draconian power grabs, federalizing the debt/finance of the EU might be solutions, but are they palatable to anyone? Why should the Germans give up sovereign power in order to save the PIIGS? That doesn't compute. They would rather be like England or Switzerland right now, part of the EU, but not the EMU.

The simple fact is that the poorer countries in the EU have suffered rather than thrived. Germany just wipes them out; they're all buying German blenders, shavers, cars, heaters, etc. As long as they could borrow money to buy all that stuff, it puttered along nicely. But without access to credit for the poorer countries, the EU simply doesn't work. So the question is do France and Germany want to be part one that might? Does anybody?

Without Germany and France the EU would be dead before it hit the floor.

I don't know, but my guess is that there's a basement FULL of "New Deutsch Marks" somewhere in Berlin, just in case.
 

Stiglitz: The Prospects of Sound Recovery of The Banking System are Very Bleak

Bloomberg reports that Nobel laureate Joseph Stiglitz thinks that the prospect of a default by the U.S. or the U.K. is an absurd notion constructed in financial markets. However, the says that banks recovery prospects are very bleak.

Speaking in London, Stiglitz says that both the U.S and the U.K. deserve to keep the Aaa rating and the likelihood of a default is very small, particularly in the U.S. "because all we do is print money to pay it back,” “The notion of a default is so absurd, it’s another reflection of the absurdities in the financial markets.”

Moody’s Investors Service (rating agency) says the grade may face pressure without more action to cut the budget deficit, Stiglitz said the economy requires more stimulus right now.

More stimulus needed

“What we need now is a second round of stimulus,” as well as action to aid over-indebted homeowners; “if we don’t, the heavy level of indebtedness is going to press down on the economy.”

Europeans countries under attack

“Europe should show some solidarity to the countries that are being attacked,” adding that there are some very big bumps in the road ahead for financial markets.

While banks are generating profits, “very little of it comes from lending, a lot of it comes from speculative arbitrage,” “The prospects for a sound recovery of the banking system are very bleak.”

The perils of economic populism The New Yorker

It’s been the political equivalent of an intervention: in recent weeks, Democrats have been bombarded with advice about how they should reinvent their economic agenda. The electorate, we hear, wants Barack Obama to be more of an economic populist but less of an ambitious reformer. He has to aggressively create jobs but also be less spendthrift. This advice may be contradictory, but then so are the economic opinions of the many angry voters who are animating what’s being called the new populism. Whereas the economic populism of the eighteen-nineties and the right-wing cultural populism of recent years represented reasonably coherent ideologies, this new populism has stitched together incompatible concerns and goals into one “I’m mad as hell” quilt. The people may have spoken. It’s just not clear that they’re making any sense.

One view of this new populist uprising is that it’s about Main Street versus Wall Street, and is grounded in voters’ fury at the bailout of irresponsible bankers. But that’s too simple. While the banks are public enemy No. 1, there’s a much wider-ranging anger out there, a sense that everyone except the ordinary middle-class person is getting some sort of handout. Big Business, Big Government, and Big Labor: voters don’t seem to like any of them. The bailout of the auto industry, after all, was as unpopular as the bailout of the banks, even though it was much tougher on the companies (G.M. and Chrysler went bankrupt; shareholders were wiped out, and C.E.O.s pushed out), and even though the biggest beneficiaries of the deal were ordinary autoworkers. You might have expected a deal that helped workers keep their jobs to play well in a country spooked by ballooning unemployment. Yet most voters hated it.

Similarly, the failure of free markets during the financial crisis might have led people to think that the government should be more involved in the economy. Instead, the percentage of Americans who think government is trying to do too much is higher than it’s been since the late nineties. Health-care reform offers a case study in this. The bills passed by Congress, whatever their flaws, would do things that voters overwhelmingly say they support: extend coverage to the uninsured, ban the worst practices of insurers, and guarantee insurance for people who lose their jobs. Yet more voters now oppose the bills than support them, with many saying that the government is overreaching. And, while voters routinely say that the rising cost of health care is a problem, it is the bills’ cost-control provisions—including a tax on expensive insurance plans and rules to restrain Medicare spending—that have proved especially unpopular. On top of this, many people are just annoyed with the whole process: a survey of voters who supported Obama in 2008 but voted for Scott Brown in the recent Massachusetts Senate race found that forty-one per cent of those who opposed health-care reform weren’t sure whether reform went too far or not far enough. In short, they don’t know why they’re against reform; they just are. It’s a bit like Marlon Brando in “The Wild One.” Asked what he’s rebelling against, he says, “Whaddya got?”

Elizabeth Warren Calls Out Wall Street

February 8, 2010 | The Baseline Scenario
Although the Consumer Financial Protection Agency made it through the House more or less intact, the banking lobby is taking another, better shot at killing it in the Senate, and is planning to use the magic words: “big government” and “bureaucracy.” Elizabeth Warren wrote an op-ed for Tuesday’s Wall Street Journal that lays out the confrontation. For most of the past two decades, many Americans trusted the banking industry–not necessarily to be moral exemplars, but they trusted that the banks were basically doing what was right for customers and for the economy. Then in 2007-2008 that mood abruptly reversed, as it became apparent that unscrupulous mortgage lenders, the Wall Street banks that backed them, and the credit rating agencies had been ripping off mortgage borrowers on the one hand and investors on the other.

The big banks face a choice. They can agree to sensible reforms that protect consumers and rein in the excesses of the past decades. Or they can simply decide to screw customers, but do it openly this time, since they have so much market share it almost doesn’t matter what customers think. How else do you explain, say, Citigroup’s concocting a new credit card “feature” explicitly to get around a new requirement of the Credit CARD Act? Or Jamie Dimon saying that financial crises are something to be expected every five to seven years, so we should just get over it?

A year ago, it might have been possible to twist the banks’ arms hard enough to get them to agree to new ways of doing business (such as a CFPA), because they needed government support so badly. Now it’s too late. So the solution has to come from the other kind of arm-twisting–pressure from the president, the administration (that means you, Tim Geithner), and ordinary voters. If people feel screwed by the financial sector–and many of them should after the past decade–then they should want the CFPA.

But last month, Republican political consultant Frank Luntz wrote a memo laying out how Republicans could kill financial regulatory reform. “Ordinarily, calling for a new government program ‘to protect consumers’ would be extraordinary popular,” he wrote. “But these are not ordinary times. The American people are not just saying ‘no.’ They are saying ‘hell no’ to more government agencies, more bureaucrats, and more legislation crafted by special interests.” The goal is simple: to make Americans think that the CFPA is their enemy, because it’s part of the government, and that the banks are nice cuddly ewoks by comparison.

This is absurd.

We like to make fun of government in this country, but really, what are you and a few of your buddies going to do to fight JPMorgan Chase on your own? For all of our beloved rugged individualism (and our individual right to handguns), it doesn’t do much good when you’re up against your credit card issuer. There is no Chicago-school free market solution to an oligopoly that, on top of all its other advantages, has an implicit government guarantee that gives it a major funding cost advantage over its competitors. One of the purposes of government is to protect ordinary people from forces (hurricanes, terrorists, monopolies) against which free market forces do not provide adequate protection. This is why we need a Consumer Financial Protection Agency. And this is what Frank Luntz wants to trick people into forgetting.

ctw

I get emails from the Tea Bag Party crowd who will lap up the Frank Luntz strategy like ice cold beer. They will scream about government intervention and Fox News will talk about stifling markets and Glen Beck will scream about how this is another step towards the 100 year Progressive plan to slaughter people or whatever other dipsh-t thing this guy tends to say.

But none of that really matters because there are also Democrats who waffle on this. Something as simple as the CFPA should be freaking cut and dry at this point…

Conservatives don’t believe that the private industry and banks had much to do with the economic crisis, they think Fannie Mae was 50% of the problem and free-loaders were the other 50%. The banks were just innocents in this whole mess so why cram a bunch of regulation down their throats? Also, the Community Reinvestment Act was regulation and look where that got us {Conservative logic here, not mine}

You can’t put forth corrective measures if you don’t properly diagnose the issue.

The Democrats will NEVER come to a compromise with the Republicans on financial reform, or healthcare, or environmental policy… or ANYTHING that is important. This good faith routine is getting a bit tiresome and the longer it gets stretched out the less I think “these Republicans are obstructionists” {which I totally think is true} versus “there are too many Democrats without the courage to put forth meaningful reform and do whatever their big money donors say”

This being one of the more glaring examples… what stifles markets is when bubbles burst or some of other large scale fraudulent activity is allowed to fester for long periods of time. If the oversight in place today isn’t enough to prevent these kinds of things from happening, as Dimon says “every 5 to 7 years” then put something forth that will do this.

[Feb 08, 2010] Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (Hardcover)

Great book, great insights, deep understanding of "Politburo" mentality of Maestro.

December 9, 2009 THE book on Greenspan by the #1 world expert,  by Fernando del Pino Calvo (Madrid, Spain)

Fred Sheehan is THE expert on Alan Greenspan and, in my view, this is THE book to know about him and his years at the Fed. Sheehan has written extensively about Greenspan and his policies for many years, being first skeptical and then critical when everyone else believed in the Maestro myth, which of course Greenspan himself and the media helped create through the long bull market. Thoroughly researched, the book is mostly factual, based on FOMC transcripts, memories from other Fed officials, conversations with colleagues, and other sources, each of them duly mentioned by the author. Among many eye opening issues, like his mediocre real forecasting track record, the transcript of the Senate confirmation hearing of the soon-to-be Fed Chairman back in 1987 will surely impress you. This is a serious book which shows the man behind the myth, and the politician - not the expert - Greenspan really was. Not only did he help create the bubble: he probably was a bubble himself. Finally, the book is a deep reflection on the flaws of the Federal Reserve as an institution. In the end, we must always focus on systems, not individuals. What has happened is not about a fallible man; it is about the flawed system that allowed him to do damage.
December 5, 2009 Tremendously revealing and unusually sound, by Jeffrey Tucker "Jeffrey Tucker " (Auburn, Alabama)
I figured that this book might be just another in the huge outpouring of post-crash reflections. I was wrong. The prose is impeccable. The research is extensive: I felt nearly a sense of guilt that the author did all the work and I had to do none. The theoretical framework is what surprised me most: he really understands debt, inflation, sound money, and power politics. So far, I would say that this book is the definitive account. It hits Greenspan in the only way that really matters: not whether his policies were as good as they might have been but the extent to which they served the cause of the State. I'm supremely impressed with this work. I should add too that I literally could NOT put this book down once I started it. My congratulations to the author who has produced a work that stands above the rest - head and shoulders above them.

A final note here: I think this might be the only book so far to fully explain the nature of the relationship between Greenspan and Rand.

December 5, 2009 Tremendously revealing and unusually sound, by Michael E. Lewitt

This book is an insightful study of the profound failures of Alan Greenspan's tenure as Federal Reserve Chairman. Fred Sheehan clearly articulates how Greenspan created a system that privatizes profit and socializes risk. In doing so, he performs an extremely important task in speaking truth to power about a man who was unquestionably revered by virtually every powerful sector of the financial sector. Mr. Sheehan shows why this was the case - because Greenspan was serving the interests of Wall Street at the expense of Main Street.

This book provides an indispensable explanation of the Greenspan years, and serves as a bold warning regarding the misguided policies that continue to lead this nation down the wrong path. Mr. Sheehan deserves great praise for this book, which should be read by every person who wants to understand what is happening to our system.

January 20, 2010 The Truth Behind Alan Greenspan,  by Norman Horn (Austin, TX United States) -

Originally published at the LibertarianChristians Blog:

For the bulk of my life so far, I have lived in the age of Alan Greenspan, the chairman of the Federal Reserve Bank from 1987 to 2006. Mentioning a Federal Reserve chair like this in the past would not have been considered normal, yet Mr. Greenspan has a sort of legendary status associated with him. Well, at least some people consider him to be an iconic figure, but more and more the general public is coming to realize the destructive effect he has had on the world economy. Books like Frederick Sheehan's "Panderer to Power" have something to do with the dispelling of the myth.

Sheehan's book is the first critical, post-crash biography of Greenspan. Using Greenspan's own words, Sheehan tracks Greenspan's education as a young man, early professional life, his meteoric rise to stardom as a celebrity figure, and his tenure as Federal Reserve chair. The questions primarily raised are: What kind of man is this who has so much power over the world, and what did he do that has led us to today's economic crisis? The answers are quite surprising. Here are some of the things I learned about Greenspan.

* Greenspan was supposedly a disciple of Ayn Rand, yet he probably did not understand what Rand generally was talking about. Nathaniel Branden wrote later, "I wondered to what extent he was aware of Rand's opinions." Apparently, he would even argue the question of his own existence with the objectivist coterie. Rand herself wondered, "Do you think Alan might basically be a social climber?"
* Even in his pre-Fed years, Greenspan was actually a rather mediocre economist and forecaster. Time after time he would make highly-publicized predictions and yet the exact opposite would occur (see pages 43, 54, and chapter 7).
* Greenspan was a master self-marketer, which is probably the reason for his rise to stardom. He constantly engaged the media and the New York financier social scene, hence he had everyone's ear without the wisdom to back it up. How else can you be both a professional economist and yet date Barbara Walters?
* Even though Greenspan has supposedly had a historically apolitical career, he was a master politician (read: liar). One only need look to his involvement during the Nixon and Carter presidencies to realize that he knew how to play the political game brilliantly.
* Greenspan's policies during his Fed years were incredibly political as well. He frequently timed his actions in accordance with what was politically expedient. Wall Street and the fat cat Congress could count on the legendary "Greenspan Put" to be their savior when things were looking down.
* Post-crash, Greenspan has tried to play his own game of historical revisionism about his policies that led to the economic crisis. Sheehan exposes these and many other lies.
* Greenspan has been hired as a consultant by many of the firms who profited from the economic crisis via government handouts. Go figure, the man who enriches Wall Street and causes the meltdown gets the extra paycheck...

Clearly, there is much yet to learn about the man whom many called "the second-most powerful man in the world" for nearly twenty years.

In summary, Sheehan's retrospective on Greenspan is a fascinating read, and I anticipate it will become a valued resource for those looking to understand the Greenspan years from a perspective that offers more than tacit approval of inflationism and government intervention in the economy. Keep in mind, though, it is not an easy read. Economics is discussed at a fairly high, but understandable level. You will probably end up like me, referring to Wikipedia and other sources to recall certain investment and econ topics. Nevertheless, Panderer to Power is worth your time if you desire more knowledge about the Greenspan legacy.

Indrajith A. Weeraratne "Andrew Weeraratne " (Miami, Flordia, USA)

It is a timely written horror story that you won't be able to put down if you are into money. A loud wakeup call to the citizens as the USA has been descending on a path of corruption decade after decade with each succeeding decade getting deeper into foul play following the historical footsteps of ancient Rome, this book, on a personal level will make you understand the trends affecting the financial markets. Thus anybody who wants to make money in the markets should read this book because unless you know the system insightfully you will not be able to make money through the system. The author, Fred Sheehan, does not give us his opinion but give us facts using the synopses of speeches made by those in power during the decade of greed. However be prepared to be overwhelmed as the book, within its limited pages, attempts to cover a whole lot of material that took the financial markets in an unprecedented roller coaster.

It is the story of Alan Greenspan who rose from a non-illustrious career with no track record to write home about to be probably the most powerful man in the world as the Chairman of the Federal Reserve Board and held that position longer than any other. As you read you will realize that if there is a prize for the best politician ever lived, Greenspan to be a formidable candidate for that position for it was his skill at politics gotten him there. You cannot blame Greenspan. After all he was the product of the environment that facilitated his meteoric rise. There is an instance where the author describes a party that Greenspan attended (where people were being awestruck by the mere appearance of Greenspan the economist rock star) where he mentions also the attendance of Jerzy Kosinski the author of "Being There." "Being There" tells the story of a simpleton come to be admired as a genius by the President of the USA and others around him because they begin to interpret everything he says as words of a sage.

Sheehan points out that Greenspan was elevated into cult status by the system in spite of the fact that enough sophisticated people were alarmed as to the direction the country was heading warning how he could push the whole global economy into a tailspin. It is impossible to figure out why it went to such an extent in a country with more Nobel-prize-winners than any other nation. The conclusion I could reach is that people in power knew the scam being carried on by Greenspan as the Fed Chair but kept quiet because by knowing what was going on they could make unimaginable amount of wealth. No other point in history has insiders have made so much wealth as stocks went over thousands of percent. So all insiders had to do was to own shares of companies and keep quiet watching the money being created by the Federal Reserve snowballing values into stratospheric levels.

Greenspan is an enigma because he seems like a man who would understand that an economy cannot be sustained forever if the system has to depend on creating more and more money and the money being created end up only in the hands of a few. Then the question is why did he continue to carry on with such disastrous policies. The author attributes it to pandering to power. But reading the book I got the impression that Greenspan estimated as long as the Federal Reserve has the power to create unlimited amount of money he could carry on that scheme till he retires and when the crumbling down finally comes, people to place the blame on his successor. His involvement with president Reagan who turned this country from the greatest creditor to the biggest debtor nation paving the way for runaway deficits and still being loved deeply may have given him the impetus for that. However, he may have misjudged the courage of people such as Fred Sheehan to bear it all. In the current atmosphere, the only place people will be able to read such an inside account is in books such as this. Do not expect the corporate-owned media to give you such factual accounts.

The author shows how the current Chairman of the Federal Reserve, Ben Bernanke stood behind Greenspan loyally fanning the fire of speculation. Let's hope the President and the Senate that planning on confirming the current Chair to another term will read Sheehan's book. It is impossible to believe that recession induced by the actions of the reckless Fed is over, especially when the medicine they use to cure is the same old medicine that took us there. So the epilogue for these actions may be written yet in the future. Stay tuned.

MacKenzie (New London CT) Alan Greenspan was widely regarded as an economic genius, as wise statesman who guided the American economy through troubled waters. Events of the past years cast doubt upon Greenspan's credibility. Sheehan has removed all doubt on this matter: Greenspan was most certainly not a wise and responsible steward of the American financial system.
Real history shows that Greenspan was a just a player in a inefficient politicized system. Readers might be tempted to see Greenspan as a villain, but I think there is a broader lesson here. Nobody can make our Fed regulated banking system work. Sheehan makes it clear that Greenspan is a smart man, but there is simply no way anyone can resist the political pressures of this system. Sheehan has done a great service by debunking the Greenspan Myth, and the mythology of the Fed in general. Let's hope that we never see the development of a Bernanke Myth.

 December 8, 2009 An Essential Eye-opener,  By Vincent F. Celli "VFC" (ST Augustine, Fl)

Mr. Sheehan has written an insightful analysis of the Greenspan years, which throws light on the darker side of Greenspan's tenure at the Federal Reserve Bank. Like many who listened to Greenspan speak, I was often puzzled as to what he meant. Mr. Sheehan, with an impeccable understanding of economic forces, reveals why and how Mr. Greenspan left us with our present economic disaster. He consistently provided access to gobs of capital for financial interests, and completely abandoned his duties of oversight. The result: the financial sector grew from 10% to 40% of GDP, while billions of dollars flowed into financial profits, only to be sucked into the inevitable black hole that had been created. Mr. Sheehan illuminates this process brillianty and is to be complimented for his efforts. I was entranced by the book and urge anyone who wants to understand the downside of Greenspan's legacy to pick up this book. Your time will be well spent. The best book I have read to help you understand our current economic woes and why they happened.

December 7, 2009 A penetrating complement to "Age of Turbulence",  Hughes" (Northfield, New Jersey United States)

This is a well written, deeply researched and thoughtfully analyzed account of Alan Greenspan's ascent to power. Author Fred Sheehan provides a critical account of the Fed Chairman's rise to prominence to support the proposition that Greenspan betrayed his principles--early and often-- to further his own personal ambitions. This book is an indictment of the man and the system that allowed him to flourish. It should be read as a complement to "Age of Turbulence", Greenspan's own interesting but overly sympathetic recollection of history.

[Feb 08, 2010] Head of BIS Calls for Bigger Liquidity Buffers

Frankenbanks are definitely against higher liquidity buffers...

Regulators have been making a concerted push for banks to hold more equity as a protection against loss and overly-optimistic valuation of trading assets. But the head of the Bank of International Settlements, Jamie Caruna, argued at a secret (not) central bankers’ conference in Sydney that banks also need to carry more in the way of liquid assets (note that this recommendation apparently came in the form of a paper, but we can find no such document at this hour at the BIS website).

Caruna recommended that banks hold enough to allow them to survive a month without access to funding. Note that idea only seems radical now, since banks have spent decades perfecting the art of running lean. The rule of thumb in banking is to lend out $9 of every $10 in deposits. In the 1960s, only $5 of loans versus $10 in deposit was considered prudent.

From Bloomberg:

Capital and liquidity buffers need to be built up in good times so that they can be drawn down in bad times,” Caruana said. “Banks should hold a sufficient stock of high-quality liquid assets to be able to survive a month-long loss of access to funding markets.”

The Basel Committee proposed in December that banks should keep assets that are simple to value and wouldn’t have to be sold at fire-sale discounts during times of stress.

Lenders should also increase the amount of equity and retained earnings they hold to help them cope with losses better, the Basel Committee said last year. Banks’ core capital should exclude stock with preferential dividend rights to reduce risks to the financial system, it said in a report.

“Capital requirements are the speed limits of banking,” Caruana said today. “Capital requirements should draw on deep pockets that can absorb losses. An idea worth exploring is whether those pockets might be usefully deepened by debt that is convertible to equity when times are bad.”

Simple and slow banking is, of course, less profitable in good times than the kind we’ve had over the last two decades. But banks were kept comfortably profitable and low risk via strict regulation for nearly five decades without having a major crisis (from the 1930s through the sovereign lending mess of the late 1970s). Although the financiers will fight it tooth and nail, simple, stupid banking looks a lot better than what we have right now.

More on this topic (What's this?)

Worse than It Looks? (Financial Armageddon, 1/28/10)

'We are Rapidly Moving Towards a Dangerous Time in Our History' (When Giants Fall, 2/3/10)

Stiglitz: The Prospects of Sound Recovery of The Banking System are Very Bleak (Shocked Investor, 2/9/10)

[Feb 08, 2010] Fed Chair as Confidence Man « The Baseline Scenario

Like much but not all error, there is a grain of truth to this point. Thanks to John Maynard Keynes (whom Samuelson cites), George Akerlof, Robert Shiller, and any number of economics experiments, we know that confidence has an effect on behavior and hence on the economy. Too much overconfidence can fuel a bubble and too much pessimism can exacerbate a slowdown.

But to leap from there to the conclusion that the job of the chair of the Federal Reserve is to increase confidence–”Ben Bernanke has, or ought to have, a very simple agenda: improve confidence”–is just silly.

The Federal Reserve has two important jobs: (1) set monetary policy and (2) regulate bank holding companies and enforce financial consumer protection statutes. These affect the real economy in very concrete ways, not just via their impact on confidence. Saying that the objective of bank regulation should be to improve confidence is not just silly, it’s destructive. If your goal were to improve confidence, you would never restrict predatory lending practices (since they are good for banks and for asset prices) or crack down on undercapitalized banks (since that would reduce confidence in the banking system). I would submit that the first item on Ben Bernanke’s agenda should be doing the job mandated by Congress.

Equally quarter-baked is the idea that Bernanke should go out and talk up the economy. Even if we agree that too much or too little confidence can be a bad thing, how do we know that the current level of confidence is too low? Samuelson says that 47% of Americans rated the economy as “poor” in mid-January–with unemployment at 10% (now 9.7%), I’d say that seems low if anything. Is it really a good thing for people to be more optimistic than the economic fundamentals warrant? That’s not a rhetorical question–think back over the past decade.

If Samuelson’s point is that Bernanke should do a good job because that will make people feel more confident in the Federal Reserve, then that’s virtually a tautology, and certainly not worth writing eight hundred words about. If his point is that Bernanke should seek to improve confidence as an independent objective (implied by everything in the article itself), then that’s nutty.

Then there are the additional bits of silliness, like this one: “The administration’s decision to push health-care legislation was a blunder. It sowed conflict and was so time-consuming that it paralyzed action on other issues. Business planning and the willingness to expand have suffered, because companies find it harder to predict their costs and returns.” Businesses are one of the major interest groups supporting health care reform, because they bear the brunt of increasing health care costs, and they face the tough choice every year between increasing their personnel costs and cutting back on health care benefits. Most companies would like nothing better than the development of a viable alternative to the employer-based health care system. And what data could possibly exist that would back up the assertion that businesses have expanded slower because of health care reform, as opposed to, say, reduced availability of credit?

But I’ve already given Samuelson’s column more time than it’s worth.

annie simon

Capitalism cannot breathe without perpetual growth — but this fact is running up against the hard reality of a finite planet. Green shoots indeed. There can be no confidence now in capitalism and its last-ditch greed games. Maybe the thing has to crash. How can we get this monkey off our back without costing millions of lives? That is the question.

oldgal:

One of the major objectives of good crisis management is to lower the hysteria level to zero – hysterical folks make bad choices and big errors. This is generally achieved through gaining confidence in the way the crisis is being managed: honesty; clear explanations; frequent status and actions to be taken; and setting realistic expectations. The administration would have benefited greatly by having spokespeople who are well trained in communications – the fixers are rarely good communicators. This task is greatly complicated by the media who seem to have found their cash cow in the generation of hysteria.

Russ:

I think you’re reviewing not the column Samuelson wrote and wanted to write but the one you think he should have written.

The Federal Reserve has two important jobs: (1) set monetary policy and (2) regulate bank holding companies and enforce financial consumer protection statutes.

It will never do (2), so that’s out. (And Samuelson agrees that it shouldn’t.)

And of course “set monetary policy”, to the corporatists at the Fed and at the WaPo, by now simply means looting on behalf of the banks. Whatever it could have meant or did mean in the past, that’s all it will ever mean going forward. There’s no other wealth left to be “monetized.” In the globalist context, America’s real economy has been permanently gutted.

So the Fed chief’s job, from the establishment point of view, really is simply to maintain the confidence of Wall Street that the looting will continue for as long as possible. The actual mechanics of the job are pretty simple. Economic crashes, depressions, etc. are of no consequence as long as the system can hold onto power, so the Fed chief doesn’t have to worry about that. All he has to worry about is seizing the disater opportunities, shock doctrine style.

That’s why Greenspan and Bernanke were so complacent about the many convulsions of the “Great Moderation” even prior to the late blowup. (And that’s why Bennie coined that Orwellian term. It was indeed a signal meant to inspire his masters’ confidence, as well as a lie to the people.)

So here too, Samuelson’s dual purpose is to both reinforce for the initiated what the real nature of this system is, a confidence game indeed, as well as try to lyingly instill confidence among the uninitiated readership, that if everyone just stays confident, if everyone believes the numbers, if everyone joins in hallucinating the green shoots, most of all if everyone has confidence in the Fed chief, and believes in his confidence in himself, then the “recovery” is as good as here.

So there’s two kinds of confidence: that of the con man himself, his clear understanding of the fundamental phoniness of his job, how every aspect of it is shrouded in lies, and how he himself is master of those lies; and that he falsely inspires in his marks.

It’s the standard psychology of totalitarian regimes.

maynardGkeynes

Robert Samuelson’s entire career is based on the fact that the public has him vaguely confused with Paul Samuelson, to whom he is not related, and who, unlike Robert, was not a meatloaf. The only writer that I know of who is more thoroughly and consistently inane than R.Samuelson is Ben Stein, whom the public vaguely confuses with his father Herb Stein. The American public tends to get confused on names. Exit polls showed that in the ‘68 New Hampshire primary, more than 1/3 who voted for Sen. Eugene McCarthy thought they were voting for Sen. Joseph McCarthy.

[Feb 06, 2010] "Should Economists Be Sued for Malpractice?"

Economist's View

Maxine Udall argues economics took a wrong turn when it was "mathematized and divorced from moral philosophy":

Should Economists Be Sued for Malpractice?, Maxine Udall: ... From Paul Krugman yesterday in an article about Fiscal Scare Tactics:

The trouble, however, is that it’s apparently hard for many people to tell the difference between cynical posturing and serious economic argument. And that is having tragic consequences.

How did it come to pass that many people cannot tell the difference between cynical posturing and serious economic argument? ...

I think we can lay some of the blame for the excision of economics from the body of moral philosophy at the feet of Lionel Robbins (may he rest in peace), who asserted that “economics is fundamentally distinct from Ethics” in his Essay on the Nature and Significance of Economic Science published in 1935. ...

Of course, all of this was unfolding in a world that had come to view science and the scientific method as the sole road to Truth and Beauty. Mathematization elevated economics above the other social sciences because it rested on magical mathematical foundations. Scientific rigor was ours!

The effect of this was to relegate discussions of economic welfare to narrow corners of discourse grounded in desolate Edgeworth boxes where the emphasis was on relative prices, trades to zero sum optima, and convex preferences with little or no attention paid to why person A started with so few resources relative to person B. The joys of being in the “core of the economy” were celebrated even if being situated at that efficient bliss point left person A holding only a few percentage points of total output while person B held all the rest.

Within the ever-popular Paretian framework, there was no possibility that person B might care about person A’s relative lack of resources, that B might be willing to give up something, transfer it to A to make A materially better off, while allowing B to become (at least in moral utility space) much better off. Or that B might be willing to tolerate some inefficiency in order to make A better off. Kaldor-Hicks introduced even more profound and possibly unjust principles...

Keynes, who advocated that government play a role in moderating the effects of peaks and  troughs in the business cycle through regulation of investment banking and automatic demand stabilizers (for example, unemployment compensation and jobs creation through public works) became conflated (perhaps intentionally) with “socialism” and “communism.” When Lauri Tarshis tried to write about Keynesian economics in his 1947 textbook, he was effectively silenced in much the same way and by many of the same people who were so effective at silencing Samuelson on military spending. Samuelson’s text “contained no more than a few words on American defense spending, and none on its size in relation to the federal budget or its effect on the economy.” The Right would paint them as “red” and the Board of Regents of their universities would bring pressure to bear for writing subversive textbooks. 

Economics, mathematized and divorced from moral philosophy, was effectively neutered after WW II, at the point when its relevance to “serious economic argument” might have been established and developed. The outcome was perfectly aligned with market forces that would continue to shift the national narrative in ways that would finally succeed in convincing people that “government is the problem”. It culminated in repeal of Great Depression era regulation, thereby freeing investment bankers for unfettered speculative gains supported by a seemingly unfettered single-payer credit default safety net.

Now add to this the promotion and tenure policies at even second rate economics departments that require and only reward publication in journals that favor morally vacant, mathematically rigorous, theoretically obtuse existence proofs that more often than not bear no relation to reality as we know it. One is then left with an economics literature that few people, including some who have majored in economics as undergrads, can truly understand, either in its content or in its relevance to the important moral and economic issues that confront us today.

It is no wonder that many people cannot “tell the difference between cynical posturing and serious economic argument.” This is a resounding indictment of economists and the economics profession. The market supported and promoted it. We as a profession benefited from it with higher salaries and consulting fees. ...

We appear to be at a political impasse because the idea that “government is the problem” has become entrenched. A moral philosophy pretending to be a science devoid of normative judgment has aided and abetted that idea by elevating efficiency above any other possible moral or even economic consideration. The result is that many in the US and in the world who lack the math acumen to appreciate the subtleties of economic theory stand enthralled by sound bites derived from ... economists...

Economics provided the theory and language that supported the drive to the ditch we find ourselves in. We did it by allowing economics to become divorced from moral philosophy. Now the economy is on life support and most people in this democracy can’t tell the “difference between cynical posturing and serious economic argument,” but they can and will vote.

If economists were physicians, we would be sued for malpractice.

rkka:

"Our math must be used against their math, our data against their data, our science against their science."

The Masters of Mankind don't care about any of that. They control many, many guns, and have no qualms about using them to facilitate their exercise of their vile maxim "All for ourselves and nothing for Other People."

Understand who you are opposing.

anne:

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2010&base_name=defense_spending_has_been_grow

February 7, 2010

Defense Spending Has Been Growing More Rapidly Than Social Security

Defense spending grew more rapidly over the last decade. We spent $655.8 billion on defense in 2009 more than double the $306.1 billion spent in 2001.

--Dean Baker

anne:

We spent $655.8 billion on defense in 2009 more than double the $306.1 billion spent in 2001.

--Dean Baker

Basic defense spending was $779.1 billion in 2009 and $393.0 billion in 2001. There is in addition tens of billions of dollars more in military spending for the Central Intelligence Agency and maintaining the nuclear arsenal

To describe Obama basic defense spending in 2009 as $655.8 billion when the spending was actually $779.1 billion is just scary.

Art Cashin Market Commentary - An Encore Presentation

02/06/2010 | zero hedge

How Dry I Am (And Maybe A Little Hungry Too) – Last year, I suggested that 2010 might be the year of food shortages around the globe. That may be why I was struck by a piece put out by the always sharp-eyed, Andy Lees, of UBS in  London.

Andy reviewed a treatise on global water put out by the World Economic Forum (pronounced “Davos”). The figures Andy pulled from the report are downright stunning. Here’s how Andy began:

Water – The global growth inhibitor!!!

http://www.weforum.org/pdf/water/WaterInitiativeFutureWaterNeeds.pdf, written by the World Economic Forum, and entitled “The Bubble is Close to Bursting”, gives some pretty hard facts about water security that mean present day assumptions about economic trends seem unlikely to bear any reality to what transpires. It does talk about long term affects from global warming, but given that is all theory, I want to concentrate on just the hard facts as we know them.

70% of global freshwater withdrawals are used for agriculture – (up to 90% in developing economies), but it is thought that 50% of that water is wasted against the most efficient irrigation systems. A typical meat eater’s diet requires twice the water input than a vegetarian diet of similar nutritional value – (meat itself requires 10 times the water per calorie than plants), so a simple switch to meat would wipe out all the possible efficiency gains from drip irrigation etc, before accounting for the 2bn – 3bn (30% - 45%) growth in population numbers expected over the next 25 – 40 years.

There simply isn’t the water for the world at large to go on the Atkins diet. “With business as usual water use practices, by 2025, water scarcity could affect annual global crop yield to the equivalent of losing the entire grain crops of India and the US combined (30% of global cereal consumption”)

Daedal

This setup is particularly problematic because a centrally controlled financial system that endlessly transfers wealth from efficient internationally-linked sectors to inefficient state sectors will eventually collapse under the weight of bad loans.

Indeed. Someone needs to relay this to Jim Rogers.

[Feb 06, 2010] Is Tim Geithner Paying Attention To the Global Economy « The Baseline Scenario

with 21 comments

In an interview that will air Sunday on ABC, Treasury Secretary Tim Geithner says, “”We have much, much lower risk of [a double-dip recession] today than at any time over the last 12 months or so … We are in an economy that was growing at the rate of almost 6 percent of GDP in the fourth quarter of last year.  The most rapid rate in six years.  So we are beginning the process of healing.”

The timing of this statement is remarkable because, while the US is finally showing some signs of recovery, the global economy is bracing for another major shock – this time coming from the European Union.

The mounting debt and deficit problems in Greece might seem relatively small and faraway to the US Treasury – concerned as it is with China’s exchange rate and the ritual of G7 meetings, and likely distracted by the major snow storm now hitting Washington DC.

But the problems now spreading from Greece to Spain, Portugal, Ireland and even Italy portend serious trouble ahead for the US in the second half of this year – particularly because our banks remain in such weak shape.

Greece is a member of the eurozone, the elite club of European nations that share the euro and are supposed to maintain strong enough economic policies.  Greece does not control its own currency – this is in the hands of the European Central Bank in Frankfurt.  In good times over the past decade, this helped keep Greek interest rates low and growth relatively strong.

But under the economic pressures of the past year, the Greek government budget has slipped into ever greater deficit and investors have increasingly become uncomfortable about the possibility of future default.  This impending doom was postponed for a while by the ability of banks – mostly Greek – to use these bonds as collateral for loans from the European Central Bank (so-called “repos”).

But from the end of this year, the ECB will no longer accept bonds rated below A by major ratings agencies – and Greek government debt no longer falls into this category.  The market can do this kind of math in about 20 seconds: If the ECB won’t, indirectly, lend to the Greek government, then interest rates will go up in the future; in anticipation of this, interest rates should go up now.

That is trouble enough for an economy like Greece – or any of the weaker eurozone countries that have been known, for some time and not in an endearing way as the “PIIGS”.  But paying higher interest rates on government debt also implies a worsening of the budget; this is exactly the sort of debt dynamics that used to get countries like Brazil into big trouble.

The right approach would be to promise credible budget tightening down the road and to obtain sufficient resources – from within the eurozone (the IMF is irrelevant in the case of such a currency union) – to tide the country over in the interim.

But the Germans have decided to play hardball with their weaker and – it must be said – somewhat annoying neighbors.  As we entered the weekend, markets rallied on the expectation that there might be a bailout for Greece (and all the others under pressure).  But, honestly, this seems unlikely.  The Germans hate bailouts – unless it’s their own banks and auto companies on the line.  And the Europeans policy elite loves rules; in this kind of situation, their political process will grind on at a late 20th century pace.

In contrast, markets now move at a 21st century global network pace.  This is a full-scale speculative attack on sovereign credits in the eurozone.  Brought on by weak fundamentals – it’s the budget deficit, stupid – such attacks take on a life of their own.  Remember the spread of pressure from Thailand to Malaysia and Indonesia, and then the big jump to Korea all in the space of two months during fall 1997.

Tim Geithner and the White House may feel they must stand aloof, waiting for the Europeans to get their act together.  This is a mistake – the need for US leadership has never been greater, particularly as our banks are really not in good enough shape to withstand a major international adverse event (e.g., Greece defaults, Greece leaves the eurozone, Germany leaves the eurozone, etc).

Yes, we subjected our banks to a stress test in spring 2009 – but the stress scenario was mild and more appropriate as a baseline.  Many of our banks – big, medium, and small – simply do not have enough capital to withstand further serious losses (think commercial real estate).

As the international situation deteriorates – or even if it remains at this level of volatility – banks will hunker down and credit conditions will tighten around the US.

And if the European situation spins seriously out of control, as it may well do early next week, the likelihood of a double-dip recession (or significant slowdown in the second half of 2010) increases dramatically.

[Feb 06, 2010] Far-fetched - Banks are Far From out of the clear; even though they have hidden assistance of protections from key Congress and Senate Members... - Community Server

"Glad you enjoyed the lengthy research to build this article. It does raise critical concerns for all investors that need to realize to start applying the breaks or tapping them a little and start locking in profits. "
...The interview out of Bill Moyers Journal with David Corn and Kevin Drum, the writers with the well known magazine of "Mother Jones" hit a cord with this writer. In this interview, it was realized by statements made by Bill Moyers, and I 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." Bill Moyers went on further and said, "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" (Mother Jones Interview, January 8, 2010)?

The eventual statement this writer was waiting for came soon after from Kevin Drum. Drum had raised the thoughts of what Simon Johnson; a well known MIT Professor and former position as chief economist for the I.M.F., as well as had been interviewed in the past by Bill Moyers, stated, "Simon calls Intellectual Capture" (Drum).

Bill Moyers repeats the words, "Intellectual Capture" (Moyer).

The next quote sets the tone why all voters need to still keep alive, "The Boston Tea Party" first wave of real reforms by the power of a vote. Kevin Drum states, "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" (Drum).

Right after that statement, David Corn immediately delivered the statement that stuck in my thoughts for days. 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" (Corn).

Bill Moyers clearly rings the Liberty Bell of voters count during election time, when he stated, "Because, the tea party was about taxes, right? The — one of the causes of the American Revolution was unfair taxation. And yet--", David Corn States, "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" (Corn).

Bill Moyers continues with the statement of, "Well, 96 percent of incumbents usually do" (Moyer). David Corn delivered the reason for one of the reasons for this article post with, " 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" (Corn).

Bill Moyers finishes with the statement, "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" (Moyer).

PBS channel under Bill Moyers “America’s Economy reformed”?

Alternatively, get to get to know the name of Simon Johnson and his website:

http://baselinescenario.com/

Go to this article as can be read on Motherjones.com to get the feel why we all need to keep the anger level up as we showed is possible to make change as seen in "The Boston Tea Party" win by the Republicans and that we still have some control to try to keep them honest if at all possible.

http://motherjones.com/politics/2010/01/too-big-jail

http://motherjones.com/politics/2010/01/joseph-stiglitz-wall-street-morals

In this article we all will realize the critical condition the global recovery is in. Joseph Stiglitz holds no punches and cannot be also included in the public campaign by the banks and congress as senile as they are trying to pull off with Paul Volker.

The web-links listed below are hoped will bring the new warnings for all to concentrate on. A Warning to help the markets from not making the next critical crash brings home the ugliness why we should all take up our voice of concerns for real reform and use our votes wisely.

http://www.SeekingAlpha.com

http://thehuffingtonpost.com

http://www.c-span.org/Watch/Media/2010/01/27/HP/A/28886/House+Oversight+Hearing+on+AIG+Bailout.aspx

It is important to review the questions hammered by key congress members such as Marcy Kaptur ...

Continued theme of reforms for the economy and many affected by the current metrics of the markets...

James Gornick

[Feb 06, 2010] Goldman Sachs And The Republicans

February 5, 2010 | The Baseline Scenario

The Federal Reserve leans towards “stronger regulation”. But every regulator sent to control big banks over the past 30 years has ended up completely captured – most recently the people who allowed Goldman to keep its bank license while retaining its full range of risky activities. You can add to the powers of the Fed or take them away completely but this will not change.
 

ECON

All right !! An English economist Lord Robbins in the 1920s wisely said the capitalists get what they want and workers get what is given to them. Some things stay universal over time.

hoelder

Whatever you think about Lenin, some of his writings are very revealing, but theory and reality do not often complement each other. “The abuse of the currency brings the collapse of capitalism.” Very freely translated. If you follow the current FED policies, they are very liberally printing money to give to the “too big to fail” institutions and then earn money from other country’s interest. The beast is eating itself and does not know that.

 

kidkilowatt

It seems we are witnessing the end game of the chess match started in the 80’s by Ronald Reagan and his minions. His spectral presence hovers around this like stink on s**t. The “left”, liberals, Democrats, whichever you choose to use, have been outmaneuvered (or complicit) in every political and economic move of the last 30 years that has brought us to the edge of this precipice.

I almost have to give Goldman a tip of the hat. They were hours, if not minutes, from going the way of the dodo, and yet, 16 months later they are rolling in ill-gotten gains, denying ever having been in trouble, consolidating power, and flipping the bird to anyone who bothers to raise the subject. Chutzpah? Cojones? Sociopathic behavior? It probably doesn’t matter at this point. The predator class seems to hold all the cards, those being: recalcitrance, obfuscation, entitlement…

When you have money, power, and are unwilling to “play well with others”, it is quite easy to dig in your heels, threaten to shut off the money supply to incumbent politicians, and sit back and watch your dreams (our nightmares) come true. It really is hard to see a way in which the political and economic institutions involved will either manage or be allowed to address the issues this society faces.

pastafarian

Lessig has a piece on this…

If you want change, you have to change Congress

http://www.thenation.com/doc/20100222/lessig

Min

Maybe from the South. Like Huey Long and George Wallace and Andy Jackson. With less industrialization and an ethic of fierce independence, the South can produce politicians who are not afraid to take on moneyed interests. They know that if they are successful, money will come to them. They will not have to grovel to get it.

scathew

Well, first question will be, how will they take anyone on with unlimited corporate money toward “issue ads”?

Second, I’m afraid we (and I do mean WE) have built a system that doesn’t support human life. That is, the political system is designed in such a way that anyone who would actually be good as a politician gets filtered out and only leaves people who “simulate” humanity (what I would call “sociopaths”).

I’d like to blame that on the “ruling class”, but I think we’re all guilty. Most of us when faced with the human foible of even our preferred candidates will tear at them like sharks. Howard Dean lets out a stupid yell, a very human stupid yell, and he’s done. A great liberal says something vaguely sexist and we pillar them.

The fact is we demand that they not be human and subsequently they provide us with exactly that.

MikeRINO

Isn’t Glenn Beck from the “South”.

All I hear from the south is the FAKE Grassroots crackpots.
All the time complaining about “the government”, while the Business Community Runs this Country into the Ground.

What’s going to happen to Glen Beck when his horde of followers finds out he’s a Saudi Collaborator?

jake chase

The simple fact is that the cries about ’systemic risk’ were a simple prelude to looting on behalf of GS. Nobody has presented a shred of evidence that allowing AIG and Goldman to fail (which simply means bankruptcy reorganization, not extinction) would have made the real economy any worse. Indeed, it most likely would have encouraged the fall in real estate prices which is a necessary precursor to renewed prosperity. The whole thing was bulls**t. As to why GS can’t admit anything, their business is deceipt. Thinking of them as simple predators makes everything crystal clear. The failure we are experiencing is political failure, nothing more, nothing less. All you Obama fans should have saved your internet contributions. He was listening to the big money from day one and he still is.

Rich S

I would like to see the evidence reviewed again as well now that a little time has passed. Does anyone have a link to any previous reporting regarding the evidence that GS, etc. had to be saved? I know that’s what Paulsen told congress in September 2008, “If you don’t do this, you won’t have an economy on Monday.”
Maybe we would have eventually been better off if we had let them all die. TBTF would not now be a problem, and maybe the boom-bubble-bust-bailout cycle would have been broken at least for a few decades.
Maybe it would have been a disaster, maybe I would now be unemployed. But, at least I’d have time to go hike tha Appalachian Trail (the real one, not the Argentine one).

btraven

Well said.

I have yet to see a “road map” outlining exactly how the world would have collapsed if we had not bailed out the banksters.

We should have taken the hit – and avoided all the moral hazards. “Phantom wealth” would have been destroyed, but wealth would not have been redistributed in a such a disgusting fashion. Instead the looting continues; what little wealth remains is drained from the have-nots to the haves.

We are in a depression. It will get worse. It will last a long time given all the resistance to “feeling the pain” and moving on. If it is not addressed (and I don’t expect it will be), civil unrest will mount, the political system will change dramatically (towards a more totalitarian model), the stock market will ceast to exist.

Bradman

Well written. I lean towards the Demo’s being complicit than being outmaneuvered. Since Congress and the Senate are for all intents and purposes up for auction, I would suggest they get coin slots installed, just to dispel the illusion they have the People’s best interest at heart…

hermanas

A repeating nightmare. How much will the next bailout be? What will that do to the value of the dollar? If it is rejected and failure begins, same question. Is this the end of dollar based contracts? Is this the way it ends? Will those with large dollar reserves allow it?

tippygolden

I’m starting to wonder if the problem for democracy is not just the size of the TBTF banks … but the size of large corporations in general. The annual revenue of very large corporations can exceed the annual revenues of small countries. So there is an asymmetry of power at an individual level (eg, credit card usury) and sometimes at a national level.

Dan Palanza

Tippy, large corporations have long been de facto autonomous nations. They are mirage nations. They have no commitment to any particular geographic location. They come in, they buy the government, they loot, and they leave. Ask any of our fellow banana republics.

Boundaries are an important phenomena, which is being ignored. I might add that double-entry book-keeping is boundary science. We ought to consider going back into it in a serious way in order to re-stake our boundaries. After all, it is our own geography that is at stake.

DE

I agree. Corporations have used cheap labor from other countries to make profits and then sold the products to the U.S. population. The corporations have become international and are so united, they get to stand. BTW, anyone read “Shock Therapy” by Naomi Klein?
I have for a long time looked at this from a personal level-which has been how are we supposed to be able to afford to buy anything from these big corps. if we’re not earning enough to buy anything? That was a simplistic way to look at it, but the reason is the multi-national exploitation. The question still remains, how do we fix it?
Should we get rid of Social Security and Medicare after years of paying into and looking to collect on that? Should we oust all incumbents?
If the tea partyers would limit there anger to that, they might be taken seriously.
Oh…and how do we keep China from calling in our debt?

Sandi

This has been years in the making – as anyone who has followed the growth of corporate welfare has seen. That it reached critical mass with the financial industry just proves the gods have a twisted sense of humor. For all those who have groused since the Chicago School became ascendant that we don’t have a “free market”, but a rigged one, vindication is bittersweet. From farm subsidies to TARP, it’s all of a piece. And the death of public education plays a role, as well. Living as I do in the “New South”, I have seen how the same plantation mentality that ruled here in 1736, went through the years of textile mills, and then the banking and insurance industry,the attitude among the haves is that they are deserving and the riff-raff stays poor and ignorant because that is what they ARE, and -unless they play basketball – are destined to remain in the permanent pool of cheap labor the Big Dogs feed off of.

btraven

Wow. I’m somewhat surprised to read your comment. Not because I don’t agree with it, but because that has been obvious to me for decades. It’s always eye-opening for me to realize how far my thinking is outside the norm.

I repeat my basic observation about Capitalism:

The goal of Capitalism is to create value: the best goods and services for the best price.

The mechanisms for doing that are two-fold, and at odds with each other (a dynamic):
(1) The profit motive.
(2) Competition in the marketplace.

Both are absolutely necessary for Capitalism to work.

The profit motive exists at the individual level. This leads some individuals and business entities to drive towards monopoly (i.e. to work towards minimizing competition) because that is where profits, barring regulation, are maximized. (Note: Once a company reaches a “tipping point” in size, the more monopolistic it becomes. However, a company does not have to be big to be monopolistic.)

The primary economic role of government in a Capitalistic economy is to ensure competition – the other side of the equation for Captitalism to work.

In my mind, this happens through tough and enforced anti-trust laws, progressive taxation, an educated populace, well underwritten loans to small business, etc.

Russ

The Federal Reserve leans towards “stronger regulation”. But every regulator sent to control big banks over the past 30 years has ended up completely captured – most recently the people who allowed Goldman to keep its bank license while retaining its full range of risky activities. You can add to the powers of the Fed or take them away completely but this will not change.


Yes, according to what I’ve read Corrigan himself is a textbook example. (Although by now he sounds not so much “captured” as corrupted plain and simple.)

You can’t regulate gangland rackets. If you allow them to exist at all, they’re going to run amok, looting and vandalizing.

So there’s only two options. So far America keeps choosing the wrong one.

Potomac Oracle

There are, now, only three paths this society can take to overcome the power of the TBTF entites.

Revolution, Martial Law, and societal meltdown.

Since the Amschel Rothschild dictum reigns today as it did in the 18th century we have no viable political/judicial alternatives for controlling TBTF.

Amschel said,

“Give me the power to issue and control a nations currency and I care not what laws it makes.”

Since so few in the body politic really care about or understand the issue of TBTF, revolution is out.

With a POTUS captured by the TBTF syndications, martial law is not imminent from those quarters.

The most likely controller will be societal melt down. Following the mathematical law for Ponzi schemes, and the economic law of diminishing returns, TBTF succumbs in the presence of a vaccum.

That is precisely what happened to the Roman Empire. When there were no more supports for the process of taxation; removing from the population its economic surpluses supporting the TBTF empire.
 

scathew:

“They will plow even more money into defeating political candidates who have opposed them – for example, on credit card legislation. The Republicans see this coming and are rubbing their hands with glee.”

Thanks to the (Republican) SCOTUS.

So basically it sounds like we have to hit the wall. We have to let the country go into a real depression, and since we just shot our wad on the mini-depression, it’ll be really bad, and then people will finally learn.

That’s the only hope of killing these financial zombies that are sucking the life out of our country.

If I didn’t have a family to worry about, I wouldn’t care as much, but because I do, I’m not looking forward to the next decades. Right now it feels like watching a car accident happening in slow motion.

RA

I think I am correct in saying that Obama had the opportunity at the height of the crisis to “save” the banks by having the Treasury become the dominant shareholder, taking managerial power, firing the top looters, firing the lobbyists, ending payoffs and expectation of future payoffs to congressmen and other govt. officials, and instituting real reform from the inside and outside of the banks, so that the Treasury could sell its holding off in several years when things had stabilized.

Obviously, he didn;t do it. The upside? Is there’s another crisis coming along in 5, 10, 15 years, lay the groundwork for doing it then.

jonboinAR

That’s what I’m thinking too. Can someone tell us why that would not have been practical to do, besides for political reasons. The fact that we didn’t do that is what all the hand-wringing’s about today, IMO.

Ted Kaminski

Because politics was everything at the time. Remember the denunciation of President Obama as being a socialist out to take away our democracy by taking over the economy. Perhaps this could be seen as a preventive attack to stop any such nonsense as to applying moral hazzard to the top banksters in order to take away their personal cookie jars.

It is the american way to let the individual take responsibility, the mantra since Reagan, but hardly the way to treat corporations and their executives.

Ridge Runner

What’s astonishing is that B.O.’s supporters ever imagined that a product of “The Chicago Way” would do anything other than shill for the “privatize the profit”/”socialize the losses” crowd. Why turn one’s back on the way of life that gets you to the top?

phread

we are all witness to the neoliberal movement started by reagan…the destruction of labor unions caused many dems to go to the corporate trough for their money as the unions where no longer able to fund the opposition against the elite;the republicans and blue dog dems are corporatists doing the bidding of their masters. we are witnessing the death of democracy in Amerika Inc.

[Feb 06, 2010] IMF: "Risks to financial stability have intensified"

January 28, 2009

For those hoping that credit conditions might gradually be returning to normal, today's IMF Global Financial Stability Report market update contained a stark warning:

Risks to financial stability have intensified since October 2008. Macroeconomic risks have risen as global growth has fallen precipitously alongside a sharp slowdown of global trade. Credit risks have also risen as a deterioration of economic and financial conditions have resulted in rising loan losses. At the same time, the flight from risky assets and illiquid market conditions has increased funding costs, even as risk-free rates have declined with monetary easing.

That is despite the massive bailouts, spending plans and other government interventions we have seen since the last report:

...With the help of extensive government support, market functioning toward the end of 2008 improved in a number of asset classes. However, the negative interaction between the economy and the financial sector has intensified as the credit crunch bites harder and extends globally, with confidence among financial counterparties remaining strained. Indeed, the recent shock to bank earnings and other bad economic news has put further downward pressure on bank equity prices, and the width of credit default swap spreads points to still-elevated systemic risks.

And if you think that prognosis was depressing, the sentence that follows is even worse:

Notwithstanding public injections of capital, many banks around the world may have an insufficient capital cushion to weather a deep global economic downturn.

Translation: many banks are insolvent and probably won't survive the global recession.

The credit crunch ain't over; not by a long shot.

[Feb 04, 2010]  Alford “Why Bernanke Should Resign” «  By Richard Alford

February 4, 2010 | naked capitalism

By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.

There was a long period of time during which I believed that Mr. Bernanke should have resigned the Chairmanship of the Board of Governors of the Federal Reserve System. Subsequently, I came to believe that he would not be nominated for a second term as Chairman -- a satisfactory outcome from my perspective. However, he was nominated for a second term. For a while, it appeared possible that the Senate (post the Massachusetts election) would not confirm him for a second term- an unsatisfactory outcome from my perspective. Now, Bernanke has been confirmed by the Senate-albeit with a record number of Senators voting nay. And I am back to my original position- I believe that Bernanke should resign. In fact, the arguments for a resignation are more compelling than ever.

The reasons that I believe Bernanke should resign and the reasons behind my “I was for a Bernanke departure, before I was against it and now I am for it again” position are straightforward.

The Chairman of the Board of Governors of the Federal Reserve System must be able to function as a leader. Not only must he be a leader of the Board of Governors and the FOMC, he also must be able to use his position to influence the financial markets, the real side of the economy, the course of regulation and supervision of financial institutions, and insulate the Fed from election- cycle-political pressures. Unfortunately, Mr. Bernanke has abdicated any claim to leadership.

The Bernanke Fed has time and again stressed the importance of talk as a policy instrument to be used to influence expectations and the course of the economy. However, given his forecasting record and policy stances, it is unlikely that Mr. Bernanke will have the influence and stature that the Chairman ought to possess. The markets will not have confidence in someone who denied the existence of the housing bubble and then said the aftermath of the housing bubble would be well contained. He also has stated the obvious: the worst recession since the Great Depression took him by surprise. It will be difficult for Mr. Bernanke to influence market expectations of inflation and growth, given that he failed to see the underlying financial and economic imbalances that so many others saw.

Furthermore, a significant number of mainstream economists (as well as market participants) are now of the belief that interest rates were too low for too long. Given that Mr. Bernanke does not acknowledge even the possibility that this is true, it will make it difficult for many in the market to believe that Mr. Bernanke will commence the as yet undefined exit strategy at the appropriate time.

Also given the recent record of the Fed on bank regulatory matters and the animus towards Bernanke in the Congress, it will be difficult for him to influence the course of regulatory reform. This is unfortunate as most of the world is leaning towards regulatory systems with some role for the central bank as a bank or systemic regulator. This is complicated by the absence of any evidence that Mr. Bernanke attached any weight to regulatory concerns prior to the crisis.

From a Federal Reserve perspective, given the animosity towards Mr. Bernanke by many in the Congress (especially since the revelation about the AIG bailout), it is unlikely that Bernanke will be an effective spokesman for a Fed independent of election cycle politics This is especially true since he went hat in hand to the Hill asking Senators for their support as parts of his efforts to win reconfirmation.

Defenders of Mr. Bernanke argue that he was and is uniquely qualified to head the central bank during this period of financial stress. However, it seems with the possible exception of Iceland that every country has found someone capable of stabilizing their financial system short of total collapse.

Furthermore, none of the policy prescriptions undertaken by the Fed are unique or outside those recommended by mainstream economists. The most salient aspect of Mr. Bernanke’s uniqueness is that he has become a lightning rod for all the criticism that the Congress can offer.

All that said, it would have been counterproductive to have had Bernanke’s nomination rejected in the politically charged aftermath of the election in Massachusetts. Ever since Greenspan assumed the Chairmanship, the Fed has become progressively more involved in issues that are properly left to the Congress and the Executive Branch. If the president had decided against nominating Mr. Bernanke, it would have been in keeping with a pre-determined calendar and entirely appropriate. If prior to Scott Brown’s election, a majority of the Senate had been publicly opposed to a Bernanke renomination, then I would have supported the Senate denying Bernanke the reappointment. However, given the appearance of the flight from Bernanke based primarily on short-term political expediency, I had to step back. Under those conditions, denying Bernanke the appointment would have dragged the Fed further into the political quagmire. The odds of the Fed becoming the next Fannie or Freddie are already too high.

A Bernanke resignation would allow for (but not guarantee) an effective leader; diffused much of the criticism directed at the Fed; and allowed for the perception that Fed policymakers are responsible for major policy mistakes without turning the Fed into a political football.

The country, the economy, the financial markets and the Fed itself deserve a Chairman who can marshal the support of Main Street and Wall Street and artfully deal with the Hill. Bernanke cannot do it. It would be best if at some point in the near future Mr. Bernanke steps aside. To aide in the process, a draft press release announcing Mr. Bernanke’s resignation is provided below:

After pondering deeply the general trends in the financial markets and the actual conditions obtaining in our economy today, I have resorted to another extraordinary measure.

To strive for price stability, the common prosperity and happiness of all as well as the security and well-being of our financial markets is the solemn obligation implied by the Fed’s mandate.

Indeed, I declared war on inflation and deflation out of a sincere desire to insure sustained growth at full employment and the stabilization of the price level, it being far from my thought either to compromise financial stability or to inflate a housing bubble.

But now we are faced with prolonged financial and economic dislocations. Despite the best that has been done by everyone–the efforts of the economists at the Federal Reserve, the diligence and assiduity of the Treasury Department and the efforts of the Congress and the President-the TARP and stimulus package–the economic and financial situation has developed not necessarily to America’s advantage.

This is the reason why I have take the step necessary to allow the President to appoint a new Chairman.

attempter:

Those who think “Heckuva job” Bennie is well qualified to lead through the crisis are those who simply want more of the same, since it’s clear he learned nothing and forgot nothing.

The hype that Bernanke is an “expert” on the Great Depression is just one of those lies that the media sound machine repeats ad nauseum to the point that everyone is supposed to assimilate its truthiness rather than examine whether or not it is in fact true.

But a little examination reveals how he’s simply a monetarist flat earther. The dogma that the economy was basically sound, had a hiccup, and just needed liquidity easing, is a lie meant to obscure the fundamental contradiction of useless, concentrated wealth stolen from a putative consumer base no longer wealthy enough to consume.

And today the black magic of infinite exponential debt is supposed to keep that going. I guess Bernanke hopes we’ll soon make contact with extraterrestrials who are heavy savers with an economy based on cheap exports. Who else will be able to perform the miracle he and his colleagues propose, of somehow levitating this utterly destroyed consumer debt market?

He’s the same Wall Street financialization apparatchik he was from day one, and his only idea is to look for new bubbles to reflate to enable further top-down looting. The whole thing, bubbles, Bailout, and the same going forward, is history’s biggest police riot.

Glen:

We all know that Bernskanky should never have been reappointed let alone elected to the position in the first place but he’s there and getting all cut up about it isn’t going to change anything. Until someone can produce a conclusive piece of hard evidence (even when it was it didn’t do much) then all the conjecture in the world will not dislodge him from office. Keep up the rage but we’re going to have to work a lot smarter.

stevenstevo:

“However, it seems with the possible exception of Iceland that every country has found someone capable of stabilizing their financial system short of total collapse.”

Huh? What about Greece? And Portugal? And that little thing we call Europe? Nearly every country in the world is in a recession just as bad as ours is -- many countries are worse off than we are actually. The ones that have fared well never suffered much in the first place.

And our financial system is stable, very stable actually. And we never experienced total collapse. The Lehman bankruptcy froze our capital markets for a week or so, but we recovered. Did Bernanke not stabilize the markets, just short of collapse?

Richard Smith:

“Huh” straight back at you stevenstevo.

Try again when you’ve grasped the difference between a financial system collapse and a recession.

stevenstevo:

“He also has stated the obvious: the worst recession since the Great Depression took him by surprise. It will be difficult for Mr. Bernanke to influence market expectations of inflation and growth, given that he failed to see the underlying financial and economic imbalances that so many others saw.”

Anyone who doubts Bernanke because he failed to predict the worst recession in 80 years, then they are stupid.

Not sure who the “so many others are” that Who are these people? I can only think of a couple. Literally. That’s it, which is absolutely nothing compared to the millions of investors, homeowners, journalists, economists, etc. who did not see it coming. Merely looking back in hindsight, through 20/20 eyeglasses, and realizing that there were signs does not mean you should have seen it coming. Unless you shorted the hell out of the market ala John Paulson, then you cannot say you saw the recession coming.

In addition, these signs did not show up until right before the financial crisis. At that point, the only thing Bernanke could do was keep rates low.

And what is this exit plan? TARP is being repaid rapidly. Surely this is not implying interest rates should be raised. It’s far too early for that. And no one has a clue whether we will have problems with inflation several years from now, or even sooner. Bernanke’s actions in the future will be largely dictated by the direction of our economy. The plan is obvious: once the economy starts picking up, with improvements in employment, GDP, etc., Bernanke will raise rates. If inflation starts showing warning signs, he will raise rates even more.

The future of our economy occurs in the future. Embedded in life and in the future is an element of what’s commonly referred to as randomness. No one can predict the future. Period.

Yves Smith:

You have just revealed you are not very well read. There was a very large cohort that decried the global credit bubble and said it would end VERY badly.

The FT from late 2006 onward, daily, was saying how extremely overvalued all asset markets were. Jeremy Grantham declared every asset class to be a bubble. Marc Faber and Jim Rogers saw this coming. Bob Shiller, Raghuram Rajan, and William White all warned the Fed and were ignored. I can add 20 names to this list without thinking very hard.

If you want to keep putting your foot in your mouth and chewing, I must tell you it is not a pretty spectacle.

Mannwich:

Steve-O revealed a lot of things in his post, in addition to “not being well read”.

Clampit:

“No one can predict the future. Period.”

Well after jumping from the plane sans parachute…your future is reasonably assured.

Hugh:

I admit I came to the housing bubble late. I first became aware of it in late 2005. (The housing bubble blew up on August 9, 2007 with the freeze of the BNP Paribas funds and the subsequent panic.)

I started writing about price manipulations in oil in 2006-2007. I suppose you could say I was late on this as well since such speculation had been going on since 2004. (Oil prices spiked to $140/bbl in June 2008.)

Oh, I did say back in the late summer of 2007 that the economy was going to go into recession. (The NBER places the beginning of the recession in December 2007.)

In 2008, I and others sat around trying to predict which were the next shoes to fall and wondering when the whole house of cards would go. (The meltdown hit on September 15, 2008.)

I said last fall that the stock market represented a fully mature bubble and could go at any time. I would have expected it to go this winter, but I underestimated the effect of Bernanke’s low interest rates in propping it up. Even so, it has been going sideways the last while and will go at some point.

I consistently discounted all the talk of greenshoots and recovery. I suppose I am different from others in that I don’t see this as a double dip recession. I thought we would hit a plateau or a period of slower fall before further descent.

I said that no second stimulus was likely this year, but since 2010 is an election year I predicted a lot of piecemeal efforts to keep things together and give the appearance of action to get incumbents through November. I thought this would keep the economy, if not the Democrats, from collapse through November.

I have written repeatedly about how our elites are incapable of either real reform or effective action. 2011 continues to look like a horror show to me in economic terms.

When I started out on this, I had no background and little interest in economics. I never had any special access to technical data. What I did get is freely available to anyone on the internet. The one advantage I have I suppose is that I have a better understanding of the intersection of politics and economics than most pure economists or market followers. And, of course, I did not have the ideological baggage of most contemporary economists.

My opinion may be overly harsh but I think the only people in the markets who didn’t see this coming are A) lying, B) stupid, or C) were blinded by their own greed.

craazyman:


Could be “all of the above” Hugh.

Fed Up:

I recommend this article titled “No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models”

http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf

See page 9 of the article/page 10 of the .pdf. I believe the person has added to the list.

I would like to know more about bernanke’s mortgage because if he can’t do personal finance, he’ll never get debt deflation/defaults.

APM:

The extent to which the US Government and the Fed have been captured by the Financial Industry (and several other Industries too) is truly appalling. Any pretense of independence is gone. There are no precedents in history for a system in such a state of crisis and with such a level of corruption to have reformed itself without a major exogenous shock such as a revolution or a war. This time will be no different, the question is only when: in 3 years, in 10 years, … In the meantime it will be more of the same intertwined by timid efforts to reform the system that will be rendered mostly void by the stakeholders that have the most to lose. Other regions of the world such as Europe and Japan are facing similar economic and social challenges but at least they are facing a lower level of Government capture by Business (that does not mean it will end necessarily well though as there are so many other things that could go wrong).

justaslakker:

I repeat my comment of Jan 25 when there was talk of Bernanke not being confirmed: Bernanke is going to be shoved down our throats whether we like it or not.

The financial predators are much more entrenched than we realize. They control the white house, the congress, the military, the media, face it the entire country (as well as others). Their strategy is deception. As is illustrated in this one commentary, one player Bernanke is a complete fraud.

As for war and revolution, we are already at war. It will simply be continually expanded and shifted to other areas of the world (Iran).

Revolution? The politico’s would like nothing better than riots in the streets. They can then declare martial law and bring the troops home to fight Americans on their home turf.
Paulson tipped his hand when he blackmailed Congress into giving him complete authority to bail out the banks.

There is a solution, but it does not fit present economic theory, and would be ridiculed by academia, and I dare say everyone one this blog. The solution is to replace our debt based money with debt free money. It is an idea that gained popularity during the last great depression and has been ridiculed and ignored ever since it was introduced. That simply tells you that it is a sound idea that would effectively break the bankers strangle hold on our society.

Fed Up:

“There is a solution, but it does not fit present economic theory, and would be ridiculed by academia, and I dare say everyone one this blog. The solution is to replace our debt based money with debt free money. It is an idea that gained popularity during the last great depression and has been ridiculed and ignored ever since it was introduced. That simply tells you that it is a sound idea that would effectively break the bankers strangle hold on our society.”

Actually, I agree. Maybe present economic theory is bunk or just “works” for the spoiled and rich under supply constrained conditions.

asphaltjesus:

That “who really owns America” link is disjointed declarations strung together to create a bogeyman.

I believe American economic and political power is concentrated. I just don’t think it’s as fantastical as writers like that make it out to be.

Simon:

LOL, this is like the wimp coming up with some great comeback lines at home in bed after the bully belittled him on the school playground.

But What Do I Know?:

Someone I read put it very well–the Fed is like the World War I generals who couldn’t bring themselves to believe that the nature of warfare had changed and the machine gun and improved artillery had made the close-formation bayonet charge obsolete. For four years Haig, Joffre, et al. (and also some in the German high command) continued to maintain their image of a great calvary charge that would break through the enemy lines and bring the war to an end. Bernancke, the lickspittle, and the scholastic Fed economists are still waiting for that magical interest rate cut to “reignite” the economy, and they’ll do their best to frustrate any attempts at solutions which undermine their ability to remain in “command” of monetary policy.

Clemenceau said, “War is too important to be left to the generals.” Monetary policy is too important to be left in the hands of a Bernancke Fed.

Hugh:

Re Bernanke, I think financial players are perfectly happy with him. They fully expect Helicopter Ben to keep interest rates low so they can keep their bubbles in stocks and commodities inflated. As for meaningful regulation, they already feel comfortable they can kill any on their own. They certainly know Bernanke is going to propose, let alone enforce any.

jdmckay:

I think financial players are perfectly happy with him.

Yes, me too. Actually, I think the underlying point of author’s article here is that he, Geithner and Summers are one w/those guys… or more directly, the reason we got a bailout instead of a long overdue financial system fix.

re: “financial players perfectly happy w/him”, one of my more enduring memories along the way of this debacle was (from memory) around Spring ‘09: a time when those paying attention (even including most in financial crowd who didn’t see it coming) knew that the “crisis” was on it’s way, but that it hadn’t quite bit the general public in a big way yet. Dow had lost thousands, home values were dropping, but pain hadn’t hit hard yet and retirement funds and such hadn’t realized their losses.

I was watching CNBC one evening, they had a panel of derivative fund managers. These guys all had lost massive amounts, mostly tied to various mortgage bond incarnations. They were all dressed to perfection, relaxed, smiling, looked confident.

They were the “markets are god” crowd, the guys who demanded regulation inhibited financial “innovation” etc.

To a man, each of these dudes said not to worry, everything’s going to be fine, because we still have a deep untapped source of capital that will carry us through: THE US TAXPAYER.

And, that’s exactly how it played out.

RebelEconomist :

It is possible that Bernanke genuinely did not see the danger of a bust; a less charitable but probably more realistic suggestion is that he did, but that he preferred not to be a party pooper. Ditto Greenspan. The truth is that rigorous central bankers have been more valued in theory than in practice. Even Volcker, with success to show for his hawkishness, was dispensed with once he had served his purpose.

Eric L. Prentis:

President Obusha the blah blah is the problem, Ben and Barack are two peas in a pod, both Wall Street shills.

scharfy:

Even if Bernanke got axed, nothing would change.

What would replace him? Would he have a DEEP and understanding of the great depression? Deeper? PhD in inflation? Doctorate in deflation? Would he be the biggest supergenius on the planet? Straight A’s from birth? As smart as Obama? Smarter?

As long as monetary policy is run by technocrats, plutocrats, or other -crats, expect further turbulence passengers…

I am in favor of returning the power to regulate money, and the value thereof, back to congress. This is in our constitution, until it was amended in 1913, delegating it to the Fed.

This is too awesome a responsibility for 12 men, never mind the moral implications.

kievite:

While Bernanke is definitely not a saint but as attempter aptly put it “Wall Street financialization apparatchik” the key here is to understand that it is the ideology of “free market fundamentalism” that drove the economics of the country off the cliff.

It’s like case against Soviet Politburo. It’s naive to thing that the General Secretary of Politburo is the source of all evil but other members and the ideology behind the organization are minor factors. In reality it was ideology that was the main factor and that helped to drive those, often pretty capable men to commit crimes and stupidities that they did.

So far the carrier of the ideology like a carrier of the virus is the large part of Republican party ("the wrecking crew" of Bushists and neocons as a core) and “Wall Street affiliated” wing of Democratic party.

So in this chess game Bernanke is just one of figures, and probably not the most important.  He was moved into this position by forces beyond his control just by virtue of being an active promoter of the ideology in question. His sycophantic admiration of Milton Friedman probably served him well.

Actually great Russian Anarchist Duke Kropotkin one said “People are better then institutions”.

So attack on Bernanke is to certain extent is like witch hunt: burning the sick person in case of epidemics instead of eliminating the source of infection and creating hygienic measures preventing its spread.

[Feb 04, 2010] Italy Seizes Bank of America, Dexia Assets Amid Probe (Update2) - Bloomberg.com

By Elisa Martinuzzi

Feb. 3 (Bloomberg) -- Italy’s financial police are seizing 73.3 million euros ($102 million) of assets from Bank of America Corp. and a unit of Dexia SA as part of a probe into an alleged derivatives fraud in the region of Apulia.

The police are sequestering a further 30 million euros that the municipality was set to place in a fund managed by the banks on Feb. 6, according to an e-mail from the prosecutor’s office in Bari today. The prosecutor also asked that Charlotte, North Carolina-based Bank of America be banned from doing business with Italian municipalities for two years. A hearing is slated for next month.

Prosecutors allege that when the banks arranged swaps and created a fund that invests money the region set aside to repay 870 million euros of borrowings due in 2023, they misled the region about the economic advantage of the package. Banks skewed the swaps to their advantage to hide fees, the prosecutor said.

Apulia, located in the heel of Italy, joins more than 519 municipalities that face 990 million euros in derivatives losses, according to data compiled by the Bank of Italy. In Milan, prosecutors seized assets from four banks including JPMorgan Chase & Co. and UBS AG and requested they stand trial for alleged fraud. Hearings started in Milan this month...

[Feb 3, 2010] James Kwak: Budget Sense and Nonsense

The fiscal situation is actually very simple. The budget was in surplus when President Clinton left office, although there was already the prospect of budget-busting Medicare deficits in the long-term future. The 2001 and 2003 Bush tax cuts and the unfunded Medicare prescription drug benefit created the large deficits of the Bush era. (The Iraq and Afghanistan wars didn’t help, but it’s not fair to blame those entirely on the Republicans; plenty of Democrats went along.)

Then the financial crisis and the resulting recession blew a huge hole in government tax revenues, creating the current spike in deficits; that spike was exacerbated by the stimulus package, which most but not all economists would consider a sensible response to a major recession. (According to an earlier analysis by David Leonhardt, the projected average fiscal balance for the years 2009-2012 has changed, since Clinton left office, from an $846 surplus to a $1,215 billion deficit. The biggest lumps are $673 billion in Bush administration policies and $664 billion in the costs of the financial crisis and recession, including bailout costs.)

Yet somehow the Republicans have tried–successfully!–to spin our current and projected deficits as the result of “more government spending,” putting the Democrats on the defensive. And unfortunately, the result is the Obama administration buying into the Republican attack line–that government spending must be reduced. How else to explain the three-year spending freeze, which is mainly symbolic and a little bit destructive?

[Feb 3, 2010] Rosner “Has the New York Fed been serving the public trust Has Geithner”

naked capitalism

By Joshua Rosner, a managing director of an independent financial services research firm who writes for New Deal 2.0

In Geithner’s AIG testimony before the House Oversight Committee, the Secretary again tried to sell the notion that ‘if we didn’t act then, millions more would have lost their jobs and thousands of factories would have closed’. Even if this were true, why did they have to pay these counterparties one hundred cents on the dollar? The answer may be because, as President of the New York Fed, the counterparties you paid out on AIG owned your company.

To simply say “we had to” is an oversimplification and a partial story. Those of us who saw the crisis coming and recognized the fragility of the system before the Fed or Treasury disagree with the “we had to act” line, but the story is actually larger than that, and predates the unfolding of the crisis. The full story puts Tim Geithner and Larry Summers dead center in creating the environment that drove us to crisis.

Secretary Geithner can keep repeating his assertion he has worked in public service his whole life. Never mind that this calls into question his tangible market experience, this claim begs the question: How does he define working in the public service?

Geithner’s last job, as the President of the New York Fed highlights that question. The NY Fed’s most important jobs, arguably, are safety and soundness supervision and capital market supervision. Success in carrying out those responsibilities should be the basic litmus test for the measuring how well the NY Fed is serving the public trust. In these roles it is supposed to examine, regulate and oversee the Federal Reserve regulated bank holding companies in the NY Fed’s region, the largest bank holding companies in the country, many of which were AIG’s counterparties.

The New York Fed is not government-owned. Most people fail to recognize this fact. Simply, the Federal Reserve Board (responsible for monetary policy, with a dual mandate of full employment and price stability) is an independent part of the federal government, while the New York Fed is a shareholder-owned or private corporation. In other words, where the Federal Reserve Board is www.frb.gov, the District Bank is www.newyorkfed.org. Historically, the New York Fed has been among the most profitable shareholder-owned corporations in the world. Yet it keeps the details of its shareholders’ ownership information private. What we do know is that its owners include precisely those institutions it is tasked to regulate and supervise and those is has obviously failed to adequately supervise. Unlike the other District Banks of the Federal Reserve system, which have overseen their banks quite well, the New York Fed’s concentration of the largest banks, coupled with its unique role of managing the market operations of the entire Fed system, has built a culture where it sees itself as a market participant and peer to those firms it regulates.

The President of the NY Fed is chosen by, paid by and reports to the private shareholders of that private institution. Only three of the nine Directors of the Board of the New York Fed are chosen by the Federal Reserve Board and, until this year, the NY Fed’s Chair — chosen by the Federal Reserve Board in Washington — was a former Chairman of Goldman Sachs who still sits on Goldman’s Board.

We do not know the full roster of shareholders, but the list of the NY Fed’s Board and management group is particularly interesting, reading like a Who’s Who of sell-side financial corporations that the taxpayer has bailed out and whose systemic riskiness Washington would rather take indirect and half measures to address rather than take a head-on approach of resolving.

In truth, Geithner’s ineffectiveness in his role at NY Fed President and his current political posturing — without any policy substance to directly address too-big-to-fail or the Fed’s flawed powers to bailout firms — seems to have resulted from design rather than accident. After all, in a previous “public service” role, Geithner was the lead negotiator for the WTO’s General Agreement on Tarrifs and Trade for financial services. In this role, Geithner reported to Larry Summers, who in turn reported to Secretary of Treasury Robert Rubin. In 1998, this team won the banks EVERYTHING they requested from that treaty. From open access to new markets to unrestricted growth in equity and credit derivatives, they opened the door to rapid and deregulated growth of the large multinational banks, allowing them to become “too big to fail”. Moreover, the terms of the agreement has made it almost impossible to put the “too big to fail” genie back in the bottle without running afoul of rules of this international agreement. That was the work of Geithner as “public servant”.

It appears that his reward for this work was nomination to run the privately owned NY Fed. The nomination was orchestrated by many of those same banks that own the NY Fed and for whom he delivered on that GATT (General Agreement on Tariffs and Trade) “Understanding on Commitments in Financial Service” (an international agreement, won by arm-twisting, that led to global deregulation of the fnancial services industry and encouraged the largest firms to enter new business lines and new financialmarkets without resistance).

I expect documents to come to light that will show that Geithner and Summers did the WTO negotiations on behalf of the industry and viewed the completion as a ‘deliverable’ to their financial constituents. How can Obama say, while Summers and Geithner are his team, “if the banks want a fight, I am ready to fight them”?

Geithner’s comment from January 1998 demonstrates that he was working on behalf of the industry and not necessarily the public:

Second, we, I think, established — I hope you agree, Bob — very effective cooperation with the U.S. financial community, both in defining priorities, and more importantly in some ways… mobilizing a coordinated approach with other globally active financial institutions in other jurisdictions…Fourth, we worked very closely with the international financial institutions so that they made a very strong, compelling analytical case for the benefits of liberalization, so that they built specific conditions into programs where that was appropriate, and so that they provided technical support and technical assistance to countries who were trying to find the right path of liberalization in an environment of considerable financial stress… the agreement establishes quite substantial new opportunities for access to these rapidly growing markets, with substantial increases in the equity thresholds open to foreign firms… the agreement provides protection for the substantial existing presence of U.S. financial institutions from the threat of future discrimination or future protection. And this is not a static commitment. It means that they can participate fully in the growth of these markets as they evolve further.

I expect more damning statements of Geithner and Summers using the office of the Treasury to work on behalf of the bankers.

So how did this WTO process to liberalize the global financial regulatory structure begin? Well, according to the “Financial Services and the GATS 2000 Round” report:

In 1975 Pan American, which was still there, and American International Group (AIG) took a shot at trade in services. In 1979, I was in New York with the American Express Company and was in charge of strategic planning and acquisitions. We were having problems, which we now call market access problems (we did not have this kind of terminology at that time), in thirty or forty countries. We had no remedy under the trade laws or under the General Agreement on Tariffs and Trade (GATT), which only covered goods.

To make a long story short, we decided that we would have to change that, which meant starting a new round of trade negotiations including services. My boss, Jim Robinson, chief executive officer (CEO) of American Express, asked me to start a new trade round as soon as possible. He asked, ‘How long will it take?’ I said, ‘I don’t know, ten years maybe. I don’t know. I have never done it. I am just reading this book by Ken Dam called the GATT.’ He said, ‘Well, do it as soon as you can.’ I said, ‘I need some money.’ He said, ‘Don’t worry about money. This is so important, you will have an unlimited budget.” If there was one phrase that really pushed trade and services, that was it. We put a person in Brussels, a person in Tokyo, two or three people in Washington, three people in New York, and so forth.

We enlisted the aid, which was really important, of Citicorp and also AIG. John Reed came along a few years later as CEO. We had an alliance in which Jim Robinson of American Express, John Reed, and Hank Greenberg of AIG were working together. I was the go-between. Having those three men with a lot of staff was the key. We went from zero probability of success to having a chance…One of the things that distinguish the American private sector from the rest of the world again is its relationship to the media, which is very good. All kinds of events are held with the U.S. media and sometimes the foreign media in attendance. This is very, very important. We do not see this any- where else in the world.

Finally, in 1998 Geithner and Summers delivered. What did they deliver? What are the realities of the “Understanding on Commitments in Financial Services” in the GATT agreement that were thrust on the global sovereign world? Well, as two small examples from the document:

Notwithstanding Article XIII of the Agreement, each Member shall ensure that financial service suppliers of any other Member established in its territory are accorded most-favoured-nation treatment and national treatment as regards the purchase or acquisition of financial services by public entities of the Member in its territory.

And:

A Member shall permit financial service suppliers of any other Member established in its territory to offer in its territory any new financial service.

If being a public servant is funneling unreasonable amounts of taxpayer capital, without market discipline, to the largest and most poorly managed banks, then Geithner’s selection as Secretary of Treasury makes sense. The same logic that allows senior officers of Lehman, Pepsi, Pfizer, GE, and Loews to be selected as ‘Class B Directors’ of the New York Fed, chosen as “representatives of the public” makes Geithner the perfect “public servant” to oversee those instutions these largest banks have successfully robbed. To be fair, it is also the same twisted logic that seated the last Treasury Secretary, a man who is being publically whitewashed in the media today — even though, as Chairman of Goldman, he single handedly convinced the SEC to allow Goldman and other investment banks to lever-up so wrecklessley that they would need to be bailed out as AIG counterparties.

gruntled:

Rosner’s article is highly revealing. And depressing. There really is an incestuous relationship between the Wall Street and the White House, with the New York Fed serving as a facilitator of sorts.

Josh:

I had to look at the status of the FRB versus the individual regional banks in the last few years, and came away surprised with the result.

There is one thing to add though. There are court decisions out there that construe the individual regional banks as quasi-governmental when they are deemed to act as agents/instruments of the government. Its a bit arcane, and our research was not extensive, but the dichotomy between the governmental FRB and the privately-held individual banks is there as described in Rosner’s article. The article does a great job explaining who Geithner was working for at the time.

 

Sarkozy wants to know if the shareholder is the only person who matters in capitalism - Telegraph

The doctrine of Corporate Social Responsibility was only ever eyewash intended to draw attention from the fact that corporations are responsible to no-one but their shareholders, despite the fact that their actions have consequences for all of us.

The legal framework within which corporations operate has long been designed to accommodate them in every way possible; the unholy alliance between corporate interests and lawmakers, oiled by the grease of campaign donations, has resulted in a world in which the rights of citizens of states are trampled over by international corporate entities. Bhopal is only a particularly visible instance of such behaviour, and it has historically only been when public resentment has reached fever pitch that governments have stepped in to curtail their activities.

The recent decision in the US Supreme Court to allow corporations the same legal rights as private citizens when making donations to political campaigns, effectively removing any caps on the size of donations, has been seen by many as the final nail in the coffin of the independence of government.

But it should be balanced with a requirement that corporate entities have the same responsibilities as private citizens in all their spheres of operation. An end to offshore banking - the irony that puts the pathetic toadying by ministers to these 'big taxpayers' in perspective - would be a good starting point, as well as some mechanism by which individuals within an institution can be held responsible for the consequences of their decisions.

The current situation, whereby illegal or immoral decisions can be brushed off as nobody's fault is untenable. Sarkozy is making the first steps towards a world in which these institutions, often with resouces and manpower that dwarf the governments who are supposed to be their masters, are forced to play by the same rules as the rest of society.
Patrick
on January 28, 2010
at 08:09 PM
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Sarkozy calls for tighter regulation at Davos Top AP Stories Chron.com - Houston Chronicle

Indeed, it echoed rallying cries of workers from the United States to Europe and Asia. And it was prescient, coming just hours before President Barack Obama's first State of the Union address, where he is expected to address reforming Wall Street.

"There are remuneration packages that will no longer be tolerated because they bear no relationship to merit," Sarkozy said, calling it "morally indefensible" when companies that "contribute to destroying jobs and wealth also earn a lot of money."

The comment drew a lone clap, while the rest of the hall stayed silent.

Little escaped Sarkozy's anti-market wrath: free trade, currency manipulation, failure to tackle climate change.

"By placing free trade above all else we have weakened democracy, because citizens expect from democracy that it should protect them," Sarkozy said.

"From the moment we accepted the idea that the market was always right and that no other opposing factors need to be taken into account, globalization skidded out of control," he said.

His words contrasted with much of the tone on the opening day of the five-day conference in Davos.

Business leaders resisted the idea of ratios that would govern executive pay. Some argued it would prevent companies from recruiting top talent, while others said a salary limit for a boss would be arbitrary if it was set at 20 or 25 times the earnings of a firm's lowest-paid employee.

Bankers warned that a flood of new regulations risked choking off a global economic recovery.

"Let's get good regulation, better regulation, but not more regulation," said Peter Levene, chairman of British bank Lloyds.

Peter Sands, the CEO of Britain's Standard Chartered Bank, added that his industry already has been "fundamentally changed" by tighter regulations and supervision, while Deutsche Bank Chairman Josef Ackermann said "we will all be losers" if governments clamp down on markets too zealously.

Sarkozy's speech marked a turnaround for a conservative who once espoused freer markets and won France's presidency in 2007 on pledges to loosen up his country's financial and labor rules. The financial crisis sent his rhetoric and policies veering leftward.

Former President Bill Clinton, who met with Sarkozy after the speech, told AP Television News, "We talked about how the 21st century economy needs balance, balance between finance and production, balance between government and the private sector, balance between the rich and the poor."

Sarkozy "talks to people in a way that requires them to say 'do I agree or disagree?' That's very important. No one has all the answers to these problems. But it's very important," Clinton said.

The CEO of French energy giant GDF Suez, Gerard Mestrallet, told The AP that Sarkozy's address "had good moments, and less good moments" — namely, the heavy regulatory stress.

Sarkozy urged a tax on financial transactions and a tax on imports from countries that don't heed international climate accords.

"The signs of recovery that seem to herald the end of the global recession should not encourage us to be less daring," Sarkozy said. "Rather, we must be even bolder."

He called for stimulus packages to be withdrawn slowly so they don't alarm jittery markets. Sarkozy also praised Obama's efforts to move banking away from reckless speculation.

The Davos gathering of some 2,500 people looked at a host of other problems Wednesday, including helping Haiti after its devastating earthquake.

But the most pressing concern was steadying a shaky world economy that is likely to face tough challenges in 2010. Rich world unemployment remains high and governments will be forced to pull back from lavish bailouts and stimulus packages that have propped up banks and other industries.

For all his bluster, Sarkozy pulled back from the leftist brink.

"There is no other economy than the market economy," he insisted. "We can only save capitalism by rebuilding it, by restoring its moral dimension."

France24 - Sarkozy supports bank limits in opening keynote speech

Political and financial leaders gathered in the snowy mountains of Davos, Switzerland on Wednesday for the opening of the 40th annual World Economic Forum amid a global rethink of how to regulate financial institutions.

By FRANCE 24 (with wires) (text)
Nicholas RUSHWORTH (video)

 

French President Nicolas Sarkozy threw his support behind placing limits on banks in his opening speech at the 40th annual World Economic Forum in Davos on Wednesday. Some 30 heads of state and 2,500 business leaders are convening in the snowy Swiss mountains amid a global rethink of how to regulate financial institutions and promote fiscal responsibility.

Bankers are expected to launch a counter-offensive during the forum against recent moves to limit the growth of banks into mega-conglomerates that encompass disproportionate amounts of national wealth, forcing governments to provide taxpayer-funded bailouts when the firms risk collapse.

US President Barack Obama unveiled plans last week to limit the size of banks, vowing that, “Never again will the American taxpayer be held hostage by a bank that is too big to fail.” His plan also called for financial institutions to more narrowly define their activities, forcing them to choose between proprietary activities - such as stock market speculation and dealing in sometimes risky financial instruments - and commercial activities like overseeing deposit accounts and loans.

The G20’s Financial Stability Board (FSB) followed suit, saying it would look into banking reforms on a global scale like those proposed by Obama for the United States. In a Jan. 24 statement, FSB Chairman Mario Draghi echoed Obama’s concerns over the "risks posed by too-big-to-fail institutions".

 
 
Speaking in Davos on Wednesday, Nicholas Sarkozy criticised the capitalism of the past for gambling with “other people’s money” and derided the focus on making a quick and easy profit, “often without the creation of any real wealth or jobs”. 

He hailed the Obama vision of smaller banks with more narrowly defined pursuits. "President Obama is right when he says that banks must be dissuaded from engaging in proprietary speculation or financing speculative funds," Sarkozy said in his opening speech.

Sarkozy empasised that the global financial crisis was not a crisis of capitalism, telling the crowd that the free market system is the only viable option. But going forward requires a rethink, he said: “What type of capitalism do we want?”  
 

Under fire, bankers ready a counter-offensive

The head of British banking giant Barclays, Robert Diamond, was among the first to speak at the conference on behalf of banks. Forcing firms to downsize, he said, would not avoid the missteps that led to the global financial crisis and could in fact do more harm than good. 
  
"I have seen no evidence ... to suggest that shrinking banks and making banks smaller and narrower is the answer," he told the forum. On the subject of mandatory curbs, he warned that the "impact of that on jobs, on the economy, in particular global trade and on the economy - that would be very negative”.
  
According to a PricewaterhouseCoopers poll released in Davos, 60 percent of banking chief executives are "extremely" or "somewhat" concerned by the possibility of over-regulation. Politicians in many countries are riding a wave of popular anger at corporate fiscal irresponsibility and the multi-million-dollar banker bonuses that have fuelled a rush to implement new government controls.

 

The Populist Addiction - Readers' Comments - NYTimes.com

We should not label realism and legitimate anger toward banksters with populism. That's an Orwellian manipulation of the English language.  Books is talented manipulator, no question about it. If there is an award "rascal of the pen of the year" he would be one of the main contenders.

mnjam

Populism in the original sense has not existed since 1912 or earlier. It was rooted in a conflict that is long gone -- between an agrarian south and west and an urban-industrial east of which Wall Street was just one component and symbol. It is about as useful as the word "whig." Palin is no populist. Edwards is no populist. Nor is anyone else. It's just a bad metaphor that obscures meaningful analysis of our time.

rabinnyt

And Mr Brooks belongs to the group who, liking the status quo, label any attempt at rebalancing populism.

The fact is the country needs much much higher tax rates on people earning the highest incomes -- both to reduce deficit, and to discourage exclusive focus on getting rich quick. This is not populism -- just good policy. Historically the period of Amercia's greatest prosperity (post WWII decades) coincided with very high tax rates on high earners.

Ed

Oh, but this is what Mr. Brooks’ hero, Ronald Reagan, the god of politics, did so well; he divided the blue collar and southern white voters from the black Democratic Party and smashed the unions underneath the New Day in America sunshine smile as he opened the gate to America and offered the financial and corporate sectors of our economy keys to the Kingdom. From Willie Horton to gay marriage and the smearing of John Kerry, the GOP, for which Mr. Brooks has carried a huge megaphone, has taken no prisoners and scorched the land. Now, when the inmates are driving the pickup and everyone is going to the circus that is Fox, Mr. Brooks fears we don’t have enough fire insurance. Perhaps voters see that markets never created a middle class, never insured anyone justice, and never worked without strong regulation. Perhaps pundits need to examine the effects of their support of politicians who clearly sided with one faction.

Remember John Roberts’ confirmation and his umpire metaphor for judicial ruling? The entire country is waiting for John’s first choice for an individual versus a corporation. No, David, ”the rich and the powerful do rig the game in their own favor,” seems acceptable as an intellectual abstraction, but a indigent defendant who’s given 1,000 dollars to save his life in a red state would surely find such a dismissive statement obscene, but not any more so than your assertions about the inferior Haitian culture.

Populism is shortsighted and self-righteous, but it’s not any more so than the slimy smile of the mainstream steamroller. The pitchfork or the foreclosure notice delivered from any Ivy League derivative genius who pays income taxes at 15% because of a smiling senator and K Street Lobbyist are equally odious as is the “thoughtful” philosophy of dynamic markets and expanded opportunity.

marie burns

Listen up, Brooks. You live in a country where the CEOs bring home more than 800 times the wages of their average employees, where the banks raise their fees on average consumers so top management can garner outrageous bonuses, and where one-fourth of the homeowners owe more on their mortgages than their homes are worth.

If you think “ordinary people” were at fault for their profligate spending, how is it that Ben Bernanke, the Fed Chair, was telling folks there was no housing bubble & housing prices would continued to rise? How is it those brilliant MBAs at lending institutions kept telling their loan officers to write mortgages for properties that were about to plummet in value? How is it that most of us got at least one offer of a credit card in the mail every day from some financial institution? How is it a person couldn’t make a purchase at a retail store without the clerk offering some “deal” if s/he’d take out a store credit card?

All of the experts told ordinary people their homes were income-producing assets. The experts told people they should spend now and pay later – after all, if they had a setback, folks could always take out a second mortgage on that big ol’ asset they were living in. And George W. Bush, on the advice of his expert economic advisers, said the market & the economy were so solid, ordinary people should forget about Social Security, and put their money in IRA-type accounts instead.

The only mistake most ordinary people made was taking the advice of overpaid financial "experts."

Your defense of the indefensible financial sector is not just disingenuous. It’s not just dishonest. It’s vulgar. You should apologize.

The Constant Weader at www.RealityChex.com

Recommend Recommended by 688 Readers

Jason Crowson

Wow. I am continually utterly amazed at Mr. Brooks. If there was ever a writer who spends more time hiding what he truly believes, I have never read him.

Somewhere in Mr. Brooks' past there is a fantastic writing professor, perhaps several, and Mr. Brooks himself no doubt brings his own stroke of genius to the keyboard.

Most writers spend an entire essay proving their point. Mr. Brooks seems to spend the majority of his lulling his readers into a false sense of affinity, as if they too could believe and think the way he believes and thinks.

After luring them in, he then gently sets the hook, nothing more than a flick of the wrist: yes now you can side with the most ultraconservative members of society and feel like you are a moderate. Congratulations.

And among it all, larger than life, looming like some great shadow because a huge unknown object is blocking light that would normally beam upon the subject matter are the topics Mr. Brooks precisely omits.

Make no mistake about it, my friends: if you are black, you would still be enslaved if others had not been willing to fight and die for your freedom; if you are a woman who votes, thank the women who fought and died to get that right to vote; if you're an American child who gets to go to school instead of working 16 hours a day for slave wages, thank the children of history who joined the fight and, yes, died so that you can go to school; if you enjoy weekends off, thank the workers who fought and died for your rights to have weekends off; if you have an over active bladder and urinate 12 times a day while at work, again, thank the workers who fought and died for your right to take bathroom breaks.

This is not some esoteric subject drifting in the ether. It boils down to bodily functions, political rights you are losing, and jobs that allow human beings to earn a living and maintain their dignity and integrity.

It's not a matter of feigning a maneuver into some non-existent middle ground where you can discredit people who are trying to make your life better while just as slyly buttressing the arguments of people who have worked not just for decades but for centuries to make America a country of slaves and wealthy.

Yes. Yes. Yes. Mr. Brooks we all know the history of President Lincoln and Mr. Hamilton. Thank you very much. This has nothing to do with either of them. It has everything to do with Theodore Roosevelt creating national parks while regulating the robber barons whom he berated verbosely and publicly. It has everything to do with the New Deal and Franklin Delano Roosevelt's regulations of the financial industry and establishing the social and economic safety nets that allowed the American middle class to thrive for much of the twentieth century. And it has everything to do with the rise of the robber barons once again, in a different guise, with different leaders, with different economic buzzwords, and how these neo-robber barons have worked incredibly hard to dismantle all of the Roosevelts' legacies and dreams.

The neo-robber barons have succeeded brilliantly. Now it's time for the pendulum to swing in the other direction.

Keep writing, Mr. Brooks. Your skill is astounding, your subtly profound, your subterfuge always astonishing and brilliant.

Cdr. John Newlin

Actually, it has been the attacks by enterprise and capital against the people that have brought us to where we are today. And those attacks have been anything but random. They are fueled by greed and the belief that the power to rule the people and even attack them is a fundamental right of those who have found the means to acquire great wealth. In short, the plutocrats.

The Republican Lieutenant-Governor of South Carolina is a shining example of attitude of enterprise and capital toward the less fortunate. He recently espoused a policy of starving poor people to prevent them from breeding. And it is clear that David Brooks subscribes to the same despicable principles.

Meredith

Please. Stop the class war red herring. We don't want class war, but instead to restore a balance that has been badly distorted by an extreme anti government, pro corporate ideology.

You say Hamilton and Lincoln knew a vibrant capitalist economy would maximize opportunity for poor boys %u2026would tolerate the excesses of traders because they understood that no institution is more likely to channel opportunity than vigorous financial markets. .. government's role was not to side with one faction or to wage class war. It was to rouse the energy and industry of people at all levels.

Wow. What a rationalization of our undemocratic policy. We are not a faction. We are citizens of a 21st century democracy. The energy and industry of people can't even come into play when the ground under them is giving way due to lack of support from the society they are citizen's of. Certain conditions have to be present to allow a people's industry to kick in and result in reward for them.

Much of our society has been turned over to plunderers in the name of a pseudo freedom that abuses the meaning of american individualism. A modern democracy is supposed to give it's citizens a platform that they can use to launch themselves, through education and work opportunities. Our platform is tottering, as our policies transfer wealth from the masses to the tiny percent on top.

This has affected all of us when we look for work, own a home, get a student loan, use credit cards, get hospital treatment, ride a plane, eat meat, invest in stocks.

A modern democracy must use it's govt smartly so all benefit. By doing so Europe has pretty well eradicated the economic/social class barriers from the past. But our belief system has been evolving to damned the govt and exalt private enterprise. This belief has paradoxically, been creating the very economic underclasses that America was first created to contradict.

For example, middle america is falling into a ditch with its health care bankruptcies and its retirement money smashed, with little chance to recoup. The change from guaranteed pensions to self managed 401k was a scam put over on us. When corporations used to take the responsibility to guarantee our pensions, they still managed to succeed and make profits.

Payoffs to our elected legislators by big business led to removing protective regulation. Now our economic and psychological well being is increasingly precarious and fraught with anxiety. We can't accept this anymore.

When our destructive spiral results in future generations living lives poorer than ours, pundits like David Brooks will chastise them for their lack of character.

The increased failure of our democracy is staring at America. Reform of campaign finance laws is the first of many steps to rewind the spiral into a benign cycle instead of a vicious one.
 

AnnS

So it’s easy to see the seductiveness of populism. Nonetheless, it nearly always fails. The history of populism, going back to William Jennings Bryan, is generally a history of defeat.

___

No Mr. Brooks IT DOES NOT "always" fail. Worked a treat in the 1930s - you know, the decade when the have-much-mores' were forced to share with the other 95%.

You and most of the NYT staff, and in particular your fellow columnist, Friedman, need to understand that The words "Populist" and "Populism" are not

(1) curses

(2) description of appalling beliefs

(3) descriptive of a mob mentality.

and that the words Populism and Populist are exactly how my ancestors whipped up the frenzy that lead to them becoming traitors and rebelling against their government aka "The American Revolution." The words Populism and Populist are derived from the same source and related to the word "population" and "populace" (those who live in a place".) Populism is no more than the expression of the will of We The People - the majority of We The People. The very idea of “We The People” is populism!

What are you and your fellow journalists and columnists smoking and drinking?

(1) Bankers DESERVE a populist backlash. Worked a treat on controlling them in the 1930s. They have BETRAYED and STOLEN from the "population" of this country. They need to be firmly reined in, controlled and chastised. They still do NOT get it and continue slurping at their trough of bonuses when the trough was filled by the money from the populace.

(2) Americans LOVE angry politicians who are expressing the will of the populace.

Huey Long was the only politician whom FDR ever considered a serious threat. Huey Long was not just 'angry', he was outraged, furious and very very vocal. Regardless of his shennanigans and corrupt actions in gaming the political system, he did the one thing that made the populace love him. He stood up and roared their anger about being left behind in the American society. Huey Long was outrageously populist.

FDR was angry and the voters loved it. On OCt 31, 1936 while campaigning for his second term, he gave a speech at Madison Square Garden. Remember the lines? The phrases that sent Wall St into panic attacks and had them reaching for the smelling salts? FDR stood before the voters and said these words (excerpts - not the whole speech)

"More than four years ago in accepting the Democratic nomination in Chicago, I said: "Give me your help not to win votes alone, but to win in this crusade to restore America to its own people.

The banners of that crusade still fly in the van of a Nation that is on the march.

It is needless to repeat the details of the program which this Administration has been hammering out on the anvils of experience. No amount of misrepresentation or statistical contortion can conceal or blur or smear that record. Neither the attacks of unscrupulous enemies nor the exaggerations of over-zealous friends will serve to mislead the American people....

For twelve years this Nation was afflicted with hear-nothing, see-nothing, do-nothing Government. The Nation looked to Government but the Government looked away. Nine mocking years with the golden calf and three long years of the scourge! Nine crazy years at the ticker and three long years in the breadlines! Nine mad years of mirage and three long years of despair! Powerful influences strive today to restore that kind of government with its doctrine that that Government is best which is most indifferent.....

We had to struggle with the old enemies of peace‹business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.

They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.

Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me‹and I welcome their hatred.

I should like to have it said of my first Administration that in it the forces of selfishness and of lust for power met their match. I should like to have it said of my second Administration that in it these forces met their master...." (10/31/1936 FDR)

ANd the crowds roared and screamed in excitement. And gave him close to 24% more votes than he had gotten in 1932.

SO oh yes, please understand and do tell your co-workers that

(1) "Populism" is NOT an obscenity and that their disdain for the 'populace' and the demands of the populace is patronizing, offensive and the talking heads and Congress critters are NOT the 'betters' of the populace and should be left to decide what is 'best.' (They certainly have buggered it up enough!)

(2) And angry populist politicians win and have won in more recent history than William Jennings Bryan.

steve pesce

Apparently history was not your subject in school. Populist revolts have brought about most of the important social and political changes in our country. Winning elections is not winning the point. Populists have traditionally grabbed hold of an issue and brought grassroots support to bear, and while not winning outright, cause the winners to make changes in order to prevent another round of battering from the masses. For masses, you can insert people.

S. M.

A crucial difference between leftist populism and rightest populism is that lefist populism protests economic inequalities in the system, while rightist populism protests assumed attitudes of cultural superiority on the part of leftists. Leftist populists target laws and business practices that are unfair to ALL working Americans, while rightist populists, such as Sarah Palin, play openly on fear and envy of fellow Americans who are presumed to be "elitist" in their tastes and lifestyles. Leftist populism is concerned with basic fairness in the system, while rightist populism feeds on dislike of those who are viewed as different. Thus, the leftist protest is far more objective, more nuts and bolts, meat and potatoes, than the rightest protest, which runs to the personal, the ad hominem, saying, in effect, "Those liberals aren't 'real Americans like us," and relying on stereotypes of latte-sipping, over-educated "metro-sexuals" who are presumed to be anti-business, anti-guns, and anti-religion.

This is an immense difference, Mr. Brooks, and I know you are fully aware of it, because you have been delivering the "Obama is a cold, intellectual elitist" message for at least a year now. You play the populist card very consciously, and very well.

sandra white

The problem , David, is that we don't trust the people leading government nor the Wall Street banking establishment. And, the reason we don't trust them is they seem to be the exact same people.

They didn't just rig the game to benefit themselves. they funded the Obama presidential campaign like no campaign has ever been funded before, and in return Obama not only saved their banks , with no strings attached, but he made them richer than emperors, at the same time.

The banks should have been allowed to fail. By now, the worst would have been over; and the trillions Obama and Congress wasted keeping the already rich, rich; and the already comfortable, comfortable, would have still been in the treasury and not in political patron's pockets.

You are a very smart man, David. And, your commentary is rational . But sometimes, like this time, the chips have to fall where they may. Sometimes, populism is a good thing.

Johnny E

It was to enhance competition and make it fair — to make sure that no group, high or low, is able to erect barriers that would deprive Americans of an open field and a fair chance.

I don't know, for the past 30 years the elites have been erecting barriers against the working class. Voodoo Economics if you will. Outsourcing, hiring illegals, H-1B visas instead of training our own, leveraged buyouts that destroyed good companies, pitting communities against each other to get the best tax incentives and then shipping the jobs overseas anyway, not enforcing labor and safety laws, cutting back on educational opportunities, ... The open field and fair chance has been dismantled.

The American populace has been very tolerant of having a greedy elite as long as everybody was getting their piece of the pie, especially when workers are continually increasing their productivity. But workers aren't getting their piece of the pie anymore. They've been tapped out of their life savings by job losses, housing bubbles bursting, bankster fraud and bailouts, and globalization.

Sarah Palin's Faux Populism
"Someone has to nail the media establishment for its willing perversion of language, American history and the substance of today's genuine populism."
http://www.huffingtonpost.com...

ronbroglio

In a decade in which the income gap between the wealthy and the middle class is at a peak not seen since the 1920s, "populism" means restoring a balance of wealth to something closer to what it was in the 1980s or 1990s.

Furthermore, us "common folk" are just asking for some representation amid all the special interest groups who lobby legislation. The best example I can think of is bank regulation: over a year after the market crash and no meaningful legislation has been enacted. No I don't mean taxing bonuses; I mean legislation to regulate the too big to fail banks.

Populism does not have to be simplistic and naive rallying the mob. It can be restoring a share of wealth where the middle class has shouldered the burden over the last decade.

Jack

This is just more and more urbane, stylish nonsense. Look at the numbers. Over the last two decades or so more and more of the wealth of this nation is being concentrated into the hands of a smaller and smaller minority. Politicians (and journalists) evoke one nation when it suits them. We have a financial elite whose recent behavior deserves punishment and a body of elected representatives who are in bed with them.

Ace

Brooks's analysis is seductive, but his history overlooks something crucial. Lincoln had faith that the growth of the country would be good for everyone. And it was. Since roughly the beginning of the Reagan years, however, what has Wall Street done to engender real growth? Seems to me its most profitable work has been a lot more narrow -- re-slicing and re-aggregating the pie instead of making it bigger. To say that and decry it is not populism. It's reality.

RJ

They will have traded dynamic optimism, which always wins, for combative divisiveness, which always lose."
But this state is where we are for the time being. People are angry at the systems of governance, commerce, education, etc that seem to benefit the few over the many. It seems that commonsense solutions and proposals that could make things better are fought tooth and nail by special interest and those special interests seem to win out time and time again - modest bank reform, modest education reform, modest energy policy, modest healthcare policy continue to fail due to entrenched selfishness.

We have reached a "tipping point." I tend to agree with you, that policy should be well thought out and measured. But we can't ignore the facts on the ground. Populist feelings are strong and only after populist policies are shown not to work, will some of that anger be tamped down.

Jumper

Now it's "Obama the Populist." I dont' think so. The middle class is the engine that drives the United States' economy. He's working toward getting the middle class to vote in their interests, not dividing them against some straw-man elitist.

Is it populist to point out the predatory, destructive practices in which we see the "too-big-to-fail" banks engaging? Don't think so.

You refer to Hamilton and Lincoln. They came early in this nation's capitalist development. Alexis de Tocqueville, in his, "Democracy In America," published in 1835, an outsider's look at the American experiment, said that we were in the early stages of our economic development and were able to keep policies in place to keep vast, inherited wealth from developing and distorting our national character. He also implied that it would take time to determine if a wealthy elite based on inherited wealth, would develop to change the character of America.

Yes, one role of government is to keep the playing field fair. Another "poor boy" of that early era, Andrew Jackson, said as much in his veto message that accompanied his veto of legislation to extend the charter of the Second National bank.

However, look at the top tax rate history in the U.S. From 1944 through 1983, it was 70% or higher. In 1982, at the start of the Reagan era, it dropped to the 50% range. In 1987, it dropped to 38% and has remained there ever since.

That change in the top tax bracket effectively saddled the middle class with all the costs of American society and left the wealthy elite to accumulate such vast amounts of wealth they essentially became the feared elite of inherited wealth that influences politics and the economy without regard to needs of ordinary working Americans. For example, we saw great advances in productivity during the Bush years but almost none of the rewards from that filtered down to the middle class.

President Obama's extended tax credits to American families will certainly ease some of the hemorrhaging of money from the middle class and increase some spending in the economy. Asking the wealthy elite to pay their fair share of taxes to support a society that provides them their vast wealth is not punishing them. As de Tocqueville pointed out, that was one of the most important aspects of why our democratic form or government, at that time, could survive capitalism.

What American's need is an honest discussion of tax policy as an instrument of social development minus the words, and implied accusations, such as populist, elitist, class warfare. We're talking about restoring the economic balance that most Americans see is and has been missing for many years.

[Feb 1, 2010] The Other Shoe

In broad outlines, the story is very simple. In bailing out the financial system without taking possession of more than a small equity position, and then in engineering a stimulus that was deliberately inefficient—devoting a third of its cost to tax cuts at a time of massive deleveraging—the Bush and Obama administrations squandered hundreds of billions of dollars in public resources. Now, to prove his fiscal responsibility, Obama wants to cut spending on core functions of government, like public health, the environment and national infrastructure.

You can blame him for leaving the bloated Pentagon budget off the table, or for prematurely panicking over fiscal deficits. Both criticisms are entirely justified. But in a larger sense, we condemned ourselves to a generation of torturous public finance in that spasm of terrible policy. We will be paying for it, one way or another, for years to come.

[Feb 1, 2010] “Populism”

The Baseline Scenario Amidst otherwise strong coverage of the growing debate around the nature of finance and the power of big banks, a surprisingly high number of journalists continue to misuse the word “populism”.

For example, in an article on criticism of bankers at Davos, the Wall Street on Saturday morning reported that President Sarkozy of France delivered a “populist broadside” when he said,

“That those who create jobs and wealth may earn a lot of money is not shocking.  But that those who contribute to destroying jobs and wealth also earn a lot of money is morally indefensible.”

The implication, of course, is that some politicians are pandering to “the people” vs. “the elites” – part of a long-standing theme in some interpretations of democratic political conflict.  While elites invest and engage in productive activities, the argument goes, plebians from time to time demand excessive income redistribution or punitive taxation or other measures that would undermine productivity and prosperity.

Or, as President Obama said in March 2009, “My administration is the only thing between you and the pitchforks.”

Such language reveals a complete misunderstanding of our current situation.  (Matt Taibbi has this right, but doesn’t go far enough.)

The problem we face is not that the broader population wants pointless or destructive revenge on a financial elite that has done well.  Nor is it the case that, if left largely to its own devices, our major banks will guide us back along the path to sustainable growth.

The consensus technocratic assessment is simple: We are smack in the middle of a doomsday cycle of repeated boom-bust-bailout (our version; the Bank of England’s take).  The core issue – banks considered “too big to fail” – was not resolved in or after the crisis of 2008-09; if anything, as these banks have increased in size, the problem is now worse.  We are therefore doomed to run headlong into another crisis.

This view is increasingly the developing consensus of most economists, many people active in financial markets (e.g., judging by reactions to this piece), top policy analysts from right and left, clear thinking central bankers, and pretty much anyone else who follows the news.  Elites are deeply split along pro- and anti-big bank lines.  Most people who do not have a conflict of interest – i.e., don’t work for big banks or the administration – want to see the most dangerous parts of our financial sector reined in and made safer.

Even leaders of the global nonfinancial business elite begin to understand what has happened and what comes next.

The fact that dramatic banking reforms would be popular does not make them populist.  It merely means that a broad cross-section of our population has woken up to part of our appalling reality.  Sure, they are angry – but with good reason, and the remedies they seek are entirely appropriate.  Most of our elites are on the side of the broader population on this issue; only the diseased heart of Wall Street holds out.

Unfortunately, for whatever reason, the Obama administration remains convinced that merely tweaking our existing regulations is the only responsible way forward.  Even their new “Volcker Rule” increasingly looks like superficial rebranding without new substance.

This will go nowhere – except to sad, unnecessary, and complete defeat in the November midterm elections.

By Simon Johnson

 

 

 

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